The environmental fervor behind the divestment movement is well deserved. However, if pulling our money out of fossil fuel investments will hurt our returns, it isn’t worth doing. While proponents of divestment largely ignore this criticism, it is the main line of attack for those opposed to the movement. This critique is uninformed. We need to analyze the numbers behind divestment from fossil fuels.
The Board invests our endowment in a number of different investment funds, but for the purpose of this article, I’ll focus on J.W. Bristol, the manager from which we have the most substantive information. Within their list of holdings, there are seven companies which profit exclusively from of the extraction and consumption of fossil fuels.
These are the seven objectionable corporations from which we on the Student Divestment Committee want to divest our endowment money. They are not the only seven companies that we are invested in which hold interests in fossil fuels. There are two more. However, both of these other companies profit significantly from alternative energy, and have continually invested in strong sustainable energy programs. I don’t want to divest from those types of companies.
This is an important thing to note about fossil fuel divestment. We are specifically targeting the companies which make no substantive attempts to profit from anything other than the extraction and refinement of fossil fuels. Obviously, our entire economy profits from this endeavor, but these companies are most directly to blame for our climate crisis.
From this selective divestment logic, we are left with the aforementioned seven companies. To avoid disclosing private intellectual property, these companies will remain nameless. However, it’s pretty easy to get their names from behind the desk in Tutt library.
Investors use a number of statistical benchmarks to gauge the riskiness of a given investment. One of these is called beta. Beta is a measurement of how volatile a stock is relative to a given index, such as the S&P 500. The S&P 500 is a collection of 500 stocks that Standard and Poors have decided are indicative of overall market performance. This is a tried-and-true industry standard for measuring the performance of the stock market.
These seven stocks have an average beta off of the S&P 500 of around 1.4. This means that they should increase or decrease, on average, 1.4 times as much as the market does. Basically, our investment in these seven companies is somewhat mathematically riskier than just buying every stock on the market. From this measured risk, we hope for greater returns.
The chart above shows the performance of these seven stocks against the S&P 500 over the last five years. As you can see, their returns have lagged behind the index. Fossil fuel stocks used to be a great investment – but not since 2008.
The fallout from pre-2008 speculation on oil reserves has held these stocks back. At the same time, political pressure and public sentiment have been growing against their industry, and government incentives towards clean energy alternatives have stood in opposition to their business model.
Obama’s post-election rhetoric, Democratic election victories, and large scale popular protests like last week’s Keystone XL protest all promise to keep these pressures on fossil fuel stocks. The forces driving these stocks to underperform will continue unabated through the next several years.
An obvious counter argument to this point is that while there are short term ups and downs in every market sector, we have to hold on to these stocks for the long term in order to reap the returns. This ideology works brilliantly if, like Harvard, we had 30 billion dollars to invest. With that much money, you can weather a five year storm. We don’t have that much money.
Colorado College’s endowment doesn’t have a billion dollar financial cushion. Our budget is tight, and in just a few years, risks without returns can strangle us. In the five years since 2008, the football team has been cut, temporary professors have been let go, and financial aid has been harder to come by.
Even if we could wait out our fossil fuel stocks’ underperformance, the long term outlook for these companies is bleak. Their business model is fossilizing to keep up with their product. In the long run, these companies won’t make any profits at all. The Earth will eventually run out of fossil fuels, and that’s the only product they sell.
Some say that the growth of market demand for fossil fuels in developing nations will bolster corporate oil profits in the meantime. However, a single, state owned corporation dominates much of the Chinese oil industry. It is unlikely that other fossil fuel companies would be able to break this government sponsored stranglehold.
Even if they could, they would just be accelerating our approach to peak oil production and hastening their own inevitable demise. Energy companies like these seven which are not working aggressively to produce long term, sustainable energy profits are ultimately doomed to financial collapse.
I don’t have access to the rest of our investment information, so I haven’t been able to analyze the relative profitability of our other fossil fuel holdings. Within Bristol, at least, it is clear that we are sacrificing returns by holding these stocks. This sacrifice, in turn, hurts our school’s ability to support a competitive liberal arts education on a yearly basis.
Divestment from fossil fuels is not just an emotionally driven protest. Joining this national movement isn’t going to hurt our endowment returns, or keep them as they are – it will improve them. Divesting from fossil fuels within J.W. Bristol’s holdings is a sound financial decision based simply on profitability and risk versus long term return on investment.
David Cully
Comment and Debate Editor