CON: Judge university investments solely on their economic value

The strong collegiate presence at the People’s Climate March in New York City last September showed that the fossil fuel divestment movement has gained followers in universities throughout the country. The goal was to convince schools to drop their investments in oil and gas-producing companies.

There have even been suggestions of a movement starting here at the University of Miami.

Though UM is a private institution, and as such does not need to reveal how their endowment is invested, it is not surprising that the school does hold some stake in energy companies, either directly or indirectly through an index fund.

Though popular, the divestment movement stands on shaky ideological footing and mistakes an economic decision for a social one.

The problem underlying the divestment movement is one of significance. A 2014 survey conducted by the National Association of College and University Business Officers found that the combined endowments of 851 American universities totaled $500 billion. The amount held in the energy sector is probably much lower, as universities tend to spread their holdings out for the sake of security.

For universities with endowments of UM’s size (around $865.4 million according to the university’s website), the survey estimates that 40 percent of their assets are shares of foreign and domestic companies, of which fossil fuel companies would be a subset. This figure is dwarfed by the total value of the energy sector: ExxonMobil alone has a market capitalization of roughly $350 billion, and Chevron is worth $200 billion.

To these companies, university holdings are essentially meaningless, and even if sold, they would go to another investor, resulting in no difference for the companies involved.

Moreover, in suggesting universities sell their shares, the movement seems ignorant of reality. People need to put gas in their cars regardless of whether universities profit off of them.

If universities choose to sell their stocks, the same gas will be pumped and the same gas will be burned. The only difference is who receives a cut of the sale. Again, the net effect, at least in terms of pollution, is zero.

However, in a purely economic sense, energy companies may not be the most favorable of investments. Damaged by the collapse in oil prices, many companies have suddenly lost the favor of investors.

Universities that choose to sell off their stakes would certainly be in good company. In the past six months, the energy sector of the Standard & Poor’s 500 has lost around 10 percent of its value. This is probably the strongest argument in favor of divestment.

But in context, it seems intellectually dishonest. If economics were a legitimate concern of the divestment movement, many other types of investments would be targeted as well – not just fossil fuels. However, there aren’t any student groups advocating the selling of stocks in, say, insurance companies.

Managing an investment portfolio is an economic process, and choices require economic justification. The danger that underlies the divestment movement is that these decisions become clouded in social questions, damaging their value. Universities need to treat energy companies the same way they view any other potential investment.

Andrew Langen is a sophomore majoring in economics and math. 

See Also: Patrick Quinlan’s PRO piece “Say ‘no’ to fuel company stocks, campus voices should be heard”

April 2, 2015


Andrew Langen

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