Monthly Archives: May 2015

finance green politics

Why Swarthmore Should Divest

Hi fellow Swattie, I’m glad you’re here. I know that you care about the world, and that you care about the well-being of Swarthmore. You’ve probably heard a bit about fossil-fuel divestment at Swarthmore, and it sounds like an issue you should know more about, but let’s be honest – it seems complicated and you’ve been super busy. Don’t worry, by the end of this post you’ll understand what’s going on and the arguments for either side.

This is an obviously biased post (see the title) but I think its better to have an explicitly biased post than to make an “objective” post that can’t help but be influenced by my own opinions. Whether you agree or disagree, I hope this post is useful. Please let me know what you think below!

This is a long post, so here’s a short version of it:

  • Swarthmore cares about Climate Change
    • I start with the assumption that we agree (like 97% of scientists) that human-created climate change is real and if left unchecked will drastically change the way humans interact with our climate.
    • I also assume that we agree that those changes will be catastrophic and should be avoided at great cost, as those changes involve at the very least massive loss of life and hardship.
    • There is no doubt that this assessment and the need to act is agreed upon by the wider Swarthmore community.
    • We now can talk tactics and pragmatic priorities – the Swarthmore community also cares about financial aid, the long-term success of the college, etc. and must balance those priorities.
  • Divestment is useful:
    • Divestment is worthwhile, but not to affect share price directly. Instead divestment is effective as a way to change the perception of the fossil fuel industry.
    • Swarthmore is well positioned to affect those whose opinions have the most affect on investment in fossil fuels.
    • The current college’s sustainability plan is weak and ineffectual. When looking at this tactically, divestment is a smaller cost for more benefit than retrofitting all the buildings on campus.
  • Even if you don’t care about divestment…
    • It’s actually not clear that divestment will cost anything – in fact we would likely avoid significant losses in the future due to overvaluation of fossil fuel stocks now.
    • Divesting preserves Swarthmore’s values and brand – failure to divest chooses short-term savings at the cost of institutional integrity and perceived brand.

A Quick History of Divestment (focused on fossil fuel divestment and Swarthmore)

  • 1965: Students at Swarthmore suggest divestment from apartheid
  • 1986: Swarthmore decides to fully divest from Apartheid South Africa
  • 1991: Swarthmore Board adopts policy prohibiting further use of endowment for social purposes
  • 1992: Apartheid abolished in South Africa
  • December 2009: Failure of world leaders to pass Climate Change accord in Copenhagen
  • Spring 2011: Swarthmore students (via Swarthmore Mountain Justice) start the campus Climate Change divestment movement
  • December 2011: Hampshire College divests its endowment from fossil fuels
  • 2012: 350.org launches divestment campaign
  • September 2013: Swarthmore Board decides not to divest endowment
  • May 2014: Stanford University divests from coal
  • December 2014: Swarthmore board commits $12 million towards sustainability
  • May 2015: Swarthmore’s board reiterates decision not to divest from fossil fuels
  • The Swarthmore community agrees it should help combat Climate Change

    In writing this post, I assume that the entire Swarthmore community agrees on a few basic things:

    1. Human-caused Climate Change is real (97% of scientists agree, it’s hard to get more certain than that)
    2. If left unchecked, Climate Change will cause significant changes to how our civilization functions
    3. These changes will be catastrophic, causing large loss of life and wealth, and should be avoided at great cost

    Note that I don’t specify that we agree on how much cost we should bear to avoid Climate Change, nor do I suggest that there is a consensus on how to combat it.

    However, these three items show that it is not “political” in the Swarthmore community to suggest that Climate Change is a problem that must be solved. Indeed, our presidents and deans have been speaking for the community recently when they have touched on the topic:

    I believe we all share a deep commitment to finding effective ways to combat the myriad ills that threaten the environment, indeed, the very future of our planet. It is obvious that we agree that sustainability is among the foremost priorities facing our society—and the world—today.
    President Rebecca Chopp, April 2014

    The managers of Swarthmore College agree that climate change is the most pressing issue of our time and that Swarthmore College can—and must—play a leadership role in helping to curb the seemingly insatiable appetite for fossil fuel.
    Board of Managers, May 2015

    We see that Swarthmore community believes that:

    1. Swarthmore is able to help tackle the issue of Climate Change
    2. Swarthmore is morally obligated to do so given its privileged position

    Pragmatic concerns

    So we have determined that Swarthmore as a community is unanimously (or close enough) on board to help solve Climate Change. Now it just becomes a discussion about how we balance our resources between Climate Change and other agreed-upon priorities. This is the political debate – a discussion of how to allocate limited resources amongst a set of priorities.

