Letter from members of Swarthmore Mountain Justice
A Note on Language
In the three years of our divestment campaign, we spent plenty of time learning investment jargon in the hope of persuading the Board’s Investment Committee to divest. Not only did our jargon fail to convince the Board, but it often got in the way of us communicating effectively with the entire Swarthmore community. At this point, showing the Board that we can “talk the talk” will not convince them of anything. They already know the arguments for divestment, but choose instead to accept investment orthodoxy, the same thinking that has caused the ecological crisis of climate change, not to mention vast inequality and other suffering in the name of profit. They will only change course when students, professors, and alumni join together to demand an end to business as usual. That’s why we’re writing in language that can be understood beyond the Economics department. We define specialized terms whenever it is necessary to use them.
Structure of this Report
This is a formal response to Investment Committee Chair Christopher Niemczewski’s projected cost of divestment, which appeared in The Daily Gazette on May 9 of this year.
There are many financial arguments explaining how Niemczewski’s cost of divestment is inflated by faulty or incomplete assumptions. One example is NorthStar Asset Management’s recent report, “The Cost of Fossil Fuel Divestment Has Been Greatly Exaggerated,” which states that “Swarthmore College’s rationale to not divest has been based upon inaccurate assumptions.”
In the first section of this report, though, we do not question Niemczewski’s assumptions. We think it’s important to show that, even if his assumptions are correct, his projected “losses” occur in the context of continued prosperity for Swarthmore. “We Have More Than Enough” demonstrates that Swarthmore can divest, meet all budgetary needs, and still grow the endowment.
In second section, “The Carbon Bubble,” we give a long-term analysis of the financial prospects of the fossil fuel industry, which opponents of divestment have neglected to do. We summarize why many climate scientists and financial analysts believe that divestment is a sound, and in fact visionary, investment choice.
We Have More Than Enough
We’ll start with the basics: Swarthmore’s endowment totals $1.5 billion and counting. This amount is called the “principal.” The principal does not pay directly for any college expenses. Instead, the Investment Committee invests it in the stock market and the profits come back to us as “returns.” Every year, some of the returns are spent on college expenses, to make up for what tuition and other fees don’t cover. The rest of the returns are added to the principal for the next year, thus allowing the endowment to grow over time. Only in very down years does the college spend money from the principal.
A few numbers can tell the story from here. All of the figures are from Niemczewski’s projections or Swarthmore’s 2011-2012 financial report, the last available.
4.25%: Swarthmore aims to spend, on average, 4.25% of the total endowment amount each year. This is called the “target spending rate.” The all-time high spending rate was 5.4% in 1983. Even during the 2008 financial crisis, spending didn’t dramatically exceed the target.This spending rate has been sufficient for all college needs.
8.4%: This is Swarthmore’s average annual return over the last 10 years.
What does this mean? Swarthmore’s average return is nearly double the amount it spends. The extra money doesn’t benefit current students. It is added to the endowment, so it can make more money next year, so they can add more money to the endowment, so it can make more money next year, so they can…you get the idea. If we didn’t have this extra money, it wouldn’t actually harm the operations of the school.
Here’s a few more numbers:
5.8%: This is the average annual return of the S&P 500 Stock Index over the last 10 years. This is an “index fund” that tracks the performance of the U.S. stock market as a whole. Investors can make “passive investments” in index funds, called “passive” because, unlike “active” investments, managers do not pro-actively change the stocks.
7.2%: This is the average annual return of the MSCI All Country Excluding U.S. Index over the last 10 years. This is an index fund that tracks the international market.
0.0034%: This is the projected cost of full fossil fuel divestment from an index fund, according to a recent report by the Aperio Group. This is small enough as to be insignificant for our purposes. In other words, Swarthmore could invest in a fossil-fuel free version of either of these index funds without incurring a significant cost.
Remember, our spending target is only 4.25%. Both of these index funds are more than profitable enough to exceed the target.
These numbers definitively show that Swarthmore can meet its endowment spending needs through fossil-fuel free index funds. This means financial aid, staff salaries, DJ fees and all the rest could continue as usual post-divestment
Now that we’ve dispelled that anxiety, let’s finish by returning to one more number, the one that shook the Daily Gazette commentariat and prompted this response:
$200 million: Actually, it was $264.4 million. This is Christopher Niemczewski’s projected cost of comprehensive divestment over ten years. To get this number, he assumes that we’ll switch to divested index funds (so far, so good), and then calculates how much that would cost us in the next ten years, assuming that the alternative is a continuation of business as usual, which brings in 8.4% average annual returns.
Just for fun, we calculated what the endowment would be in 2022, if those 8.4% returns and 4.25% spending rate continue. We came up with $2.25 billion. That’s the projected value of our endowment without divestment.
To get the projected value of our endowment with divestment, take $2.25 billion, subtract Niemczewski’s $264.4 million cost of divestment, and you get…
$1.98 billion: That’s our projected value of our endowment in ten years, even with full fossil fuel divestment. Even without funding climate change, mountaintop removal, and fracking, we can still pay the bills and grow the endowment by a cool $500 million. Sounds like a good deal to us. What do you think?
Of course, this is completely unacceptable if you agree with the Board of Managers’ investment philosophy. Their philosophy is grow the endowment, as much as possible, always, even if it means cutting back from current students. Only under this philosophy can $500 million in growth be framed as a “loss.” It’s time for us all to decide if this is a sensible model.
