Beyond Divestment

John Fullerton

Two years ago, students at Swarthmore College began a fossil fuel divestment campaign, initially focused on coal. Last November,, the grassroots activist NGO dedicated to reducing carbon in the atmosphere to 350 parts per million joined the fight with a nationwide “Do the Math” campus tour. The movement spread to cities, and soon to churches, unions, and beyond.

The champions of divestment know that as an economic strategy it is flawed. Their purpose is to shift the debate into the moral sphere, by drawing parallels to the divestment campaign that ultimately helped bring down the Apartheid regime in South Africa. By raising divestment as a call to action, the students have opened the door to the really important conversation university endowments and all institutions with responsibility over large pools of capital should be wrestling with at this pivotal moment in history. If we seize this opportunity, that conversation will go far beyond a debate over divestment, deeply into the very purpose and responsibilities of these multi-billion dollar endowments.

The “math,” first presented years ago by the Potsdam Institute and now even validated by Fatih Birol, the chief economist of the International Energy Agency, is staggering. If we are to avoid exceeding the 2 degree warming threshold that leading climate scientists privately will tell you they believe is too high, only about one third of the 3,000 gigatons of CO2 contained in the world’s “proved” oil, gas, and coal reserves can be released into the atmosphere. Two thirds of the reserves need to be abandoned, a write off measured in the tens of trillions of dollars. Since these carbon estimates are all based on statistical probability assumptions, to be “highly confident” (like 95%+ confident), our only choice, if we are not to trigger catastrophic climate change, is to leave virtually all known fossil fuel reserves in the ground beginning, basically, now. This reality pits the immense short-term economic interests of the fossil fuel industry (and by connection its investors) against the long-term well-being of life on the planet (including the institutions who are the investors). 

There is no precedent in the history of human civilization for an economic challenge of this scale, with consequences so profound. Is Swarthmore College, with a strong respect for multi-disciplinary thinking, rooted in Quaker traditions that emphasize “a deep sense of ethical and social concern,” led by a former Yale Divinity School professor, yet addicted to annual endowment revenues like so many elite institutions, up to the challenge to develop the breakthrough thinking that decades of responsible investment debates have so far failed to deliver?

It is easy to make the case for rejecting divestment as a strategy to meet this challenge. Reflecting on the moral dilemma of investment choices, George Soros once said in an interview:

“The financial market is amoral in that respect, because individual investors can’t affect the outcome. And that’s a very happy position to be, because then I don’t have that moral problem…”

This is a comforting and, on the surface, logical position in which to take refuge. But does it hold up under scrutiny, particularly for an institution that genuinely is committed to its Quaker roots?

Make no mistake. The reality is that the bottom lines of Big Oil and Coal will not be hit if Swarthmore, or for that matter all university endowments combined, sell their fossil fuel stakes in the secondary market. Nor will divestment materially change these companies’ real investment decisions, which are funded largely out of their own cash flow. As for reputational damage, what could be worse than pictures of BP’s Gulf of Mexico disaster, or coal miners suffocating deep underground, yet these organizations continue to operate, reputations tarnished or not.  And there is no denying that the annual financial returns of a portfolio restricted from investing in one of the largest sectors of the economy will indeed behave differently than the benchmarks against which endowments have traditionally chosen to measure themselves.

So, it can be argued, a logical assessment of the case for divestment appears to be weak. As Soros said, if investors can’t affect the outcome, then the financial markets (and by implication, investment decisions) are “amoral.” The long history of the “socially responsible investment” movement, which has led to far more talk and signing of pledges than change in investment practice, has had an uphill struggle against this very argument.

Yet, one could argue, there are few institutions better qualified to wrestle with this dilemma than Swarthmore College, with its Quaker roots, deep commitment to social and ethical concerns, focus on trans-disciplinary education, a theologian as president, and its $1.5 billion endowment. Here’s the holistic "breakthrough-thinking" hypothesis for Swarthmore to advance that will lead, not only to divestment from energy companies that refuse to make the necessary transition to clean sources of power, but also to an entirely new investment philosophy.

First, it is clear that business as usual with regard to our fossil fuel based energy system takes us well past two degrees of warming and represents a clear and immediate threat to the future of civilization. The science demands (among other things) that we aggressively switch out fossil fuels as an energy source within twenty years, long before we run out of these reserves. Swarthmore Trustees must ask themselves, “What did you do, once you knew?”

