In the wake of the recent climate strikes on campus and across the globe, many students are pressuring the Wesleyan administration to divest the endowment from fossil fuel companies. While I strongly agree with the environmental and moral arguments for divestment, I also believe that fossil fuel companies are empirically poor investments. Therefore, even if Wesleyan does not care about the terrifying climate crisis, the University should still move away from these hazardous stocks to maximize annual returns.
On fundamentals alone, I understand why the University may gravitate towards fossil fuel investments. Oil giants generally possess robust financial characteristics, such as low debt levels, and they trade cheaply given their steady business models. In the longer term, many proponents of the industry also point to how these companies should appreciate the value of oil prices as they rise in tandem with economic growth.
Even though these bullish arguments sound compelling in theory, I believe the problems with the fossil fuel industry far outweigh the aforementioned positives. The energy sector vastly underperformed domestic equities in recent years and will continue to for a variety of reasons.
The first explanation pertains to how fossil fuel corporations will steadily lose market share in the coming decades to renewable energy. Competitors, often aided by government subsidies, are constantly researching methods to store harnessed energy and reduce the cost of non-carbon sources. These investments have already begun to pay off. For example, solar energy has seen a staggering 86 percent decline in costs since 2009, according to a recent Lazard report.
However, governmental actions such as carbon taxes, a cap, trade systems, and environmental protection laws remain the biggest risks for the sector. These proposals will only become more prevalent as policymakers are pressured to act on the worsening climate crisis, crushing margins and profitability for the fossil fuel industry.
Due to these undeniable trends, corporations will be forced to sell their resources at a less attractive price to meet lower demand. Therefore, these stocks will drastically depreciate in value during the coming decades.
Some may argue that oil companies will innovate to survive the coming storm, but there is little evidence of serious action. In 2018, even with the immense pressures in Europe from the Paris Accords, oil companies spent little over one percent of their annual budgets researching alternative energy sources.
I doubt these companies will ever change. Discovering fossil fuel reserves requires immense sums of capital and risk. Without unprecedented governmental intervention, it would be illogical for oil and natural gas companies to suddenly abandon these coveted assets. Corporations will instead try to fight the inevitable rather than change their flawed and dying business models.
Already, in the private sector, pensions, endowments, and other institutional investors across the world are moving away from hazardous fossil fuel stocks. For example, Norway’s pension fund recently pledged to divest 37 billion dollars from the fossil fuel sector. Pressures to divest will only amplify across the globe as climate change worsens, lowering the demand for shares of carbon-intensive companies.
Wesleyan must also divest not only to uphold the moral integrity of the university, but also to maximize the return of the endowment. Like its peers, the University should use climate change as an opportunity to invest in forward-thinking companies that will provide both superior returns and innovative solutions for the planet.
Hudson Dore can be reached at firstname.lastname@example.org. Hudson is a member of the class of 2022.