The Carbon Bubble
Interestingly, for a report on fossil fuel divestment, Niemczewski’s report doesn’t address the economic outlook of fossil fuel companies. A close look at climate science shows that the outlook is poor. More and more investors are waking up to this reality.
The Basics of Climate Change
We agree with the Board of Managers and administration that governmental action is needed to prevent runaway climate change. The world’s governments have already committed, in theory, to limit temperature increase to 2° Celsius. Climate scientists believe that exceeding 2°C will trigger feedback cycles, leading to far higher temperatures. In this world, food production is likely to decrease by as much as 50% in tropical and subtropical climates, including the southern United States. Extreme weather events on the magnitude of Hurricane Katrina, Sandy, or this summer’s wildfires will become far more frequent. A study in the prestigious journal Nature estimated the total economic cost of climate change at $400 trillion. By comparison, the global economy is only $70 trillion each year.
We’re not usually fans of the World Bank, but it released a sobering report this year. In referring to the event of a 4°C warmer world, which we will reach this century if business as usual continues, it writes, “Given that uncertainty remains about the full nature and scale of impacts, there is no certainty that adaptation to a 4°C world is possible. A 4°C world is likely to be one in which communities, cities and countries would experience severe disruptions, damage, and dislocation, with many of these risks spread unequally. It is likely that the poor will suffer most and the global community could become more fractured, and unequal than today. The projected 4°C warming simply must not be allowed to occur.”
Betting On Climate Failure
Policy-makers are increasingly aware of the dire threat of climate change, whether from their own research or because of pressure from grassroots movements. This is why the world’s governments have agreed to limit warming to 2°C. As they act on this commitment, fossil fuel companies and their investors will pay the price.
All fossil fuel extraction corporations own underground “reserves” of coal, oil, and/or gas that they plan to extract and sell in the future. A corporation’s reserves are factored into its stock price. Carbon Tracker International (CTI) has calculated that, if the world’s governments take action to prevent climate disaster, 80% of existing fossil fuel reserves will have to be left in the ground. This is very bad news for investors. HSBC, the largest bank in the world, backed up CTI’s analysis and calculated that the entire fossil fuel sector could decline in value by 40-60% when governmental action finally occurs. In other words, fossil fuel companies are currently valued much more than they should be. When a whole industry is overvalued, it’s called a “bubble.” Remember the housing bubble? This is the “carbon bubble”–and smart investors need to get out of the way before it pops. Those who don’t stand to lose a lot of money.
Mainstream investors are starting to take notice of the carbon bubble, as the HSBC report indicates. Another study found that 53% of fund managers divested or avoided at least one company last year because of concerns about climate change.Still, most investors, Swarthmore included, are exposed to the carbon bubble. We know from personal conversations that Niemczewski and the Investment Committee are aware of the carbon bubble risk, but they continue to invest anyway. We can think of two reasons why this may be the case.
First is the possibility that Swarthmore and other investors want to profit from the carbon bubble until the minute before it bursts. This is the logic that fuels financial bubbles and crashes–everybody thinks they’ll get out at the right moment, but most of them are wrong. Just before the 2008 financial crisis, a Citibank executive famously said about his practice of making risky loans, “As long as the music is playing, you’ve got to get up and dance.”Citibank got slammed in the ensuing crisis. If Swarthmore dances too long in this case, we will be hit even harder when governmental action on climate change finally comes. Even if you think it is moral to dance up to the edge of ecological disaster, are we good enough to get out in time?
Second is the possibility that Niemczewski and his colleagues don’t believe the carbon bubble will ever pop. In the words of one divestment activist, they are “betting on climate failure” by expecting that governments will fail to act on climate change, and we’ll blow past the safe limits. In this scenario, fossil fuel corporations remain profitable for a while longer, but beyond that all bets are off. Remember, the World Bank says that human adaptation may not be possible in this scenario–our civilization itself could fall apart. Needless to say, civilizational collapse poses a large threat to the existence of Swarthmore College.
It’s Not Too Late To Come Around
There is a third possibility, which we see as most likely. We doubt that Christopher Niemczewski, Sue Welsh, Rebecca Chopp would have Swarthmore willingly profit from an industry that is threatening the entire global order. Even though we’ve talked to them about the carbon bubble and the climate crisis, it’s likely they haven’t fully internalized it.
As we slowly come to grips with the truth of climate change, as individuals and as a Swarthmore community, one essential fact will become clear: In order to preserve a stable future, we must build a mass movement to stop fossil fuel extraction in an incredibly short time-frame. We need vast changes in our communities, institutions, and governments to make the change needed. Through the visionary and financially sound tactic of divestment, Swarthmore can make a real change and encourage other individuals, institutions, and policymakers to do the same. Otherwise, we are truly betting on climate failure and unimaginable consequences.
 Assuming a long-term inflation rate of 2%, the Federal Reserve’s target, inflation-adjusted endowment stability requires a 6.25% average return (4.25% for spending plus 2% for inflation). 50% reinvestment in domestic indexes and 50% in international indexes will yield 6.5% average return for divested funds, if trends hold.
 During the 2008 financial crisis, the Board made severe cuts to programs and services instead of exceed the usual endowment spending rate.
 Projected changes in agricultural productivity, Cline, W. R. 2007. Global Warming and Agriculture: Impact Estimates by Country. Washington D.C., USA: Peterson Institute.
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