    In an ideal world, Swarthmore has infinite money, time, and focus to address all the wrongs in the world that we agree about. In the real world, Swarthmore has a few other significant obligations and goals that we must take into account.

    The Swarthmore community also:

    • Desires to continue as an organization as long as possible
    • Desires to help less-wealthy applicants thrive at Swarthmore
    • Desires to gain the highest status possible amongst universities and colleges
    • Desires to end racism, sexism, etc in the wider world

    That’s a lot, but we do have some powerful resources to help us:

    • A $1.88 billion dollar endowment (in the top 20 in the U.S. for per-capita endowment)
    • Respect amongst the academic, cultural, and political elite
    • A strong network of alumni who also share these values

    The first three other desires Swarthmore as a community agrees on are directly tied to the size of the endowment and the returns on it. In order to continue as an organization in perpetuity, a large endowment helps – returns from the endowment helps Swarthmore pay for buildings, faculty, etc. and serves as a reserve fund in times of need. Those funds also help offset tuition breaks offered to less wealthy applicants (and help offset full-price tuition as well). Finally, one mark of respect amongst institutions comes from the size of one’s endowment.

    The last desire is a set of other socially beneficial causes that the community agrees on which we would like to help with. I don’t pretend that Climate Change is the be-all-end-all social cause, but I will argue that much progress in other causes would be undone due to the pressure from Climate Change in the future, and so it would be wise to tackle this issue with a higher priority.

    Additionally, there are fewer clear paths forward for the other social causes: combatting Climate Change requires the world to emit fewer greenhouse gases and ideally reduce the amount of greenhouse gases already in the atmosphere. Simple and clear.

    Influencing (as an example) the Black Lives Matter issue is not as straightforward – the Swarthmore community agrees that our society does not value the lives of our black citizens enough, but how do we help? Should we divest from St. Louis-based businesses? Should we support body cameras on police? etc. It is not quite as clear, at least yet, that divestment would be the most effective use of our resources in helping that cause. One could imagine a situation in which divestment would help (for instance divesting from Woolworth’s during the civil rights era to pressure change), and in that case I believe it would be fine to use the endowment as well.

    The Logic of Divestment

    So we have unanimous agreement that there is a problem and we have a clear goal to avoid catastrophic Climate Change: reduce greenhouse gases across the world. So how do we do this in practice?

    The divestment movement suggests that one way to reduce usage of fossil fuels is by altering the perception of the fossil fuel industry amongst investors, particularly large, influential investors. This will inspire less investment in fossil fuels and less consumption following that decrease in investment. Note that the divestment movement does not think that selling the shares themselves will actually cause the share price to change, not without a wider change in perception.

    Currently, fossil fuel companies claim large amounts of coal, oil, and gas reserves as assets on their balance sheets. These companies use investment capital provided by the financial markets to fund more exploration for new resources and to fund R&D to better exploit their current holdings. Investors fund these companies (and by extension, further exploration and consumption of fossil fuels) because it has historically been a good investment. Ideally, however, the negative externalities of carbon in the atmosphere would be priced into the costs of fossil fuels, and the value of these reserves (and therefore the value of the stock) would decrease. This is called the Carbon Bubble.

    Right now, the stock prices of these companies reflect the assumption by investors that the negative externalities of carbon will never be taxed. However, for our civilization to avoid catastrophic Climate Change (see above that the Swarthmore community agrees that we should avoid this), those fossil fuels must not be burned or the negative effects of emitting the carbon should be included in the price of the fuel itself. As an example, each gallon of gas might be priced to include carbon capturing and sequestration of an equivalent amount of carbon elsewhere in the world, similar to offsets you can optionally buy on an airplane. Or more depressingly, the tax on every 100 gallons of gas might go towards resettling a Bangladeshi refugee from sinking land.

    Divestment is a powerful statement about this situation:

    We believe that Climate Change is real, and that the costs of burning fossil fuels will be priced into the fuel itself at some point in the future. We believe that it is unjust to push the burden of dealing with the negative externalities of carbon onto the rest of the world, and that this injustice will end sooner rather than later. We are so confident in this that we are betting large sums of money on this outcome.

