To the Editor:
It almost seems like a semesterly tradition to see a handful of windswept students outside Day Hall wailing about the evils of fossil fuel, proclaiming that the end is nigh and demanding that the University sell the equity its endowment holds of multinational energy companies. By and large, their demands fall on deaf ears. This is a good thing. Divestment would harm Cornell, reduce its influence and, most significantly, do absolutely nothing to fight climate change.
What happens when an endowment “divests?” It happens all the time — when the huge pools of assets managed on behalf of pensions and universities shift their capital goals or investment focus they liquidate their holdings in one sector, company or other asset and redeploy that capital elsewhere. What happens to these sectors, companies or securities? Do they go away? No, in fact, the securities sold are purchased by another investor. Companies live on, nothing changes. Climate activists argue that if enough people realize how bad energy companies are, demand for their equity will decline leading to the companies’ demise. But let’s examine this argument.
Modern investment theory proposes a very close relationship between risk and return. More risky assets, the argument goes, ought to entice investors with a commensurately higher reward. So: Let’s say all major university endowments decide they categorically refuse to invest in the energy sector. Hypothetically, liquidity for equity in such companies would fall, making the shares slightly riskier for investors. The cost of capital for energy companies will go up slightly. Recognizing this, company management will have to coax the remaining investors in the market to purchase their securities by offering more value — perhaps an accelerated share repurchase schedule or a dividend hike. As modern finance theory predicts, risk has been compensated for with return, and the investors who don’t mind owning shares of energy companies will earn a premium. In the end, all divestment would accomplish is raising the return for other investors in the market and ensuring that Cornell would receive none of this benefit. Cornell’s endowment would suffer, with ramifications across campus, and the only difference would be that someone else earned an excess return instead of us.
Another key flaw with the divestment argument is that the minute Cornell sells its equity, it gives up its voice. Voting with your feet isn’t nothing, but it certainly isn’t going to compel any major company to change its behavior. On the other hand, companies would be much more likely to listen to their shareholders. If a large and influential endowment raises an issue at board meetings or via proxy or gives the management team a call, it would likely find a ready ear. This is off the table if Cornell decides to categorically walk away.
A final point is to remember that energy companies are not irredeemable. They are rational economic actors extracting natural resources to provide energy and products that touch almost every corner of modern life. If they are guilty of ruining the environment, that makes everyone who has ever touched a light switch, needed a petrochemical-based medical device or ridden in a car guilty by association. If you actually care about the environment, don’t moan and groan about some share of stock that some pool of someone else’s money owns. Plant a tree, donate to a charity, support a serious advocacy campaign or get involved in renewable energy research. These concrete actions do far more for the environment than demanding that Cornell sell any energy company equity it holds. Even if those calling for divestment prevailed, the only meaningful consequences would be the university missing out on any excess return it could have earned and losing any influence it could have exercised.
Peter Anderson ’20