Vote No to Keep a Seat at the Table

Dear Swarthmore,

I love this campus, and I love that we keep asking ourselves hard questions. At first, second, and third blush, “should we divest” is not an easy question. On the one hand, the College should be environmentally conscious and actively fight climate change where we can. On the other hand, the endowment exists to help current and future generations of Swatties, and should make as much money as possible.

The crux of the issue is a perceived tradeoff between maximizing the endowment’s return and refusing to invest in industries that make the world a worse place. But is this tradeoff real?

Bosh, I say. There’s a great Economist article that cites a survey that found “a mildly positive correlation between the pursuit of socially responsible policies and financial performance.” In other words, socially responsible investing might make you more money.

The article continues: “A more recent study by MSCI, an index firm, covered the period from February 2007 to March 2015; it found that investment portfolios with greater exposure to firms with high ESG [environmental, social and governance] ratings, or to firms that had recently increased their rating, performed better than the market as a whole.” This seems like pretty conclusive evidence that socially responsible investing doesn’t harm returns.

A Daily Gazette article published today cited a report prepared by the board that predicted losses of $200 million or more over ten years by divesting. The board based this projection on the fact that our endowment has been outperforming the market (by 1.7-1.8% a year) for the last ten years. They claim that if we divest, our years of beating the market are over.

However, the board provides no evidence to support that this delta would magically evaporate if we were to switch our investment strategy and divest. There are plenty of green investment funds that do not touch fossil fuels, and many make healthy returns. The board’s figure appears whisked out of thin air.

So if this tradeoff between investing responsibly and maximizing returns doesn’t really exist, what’s the problem? Shouldn’t we cut the cord?

After thirty minutes on the Internet, I think we should vote no on divestment.

First, divesting doesn’t do anything to advance environmentalism unless it’s done on an unrealistically large scale. Divesting is done with the goal of either (1) increasing polluting firms’ cost of borrowing and pushing down their stock price, or (2) sullying oil and gas’ image in a similar manner to big tobacco. The first goal is basically impossible to achieve; there’s a huge $84.9 trillion worth of assets in America alone, and we would need to get a sizeable percentage of that money divested to have any real impact. The second goal is more realistic, but I’m not convinced that divestment is the best way to accomplish it.

The second, and more important, reason not to divest is to keep our seat at the table. If we, and other like-minded investors, invest in pooled funds that touch fossil fuels, we can make sure our fund managers are active and engaged shareholders. Funds follow the money, and if their investors tell them to go to shareholder meetings for Exxon Mobil (and the like) and tell the company to pay out dividends instead of reinvesting profits and developing a new oil field, that’s a victory for the environmentalists.

By maintaining our investments in fossil fuels we give ourselves some modicum of leverage over polluting firms. Individually our endowment does nothing, of course, but when pooled with the endowments and investments of other environmentalists, we can have real impact. We really can have our cake and eat it, too.

 


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4 comments

  1. 4
    Kyle Richmond-Crosset says:

    Shareholder resolutions are great, and they are being supported by organizations like Ceres (https://www.ceres.org/investor-network/resolutions). I would like to point out that the current divestment proposal and the ability to conduct shareholder resolutions are not mutually exclusive. First, we will retain some shares in these fossil fuel companies (hence the partial divestment) and still introduce shareholder resolutions. Second, we can introduce shareholder resolutions at other companies that also have the potential to become more sustainable.

  2. 3
    Aryt Alasti says:

    A number of the major fossil-fuel companies have been borrowing hugely to maintain dividend levels. Meanwhile, their stock prices have fallen due to the decrease in oil and gas prices, and there’s no prospect of the supply versus demand scenario improving significantly anytime soon.

    Also worth mentioning is that by law, shareholder resolutions cannot address basic company practices, and few of the climate-related issues which can be addressed have had much support amongst stockholders. Therefore, a seat at the table, even with a group of other dissident shareholders, is not likely to result in an effective collective voice for necessary change.

  3. 2

    This position really makes no sense. On one hand you maintain that divestment will do nothing to pressure polluters to change, because the size of our investment is too tiny to matter; but on the other hand, our investment is magically so large that our shareholding representatives (despite their apparent complete lack of interest in the matter historically) can apply leverage to the fund managers, who will apply leverage to corporation boards, who will apply leverage to executives, who will magically bend to our will.

    No, the situation is quite the opposite. Our leverage as active investors, even if Swarthmore’s managers were as vociferous in their opposition to fossil fuel development as Swarthmore’s students are, is effectively nil after dilution through the shareholder process. Our only real power lies in creating and growing a divestment movement, not continuing to collude in climate change through our investments.

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