October 07, 2013
Engage or Divest?
by Robert Kropp
As college students continue their campaign for divestment from fossil fuel companies, Northstar
Asset Management debunks estimates of the cost of the investment strategy and questions whether
shareowner engagement can be effective.
Much of the legwork had been done before—a 2011 report from Carbon Tracker reported that
no more than 20% of all fossil fuel reserves accounted for at present could be burned if the worst
effects of climate change are to be averted—but it was a Rolling Stone article authored by Bill McKibben of 350.org that launched the movement calling for divestment of
ownership of fossil fuel companies.
The primary focus of 350.org's divestment
campaign has been the endowments of US colleges and universities, and to date students at some 250
institutions have engaged with trustees in an effort to pressure them to divest their holdings in
fossil fuel companies. The students can count some successes in their campaign, as six colleges
have agreed to divest thus far. But many high-profile endowments such as that of Harvard—the
nation's largest—have resisted. After 72% of Harvard students voted in favor of a divestment
policy, a university spokesperson said, "Harvard is not considering divesting from companies
related to fossil fuels."
In a letter published last week, Harvard
President Drew Faust elaborated on the college's refusal to divest. “Given our long-term investment
horizon, we are naturally concerned about environmental, social, and governance factors that may
affect the performance of our investments now and in the future,” Faust wrote.
“as shareholders, I believe we should favor engagement over withdrawal,” she continued. “In the
case of fossil fuel companies, we should think about how we might use our voice not to ostracize
such companies but to encourage them to be a positive force both in meeting society’s long-term
energy needs while addressing pressing environmental imperatives."
In her letter, Faust
offered a narrow view of fiduciary duty. “The funds in the endowment have been given to us by
generous benefactors over many years to advance academic aims, not to serve other purposes, however
worthy,” she wrote. “As such, we maintain a strong presumption against divesting investment assets
for reasons unrelated to the endowment’s financial strength and its ability to advance our academic
But even setting aside arguments over whether an enhanced interpretation of
fiduciary duty should include long-term consideration of environmental, social, and corporate
governance (ESG) factors, what might be the strictly financial impacts of divestment? According to
an analysis by Patrick Geddes of Aperio Group, the impact could be negligible. Geddes found that
even a portfolio that excluded all fossil fuel companies would incur significantly less financial
risk than would the practice of active stock selection.
"Screening negatively affects a
portfolio's risk and return," Geddes concluded, "but…the impact may be far less significant than
And last month, Northstar Asset Management concluded that the methodology used by Swarthmore trustees
to reject divestment was faulty. Even considering a worst-case scenario, Northstar concluded “that
there is, in fact, no substantive reason for investment fiduciaries to not divest their fossil fuel
Sustainable investors have wrestled with arguments of divestment versus
engagement, and many if not most have concluded that engagement provides them with the better
opportunity to pressure fossil fuel companies to change their behaviors. However, the engagement
strategy comes in for its share of criticism in Northstar's paper.
“Shareholder efforts to
convince fossil fuel firms to expand into alternative energy businesses have proven ineffectual
and, as a result some fossil fuel firms have even stopped trying,” the paper states. “SRI investors
and their fiduciaries also have a responsibility to consider the cost of NOT divesting—on people
and the planet, as well as on profit.”