Unfortunately, divestment will have no effects whatsoever.

As I see it, there are three arguments in favor of divesting from fossil fuels. The first is a confusion about the stock prices of declining companies. The second is a confusion about trends in energy production. The third is a confusion on what investment is.

The confusion about the stock prices of declining companies is that one should avoid investing in a business like oil because its future looks poor. This was a very common belief until about 40 years ago. Back then, as soon as a company looked to be in decline (say, Sears) everyone stopped buying its stock, and the value suddenly fell near zero. However, buying an already existing stock is not investing in a company because you think it will be productive, it’s making a bet on the value of its assets. But the thing is, declining companies still do have some output. You can at least sell off the lots they own and melt the capital down for scrap. In fact, buying the undervalued stocks of declining companies was how Warren Buffett made his first fortune. Nowadays, the stock values of declining industries like oil are probably valued about right. That is, (accounting for risk) you’re probably going to get the same return from those assets as you are from owning any other stocks. In general, you’re not going to beat the market. You’re certainly not going to beat the market while you’re attempting to do good. 

The second confusion is on prospects for the energy industry. Solar is getting much cheaper, but it has limits. The primary is that production is sporadic, and not well aligned with maximum usage. This can be overcome with efficient energy storage systems like the Hoover Dam, but even in rich countries natural gas will continue to supplement renewable energy for a long time to come, especially in home heating. It’s hard to produce electricity for home heating and electricity consumption is highest at night, when solar production is…less high. In poor countries, where much of the electricity production is from privately owned generators and the state capacity isn’t there for consistent production, let alone storage. Electricity will heavily rely on gasoline for a long time to come. This is to say nothing of the massive super-charger infrastructure needed for electric cars, especially in trucking or other long distance travel. No matter what we, Germany, and Japan do, demand for oil isn’t going to shrink very fast. 

The third confusion has to do with the actual effect of divestment. As far as I can tell, the idea is that divestment is like a boycott; as you lower demand for, say, Sabra hummus by not purchasing it, the prices for and profits of Sabra are lowered and discourages Sabra’s support of Israel. So by boycotting Sabra (or Aramco) stocks, you lower the price of said stocks, thus discouraging overall investment in fossil fuel firms and lowering total fossil fuel output. 

Except that demand for a stock is very different from demand for hummus. Again, buying a stock is making a bet on the return of a corporation’s assets. If a few actors refuse to make such a bet, but the expected return is a certain amount, then other investors will make the exact same bets and the stock prices will be the exact same. Demand for stock is not like demand for hummus. The price is not determined by how many people like it. That would be true if investment in Chevron were speculation. But no one is speculating on oil stocks; these aren’t WeWork; these are old assets in an old industry. In the long run, it’s determined by the underlying value of the assets, essentially, by demand for oil. Granted, every investor wants to buy stocks that are not equally risky or whose changes in value are correlated. Divestment could have an effect if so few people were willing to buy oil stocks that even if all of them put all their stocks in that risk-range into oil, oil stock prices would still have fallen. But this would have to be an incredible divestment. Oil can easily be balanced with renewable energy stocks, so it’s easy for a few investors to purchase lots of oil stocks, making divestment ineffective. Essentially, a boycott on something lowers demand not just for that thing, but all things that can be substituted for it. Since stocks are so easily substituted, stock-boycotts aren’t well targeted at the boycotted firms. They will instead slightly lower demand for stocks across the board, but the University’s other investments will raise demand across the board, and in the end nothing will have happened at all.

Now, while divestment does nothing, it is costly. This is not because an endowment in internal management has much trouble not directly investing in oil stocks. This would be easy. The trouble is that a multitude of financial instruments mix in some fossil fuels: mutual funds, index funds, exchange traded funds, and parent companies among other things. It’s extremely hard to avoid investing in things that invest in fossil fuel firms. 

Luckily, there is a much cheaper and more effective way to fight climate change: donate to Senate campaigns for moderate democratic candidates in swing states. Specifically, any money you were going to give to Wesleyan, instead give to the Against Malaria Foundation or senate campaigns in Colorado, Maine, North Carolina, and Arizona. A carbon tax will only be passed if there are 50 Democrats in the Senate, and that’s if the filibuster is abolished. This would collect massive revenues for the government and save millions of lives especially if paired with economic pressure on China, India and other major carbon emitters to reduce output themselves. Unfortunately, it would be somewhat uncouth for the Wesleyan endowment to be spent toward such ends. 

… And you should support nuclear energy.


Tom Hanes is a member of the Class of 2020. Tom can be reached at thanes@wesleyan.edu.

  • buggaboo333

    People on the left don’t understand what investment is and how secondary markets work. As long as they can pin a ribbon on their shirt and virtue signal to everyone, mission accomplished. Man-made climate change is a myth. IPCC has been wrong on the issue forever. If you want to lower the amount of C02 in the world, help countries get rich through capitalism. People get clean as a consequence of wealth, not government mandates.