    That such powerful institutions both believe that this outcome of carbon being accurately priced will occur and have vested interests in this outcome occurring should encourage all investors to reevaluate the true value and future of fossil fuels. Politicians should as well take notice that fossil fuel jobs are no longer as desirable to attract as before, and that the fossil fuel industry is likely not a reliable, powerful ally beyond the near future.

    Or more succinctly:

    The Carbon Bubble exists, and we as an institution find that the status quo is fundamentally shifting. Divestment is our institution acting upon that finding.

    This statement is somewhat symbolic, but that is the point – divestment highlights to other large institutions and investors that the world has changed, and that investments in fossil fuels are no longer likely to offer decent returns. When the elites of our society suggest that the future will look different, and back that suggestion up with the money that they steward, they’re probably onto something, and you as an investor should probably listen.

    Arguments against divestment by the board

    There are a few common arguments against divestment, starting with the glib response that “someone else will buy the shares”, which is true but misses the point as shown above. The Swarthmore Board of Managers (a body of individuals who elect their own successors under no obligation to listen to the wider community) asserts that divestment will be very expensive and will compromise other priorities the college cares about:

    The College’s budget is dependent on the endowment to support financial aid, sustain its exceptional faculty, provide academic and extracurricular programing, and build and maintain facilities.

    In particular, we seek to preserve our increasingly rare stance of need-blind admissions, funding student need with all scholarships and no loans, and expanding access to our education for those who cannot afford it. In fact, increasing the access of exceptional low-income, first generation, and minority students to Swarthmore is a top priority.

    If we were not able to work with these investment managers, it would cost the college between $10 and $20 million annually based on the past performance of our current managers.

    However, the Board is enthusiastic about spending tens of millions of dollars on sustainability measures on campus. So the Board and the divestment advocates agree: Climate Change is important to combat and we should be willing to spend millions of dollars to do so. The Board’s argument is not that divestment will not work or that it would not be a useful step, but that it is too expensive relative to other alternatives. I’ll detail later on why I think individual action like building a sustainable building is not actually high-impact when it comes to the collective-action problem of Climate Change.

    Additionally, the Board is (rightfully) worried that opening up the endowment to divestment from fossil fuels will encourage activists to approach the Board seeking to use the endowment for other social causes. However, few causes are as apolitical as Climate Change is in the Swarthmore community – there can still be a strong barrier to using the endowment, requiring a sustained campaign to convince the Board that, yes, issue X has near-unanimous support amongst faculty, students, and informed alums.

    Another suggestion which the Board has proposed is using the fractional ownership of these fossil fuel companies to push for sustainability measures. However, I highly doubt this would be effective: without a divestment movement there would always be others to purchase shares, and there is no chance that Climate activist investors will form a large enough section of the shareholder body to effect change.

    As for the Board’s (paraphrased) argument that: “in the past (in 1991) an unelected body decided not to consider social objectives in endowment investments, so we will not consider social objectives today”, well, I can’t imagine any member of the community finding that argument convincing.

    Arguments against divestment by Professor Burke

    A separate and more interesting discussion came from professor Timothy Burke, who has a few great points and one strong concern about tactics. He suggests that:

    • We need to stop treating people who disagree on tactics as if they reject the scientific consensus – there are legitimate debates to be had on the most effective use of limited funds, time, focus, etc.
    • Screening the endowment for “moral purity” is impossible – the college will always end up invested in some form of exploitation
    • Colleges are no longer institutions which can lead the broader nation on social issues, a condition which has been true for at least 30 years

    The first point is important – the ferocity of activists turns off many people I know, and the divestment movement at Swarthmore still has a bad reputation amongst alums from when activists shut down healthy debate and discussion via chanting a few years ago.

    The second point is probably true, but less interesting; complete moral purity is not an outcome which many in the divestment community are actively seeking. Impact is the more important goal of the movement.

    The third point is the most interesting, as we are now talking broader tactics. Professor Burke argues that starting the divestment movement from elite bastions that have little connection to normal Americans and are often resented by a broad spectrum of the country does the movement no favors. He contrasts it with the anti-apartheid movement, a campaign that divestment supporters often reference:

    The anti-apartheid coalition moved outward from progressive activism to a wider political base, and was largely careful to attend to the conditions that would facilitate that movement. It used the university as one stepping-stone because the university was part of a constellation of respected civic institutions that included churches, community groups, local municipal governments, and mainstream journalism.

    That cluster of institutions was already beginning to fragment in the 1980s, and is now almost wholly dispersed. You cannot keep running the same plays if the game itself has fundamentally changed.