Second, logic is not working. We know what we need to do logically to avoid the catastrophic consequences of climate change, but we are way off course. The arctic melted ahead of what the scientists projected, and we know the next IPCC report will be horrific, documenting the non-linear shifts that are spinning rapidly out of control. The status quo is very resilient (in a bad way) for multiple well-understood and "logical" reasons, not the least of which is our short-term profit focus. Abandoning the fossil fuel energy system will entail economic write-offs measured in the tens of trillions of dollars (our “$20 Trillion Big Choice”), so naturally there is unprecedented resistance. The financial stakes in South Africa’s economy were trivial in comparison.

Third--and here is where the real opportunity for the college lies--a serious, open multi-disciplinary dialogue among the Swarthmore community (leadership, faculty, students, board) questioning the validity of the assumption that investment decisions are “amoral” and have “no impact on the outcome” will draw a conclusion quite contrary to what the conventional logic outlined above would suggest.

Let’s imagine how that dialogue might unfold: The humanities professor will kick off the discussion by questioning Soros’ presumption and instead will draw on Henry David Thoreau’s morality that teaches, “our whole life is startlingly moral. There is never an instant’s truce between virtue and vice.” The physics major will assert that quantum physics tells us that everything is literally connected to everything, so to suggest that individual investment decisions have no larger impacts is a dubious assumption, in conflict with the insights of modern physics. This will then trigger Swarthmore’s theologian president to reflect that the one common thread underpinning all leading religions and spiritual practices the world over is the idea of “oneness” - everything is connected - startlingly consistent with the insights of quantum physics. The biology professor, armed with the latest understanding of life’s principles, will nod in approval.

The entire trans-disciplinary group will marvel at how all signs point to an irreconcilable conflict between the reductionist logic of the endowment’s current investment practices, and what the humanities, science, and religion professors are teaching in the classrooms. The Chair of the Investment Committee's protests about the “risk” of altering the investment strategy away from the conventional approach will ring hollow when the group discovers that “risk” in his mental frame relates only to the backward looking volatility of monthly returns in a portfolio of securities, an abstraction entirely divorced from the very real forward looking risk of climate change threatening unimaginable disruption of civilization itself in the lifetimes of the students in the room.

The ecology professor will then suggest we are at an evolutionary moment when there is no physical choice between system collapse or its emergence into a higher level of complexity, like a caterpillar turning into a butterfly. The systems scientist in the room calls this emergence a phase transition. This unprecedented trans-disciplinary dialogue leads the collective thinking to conclude that in fact Swarthmore, including its $1.5 billion endowment which is an inseparable part of the whole, have an important role to play, a higher purpose than imagined when the deliberations began.  That purpose is to participate in and help direct this phase transition through the investment practices of the endowment.  The group will come to understand that consistent with the insights of both modern science and the great wisdom traditions, this investment practice is holistically connected to, and inseparable from, the educational, social, and moral mission of the college.

Suddenly the Trustees will see that an investment philosophy aimed at “optimizing risk-adjusted financial returns” on an annual basis using failed modern portfolio theory, independent of any reference to the context of the great ecological crisis facing mankind, is not only irresponsible and yes immoral, but also in conflict with our best understanding of how the universe actually works, as taught in the classrooms of the college.

Armed with this conclusion, President Chopp and her new “unconventional” financial advisors will lead the Trustees to craft a bold new investment philosophy for the endowment. It will be grounded in a holistic decision-making process that seeks to harmonize (not trade off) financial, social, and ecological objectives, consistent with the mission of the college. It will dismiss a strategy of mere “divestment” from passive fossil fuel holdings as an inadequate stewardship of resources and an abdication of fiduciary responsibility. The new policy will solicit proposals for investment managers that invest prudently and directly in the energy transition, through direct infrastructure and efficiency projects, many right in the college's home state of Pennsylvania, and directly in enterprises that will flourish in the shift to regenerative capitalism underway. A fresh approach to asset allocation will include a planned phase out of exposure to the fossil fuel energy system – yes, divestment - beginning with coal and tar sands oil, and will be seen as prudent and genuine real world risk management against the looming stranded asset risk that both HSBC and S&P have recently addressed.

Swarthmore’s approach will become the standard against which other universities benchmark their own investment philosophy and strategies. Capital will flow into the real investments of the economy of the future, helping to bring about that future in the process, and out of meaningless stock speculation in secondary shares. Indeed it’s already happening, to the tune of $4 trillion dollars of real investment in the past five years according the Ethical Markets Green Transition Scoreboard.

The student activists will cheer. The faculty will feel empowered, their collective knowledge valued like never before. The Trustees will worry, which is their job. The future will have been affected since everything is literally connected to everything. The Academic Dean will revamp the economics curriculum. Emergence will be set in motion.