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October 23, 2017

“Divest the Globe” campaign is another drop in the divestment movement’s ineffectual bucket

This week, the Action Network is planning several days of demonstrations as a part of their “Divest the Globe” campaign.  The protests will coincide with 92 of the world’s largest banks meeting in Sao Paulo, Brazil to discuss risk management and climate policy. Protests will focus on targeting banks like Wells Fargo and J.P. Morgan Chase that invest and lend to infrastructure and industry projects. More specifically, the Action Network is targeting banks that have contributed financially to the Dakota Access Pipeline and the group asserts that “financing climate disaster…will result in a massive global divestment movement.”

No matter how noble the intent, divestment continues to be a poor choice for institutions as it is costly and ineffective. Many large institutions have already publicly rejected divestment and here’s why:

Divestment is expensive

Divesting from fossil fuels will produce huge losses for institutions, like schools and pension funds. Research has shown that over the long-term, divested portfolios under-perform those that remain invested in fossil fuels.  For instance, a recent study by University of Chicago Law School’s Prof. Daniel Fischel found that if some of the nation’s largest pension funds had divested, they would have missed out on trillions of dollars of returns over several decades.

In addition to missing out on significant returns, the sheer transaction costs of divestment add to the enormous price tag of ridding a portfolio of fossil fuels—since there are steep fees associated with selling investments and active financial management. Furthermore, investing with environmentally-conscious financial managers means higher standard management fees. According to a report by Arizona State University Hendrik Bessembinder, “environmental funds charged between 0.38 and 0.73 percentage points per year more than other funds.” All this points to the fact that institutions will need to spend a significant amount of money in order to divest, on top of the huge losses they incur once the divestment is final.

Divestment is ineffective

The goal behind the divestment campaign is to essentially pull funding from fossil fuel companies in order to fight climate change. Regardless of the intention, it is impossible to make a case that divestment accomplishes this goal. It was for this very reason that in 2015 the Massachusetts Institute of Technology (MIT) rejected divesting its endowment. In a statement, MIT President L. Rafael Reif said, “Combatting climate change will require intense collaboration across the research community, industry and government….We believe that divestment — a dramatic public disengagement — is incompatible with [this] strategy.” Fossil fuel emissions are not in any way related to fossil fuel holdings. Divestment would simply shift the holdings from one party to another, and does nothing to actually lower emissions.

Divestment is hypocritical

If divestment enthusiasts have their way, institutions would drop all fossil fuel holdings. But what impact will that have if society at large is still using products from these companies? In the United States alone, fossil fuels – petroleum, coal, and natural gas- continue to provide the majority of energy consumed in the country, as they have for the last century. According to the U.S. Energy Information Administration, that number is predicted to remain steady into the foreseeable future. So what exactly do divestment advocates hope to accomplish? While advocates pressure institutions to divest their holdings, the cars they drive and the lights they use are still powered by fossil fuels. And as Prof. Fischel points out, “Even activists acknowledge that divestment is more about stigmatizing fossil-fuel companies and might not have a direct financial impact on them.”

Large institutions have already said ”no”

Numerous institutions – from the world’s most highly regarded universities to some of the largest pension funds – have rejected divestment. Fiduciaries recognize their responsibility to those they serve and have chosen to keep their fossil fuel holdings. As reports have shown, fund managers at these institutions “may sympathize deeply with the objectives of fossil fuel divestment, but ultimately, they have to be practical and recognize the costs that come with divestment and what those costs mean for stakeholders.” Several entities that get credit for divesting, like Barnard College, Syracuse University, and a host of Catholic institutions, have pledged to divest holdings they don’t even have!

After striking out with universities and pension funds, activists are shifting their attention to banks. The movement’s leaders are calling for organizers to close their accounts at banks and protest these institutions; but with misguided goals and far-reaching expectations, one cannot be certain that this week’s demonstration will satisfy divestment activists.