    Professor Burke is 100% right that the game has changed. However, I don’t think he realizes how it has changed. The 1970s and early 1980s were a time of institutions and characterized by people having the power to affect change en masse. Unions, coalitions of faith groups, and student groups were successful in actualizing change. This is no longer the case, even amongst people who still belong to unions and who still belong to organized religious groups. In today’s world, star power is more important than ever, and only a few people have the power and influence to make change succeed. For policy, we can take a look at the influence of George Soros or the Koch brothers on energy & finance legislation, or how selective applications of funding from the Gates foundation have transformed large sectors of education. Even teachers unions have been continually on the defensive, and both union and church enrollments have been in decline for decades. Culturally speaking, the local pastor or union leader is an endangered species – an endorsement from Ben & Jerry is probably more valuable than the support of the Methodist churches, for instance, and will get you more press and notice from the people who actually have influence.

    So trying to convince large numbers of Americans is actually not very valuable in today’s society if you actually want to get anything done, and is a hell of a lot harder than the alternative. That alternative is to convince the people with power that you are right. This is even easier than you might think as currently the 400 wealthiest Americans have more wealth than half of all Americans combined! As the divestment movement is structured, it doesn’t even need to appeal to the moral side of those with power, just to the desire for those with power to avoid the risk for the “Carbon Bubble”. As discussed before, Swarthmore actually does have a good amount of influence and respect amongst other education institutions, the media (i.e. David Brooks, Arthur Chu, etc) and the political world, and is thus a good candidate to lead the movement.

    So yes, I agree with Professor Burke that Swarthmore is a terrible place to start a mass movement. However, we don’t need a mass movement – we just need to affect a very small, elite segment of the world population which holds most of the cultural, political, and financial capital. Undemocratic? Yes. Cynical? Yes. The only way to avoid effect real change and avoid catastrophe? I believe so.

    Why individual sustainability actions are not very worthwhile

    The Board suggests that Swarthmore should lead by example and conserve in an individual way. I find this plan weak and vain, and the money spent on building sustainability essentially wasted in comparison to how it could be used to drive meaningful change. This is a strange position – every little bit helps, right?

    While individual action might buy us time in resolving Climate Change, individual action is fruitless in the long-term for this problem. Professor Burke’s criticism that Swarthmore is not the right place to start a worldwide social movement rings true – fossil fuels are consumed by individuals everywhere, and realistically no one really cares how many barrels of oil Swarthmore saves, or how many trees it plants in the Crum. Those individuals will continue to drive and consume, and if oil is slightly cheaper because Swarthmore uses less of it, someone else out in the world who has never heard of Swarthmore will use more of it.

    Climate Change is a collective action problem on a global scale. The businesswoman in China starting a coal mine and seeking favorable investment from global finance will never hear about nor care about how “green” the new biology building is, she will decide to open the mine based on economic considerations. The carbon emissions of those economic considerations dwarf the savings that Swarthmore can provide, even if we became 100% efficient. It is those economic considerations you must change.

    A particularly sharp reader might object that this parallels share price – when Swarthmore divests, wouldn’t someone who has never heard of Swarthmore or doesn’t care will simply purchase the shares or provide the loan for the mine? However, we have shown that the true purpose of divesting is to advance the idea that the Carbon Bubble exists and will materially affect the fortunes of fossil fuel companies. As long as an investor has heard of the divestment movement (and at this point all large investors have), understands the concept of the Carbon Bubble, and has their own self-interest in mind, that investor is less likely to invest.

    If you want the college to divest, why not just donate to the special fund set up by the Board?

    In May of 2015 the Board reiterated that the general endowment was off-limits for divestment, but opened a special fossil-fuel-free fund one could donate to. The argument is: Others in the past donated to the college for the explicit purpose of running of the college, not for affecting the social issues that a future generation might care about. Thus it is improper to use those funds for any other purpose.

    I find this argument weak as well. Swarthmore itself was started by radical Quaker abolitionists – these original benefactors strongly believed that Swarthmore should push forward on issues the community believed in, even if these issues were not central to the day-to-day mission of education. As an example, the first Board was made up partly of women, which at the time in Pennsylvania was illegal and highly unusual. Could the college have started with a Board officially made up of only men? Certainly, and it would have been less distracted from its mission of creating an environment to educate in. However, the founders of Swarthmore decided that the morally right thing to do was not the most short-term advantageous thing to do. This is a value that Swarthmore strongly holds, and always has.

