Another look at divestment

By Max Schnidman ’14

The debate over divestment has swarmed across college campuses over the past year, and it has finally hit the Hill. Members of our community are asking the College to “immediately freeze any new investment in fossil-fuel companies, and to divest within five years from direct ownership and from any commingled funds that include fossil-fuel public equities and corporate bonds.” They argue that such an act will prevent harm to our environment. Their position, while morally admirable, is economically untenable.

First, a quick discussion on investments: the college doesn’t leave our tuition money under a mattress. Rather, it invests this money in the markets through a combination of stocks, bonds, hedge funds and other financial instruments designed to provide greater returns than a bank’s interest would provide. Of course, these investments carry risks: a company could declare bankruptcy, the Eurozone could collapse, etc. Combinations of assets, however, can reduce risk, and Hamilton’s assets constitute a well-diversified portfolio: a collection of assets that most highly mitigates risk from individual assets.

What happens, then, if we choose to divest from fossil fuels? Our well-diversified portfolio suddenly loses its diversity and exposes itself to greater risks from other firms and sectors of the economy. This could reduce both the financial security of our endowment and the returns from our investments. According to the College’s 2012 financial statement (available online), our investments directly into energy partnerships, royalties and firms are worth about $59 million. This comprises just under eight percent of our investments (as of March 2013), but doesn’t include overall risk to the portfolio from the energy sector (a college official clarified these numbers and stated that the college does not track its portfolio risk to each sector of the economy). While some may argue that this eight percent means that divestment would be easy, the fiscal cost of exiting the contracts would be significant, and the impact that divestment would have on our future expenditures could be devastating. Our endowment funds development projects, academic programs and financial aid packages. Divestment could make it unfeasible for many of its advocates to continue attending Hamilton College.

Advocates may counter that financial aid only costs the college $26 million, less than half the returns from energy investments, and that such a small amount of money can easily be made up. This argument ignores, however, the increased risk that our portfolio would be exposed to, and the loss in returns that our endowment would face from fewer investment opportunities. Additionally, not all of the $59 million from energy goes directly into expenditures; rather, much of those returns stay in the asset, generating future returns and keeping our endowment healthy.

Advocates may then respond that the endowment should be used more liberally for expenditures. That may be true, but much of the endowment is held in reserve for future growth and financial security. Hamilton’s investment strategy has a much greater time horizon than any individual investor: while the average person may plan for investment over forty years, the College has to plan for many decades, as the institution is expected to outlast any members of the current community.

Divestment proponents may also counter that our energy returns have decreased year-over-year (by about 11%), and that divestment may actually help our endowment. These returns, however, need to be compared to the rest of the energy market. The Vanguard Energy Fund, a composite fund of the energy market, saw a 21% year-over-year decline in the same time period. Our energy investments actually outperformed the energy market, a testament to our asset management team, and a sign that our energy investments are financially beneficial.

Advocates also argue that our divestment will help convince firms to cease their activities in fossil fuels. Our divestment alone, however, wouldn’t be enough. If we divest for reasons outside the market fundamentals, then the energy assets will be underpriced, leading to other investors buying up the assets immediately to get the returns. It would require a massive shift in market demand that academia alone cannot cause to convince firms to reduce fossil fuel activities. Additionally, by maintaining our assets in energy companies, we could use our voting power as shareholders to enact change from within, rather than attempting to unilaterally change the markets.

Climate change is without a doubt a significant issue, and while we do need to find a solution, but divestment is not it. Divestment is a feel-good position that will only harm the College in the short term and the environment in the long term, as the market as a whole will continue to invest in fossil fuels. Rather, we should maintain our holdings in fossil fuel firms to convince them to change from within by advocating for alternative methods of responding to climate change, such as geoengineering, which argues for human intervention in the climate to mitigate the effects of climate change. This process could open up entirely new industries and cause significantly less stress on the market. Climate change solutions need to work with the markets, and not against them, in order to succeed. The choice is clear. Divestment works against the market, and geoengineering does not.

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