Fossil Fuels Divestment

On Nov. 5, 2012, the Unity College Board of Trustees voted unanimously to divest our $15 million endowment from the top 200 fossil fuel companies, making Unity the world’s first institution of higher learning to explicitly target — using Carbon Tracker, a nonprofit financial think tank — companies that produce carbon-based fuels. With so much at stake for our financial well being, why would Unity take such bold action?

Arguably, our small endowment is considerably more sensitive to bad investment choices than those of elite institutions such as Harvard, Princeton and others. Since our action, hundreds of campuses have started divestment movements. An increasing number, including Pitzer, Stanford and Syracuse, have voted to divest billions from fossil fuels.

To date, our investments have thrived. But, as I will explain, divestment is largely immaterial to returns and fees.

Ties to Our Academic Mission

You might think the ethical imperative derives from the fact that we are an institution informed by the U.S. National Academy concept of sustainability science. But our academic mission is largely irrelevant; we believe divestment is obligatory, as both an ethical imperative and a fiduciary responsibility.

All institutions of higher learning have embedded in their missions a dedication to the maintenance and renewal of civilization. By contrast, the business of fossil fuel extraction will, with high certainty, result in the destruction of civilization in the latter half of this century.

Put simply, we must leave the carbon in the ground. Generous estimates suggest we can burn only about 20 percent of conventional reserves without pushing atmospheric warming beyond the putative 2°C guardrail the United Nations Framework Convention on Climate Change determined as the threshold for irreversible damage. Presently, we are on track to warm the planet 4°C to 6°C by 2100. Scientists broadly see this as a catastrophic scenario for the Earth’s living systems.

So, the first step in deciding on divestment is for stakeholders, leadership and governance to reach a consensus about the ethical imperative of divestment and its relation to the values of the institution. In my experience, only after establishing a campus consensus on the ethical imperative of divestment should financial experts then be consulted about how to achieve it.

Most portfolios have holdings that commingle desirable and undesirable assets, so it is necessary divestment be executed over a considerable period. The approach that works best is to progressively reduce exposure to the top 200 fossil fuel companies over a period as long as five years. This should not require additional fees, because it does not involve extraordinary trading or management. Divestment simply adds a new criterion to routine portfolio management.

Adjusting the Portfolio

One way to accomplish divestment is to avoid the energy sector entirely. This approach, taken by Unity College, cut exposure to the 200 targeted companies to less than one percent of overall returns in less than two years. As institutional clients continuously push the financial industry to create new fossil fuel-free products, there are now thousands of financial products that can replace, replicate and sometimes even outperform the energy sector.

When such a direct approach is not be possible for large endowments, slow and steady reduction of exposure over longer horizons achieves the same result, realizing that, because of derivatives trading and the interdependence of holdings within equities, “absolute zero” exposure will be elusive — even unlikely — in almost any scenario.

It is important to understand returns on a divested portfolio are largely unrelated to the act of divestment. Returns are primarily determined by the overall performance of the market and asset selection by savvy management. As higher education faces extreme disruption during the coming years, risk — particularly fiduciary risk — will manifest in many forms. Remember that divestment and returns are not automatically correlated, and higher education must meanwhile make clear statements about ethical values.

Unity views this articulation of values as an essential market position, and views the downside fiduciary risk of divesting as less challenging than the risk of not upholding its unimpeachable moral imperative to distinguish itself as an ethical bulwark for higher education in the marketplace of this, the Environmental Century.

As president of the first college to divest, I am enormously proud of our visionary board, faculty and students. Unity College has entered a new era in which our brand and ethos are a national province. Parents and students look to us an example of what higher education can be. We are all in this together to develop a model in which financial risk is mitigated by investing choices that are ethically and financially sound while — most importantly — nurturing a civilization on which all our endeavors depend.

This article originally appeared in the issue of .

About the Author

Dr. Stephen Mulkey is president of Unity College in Unity, ME. His scientific research includes ecosystems spanning the globe, and he is recognized for research and program development relevant to climate change.

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