    Donating to the college is not like donating to a factory trying to make as much ‘education’ as possible, but instead a donation to a living community which has agency to govern themselves as it sees fit. The donation to the college is just that – a gift, something which the community can use as it sees fit, and it is pretty obvious what values the community holds.

    On a tactical level, that special fund did not get any press and is useless to combat Climate Change (again, an outcome that the community desires). The headlines are along the lines of: “Swarthmore chooses not to divest”, and are not even along the lines of: “Swarthmore allows for some divestment, going forward, which will be a very very small fraction of the funds it manages”. For divestment to be worthwhile, Swarthmore needs to indicate that the entire community sees the danger of the Carbon Bubble and has decided to avoid the risk. Silent divestment via the special fund is worse than doing nothing – at least when you’re doing nothing you know that you’re doing nothing instead of believing that you are having an impact.

    Still think we shouldn’t touch the endowment for moral reasons?

    Fair enough – I understand the reluctance. This section is to convince you that divestment is actually a necessary step to:

    • Avoid downside risk to the endowment (aka that we’ll lose money) from the Carbon Bubble
    • Ensure that Swarthmore is still seen as a leader, with the benefits that come with that position
    • Ensure that Swarthmore avoids hypocrisy and maintains its values

    While I could write about this, someone with better qualifications has already done a better job than I would do: http://daily.swarthmore.edu/2015/03/05/the-financial-advantages-of-divestment/

    This article was written by a financial professional who spent time looking at Swarthmore’s case specifically, and who concluded that it is actually a wise investment decision to divest. The Board suggests that Swarthmore’s endowment will lose $10-20 million a year if we divest. That number is almost certainly an exaggeration, and ignores the downside risk of the Carbon Bubble, as the investment professional explains:

    If we agree that climate change is a huge threat that society will act on, then it necessarily follows that divestment will occur to limit losses, that fossil fuel company prices will drop substantially and that institutions with these stocks in their portfolios will experience large losses.

    He then identifies the other reputational risks that come from failing to lead:

    Aside from the financial risk of being a late exiter, the moral and brand damage to Swarthmore from being a late mover would likely be large.

    A January 15, 2015 letter by many of Stanford’s faculty to the Stanford President and Board of trustees puts the issue this way: “If a university seeks to educate extraordinary youth so they may achieve the brightest possible future, what does it mean for that university simultaneously to invest in the destruction of that future?”

    This analysis lays a convincing argument that by divesting we avoid significant risks to Swarthmore, both financial and reputational. This is without even considering any moral argument for divestment.

    So how do I help?

    Great – thanks for joining us! It might seem hard to affect change, as the Board’s response recently seems final. However, the student activists at Swarthmore are not quitting anytime soon, and your power as an alum is greater than you might think.

    Ways to help:

    • Join in actions when you return to campus for your reunion. Email me if you want to help plan.
    • Help spread this information to others. There are divestment movements on many many campuses, and many alums who don’t yet have enough information to make a decision. At the very least the conversation about divestment will be pretty interesting.
    • Next time the college asks you for a donation, let the college know that you won’t be donating until they divest the entire endowment. Alumni giving rates are very important to elite colleges, and this is one of the stronger levers we have. Make sure you can explain why donating to the side fund is not worthwhile (see the section above).
    • To still donate but actually put pressure on the administration, donate here
    • Like these groups on Facebook: 350.org and Swat MJ
    • Personally pledge to divest from fossil fuels (I find this less effective than getting an institution to divest – your personal divestment probably will make few headlines!)

    Conclusion

    Thanks for reading this far. Hopefully you feel informed about the debate, even if the presentation was highly opinionated.

    Again, the divestment movement seems complex, but ultimately boils down to a set of simple assertions:

    • Human caused Climate Change is real.
    • The Swarthmore community agrees that Swarthmore College should help fight Climate Change.
    • The Swarthmore is able to be a leader in changing the status quo.
    • Divestment can help change the flow of global capital away from carbon-intensive fuels.
    • The Carbon Bubble exists.
    • Divestment will actually help the college’s endowment value in the long-term.
    • There are risks to our reputation from not divesting which have not been examined by the Board.
    • Divestment is a more effective strategy than individual efforts by the college and the community.

    I believe that all of those assertions are true (although all do not need to be true for divestment to be worthwhile), and I hope that I have shown in this post why I think so. I am always open to new information, however, and would love any perspectives, ideas, or information that I may have missed.

    How about it – do you think Swarthmore should divest?