February 25, 2020

KROLL | Divestment Explained

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Fossil fuel divestment is finally a hot topic. With no small thanks to the protesters who blocked roads and occupied Ho Plaza earlier this month, the movement has been ushered from the margins of campus political life into relevance. Though people may not necessarily know what ‘divestment’ means, they’ve at least heard about it, read about it or had it shouted at them. However, the job is far from done.

The goal of the fossil fuel divestment movement is, obviously, to divest. However, the Cornell community can’t do that directly. That decision has to come from the Board of Trustees — specifically, the Finance committee.

Once all five Cornell shared governance bodies (student assembly, faculty senate, employee assembly, University assembly and graduate and professional student assembly) pass divestment resolutions, the motion will be sent to the investment committee, then the executive committee which will then make a recommendation to the rest of the Board. At this point, the entire board will vote on the divestment measures. The outcome of that vote determines whether or not we divest.

The immediate impact of fossil fuel divestment is fairly simple. If the board votes in the affirmative, our endowment’s managers would sell off Cornell University’s shares in companies that profit from the production and sale of fossil fuels. If we’re lucky, they’ll also reinvest those funds in renewable energy ventures.

In itself, that would be a big deal. Although Cornell doesn’t disclose how our endowment is invested, four to six percent of most University endowments are invested in fossil fuels. If this pattern holds for our endowment of $7.3 billion, we would have roughly $400 million in fossil fuel holdings.

The long term impacts of fossil fuel divestment are more complicated. When we sell off our shares, they’ll be bought by others — we can’t pull Big Oil’s plug in one fell swoop. Instead, the movement aims to create change by challenging the fossil fuel industry’s market legitimacy.

Theoretically, as more universities sell their shares, fossil fuels will be stigmatized, which will negatively impact stock performance. A 2019 report from Truzaar Dordi and Olaf Weber asserts that “divestment announcements decrease the share price of the fossil fuel companies,” based on “several robustness tests using alternate expected returns models and statistical tests … to ensure the accuracy of the result.” The share values of companies are often regarded as indicators of  general performance. Market stigma and depressed stock value will hopefully incentivize fossil fuel companies to clean up their act.

The Cornell administration referenced this reasoning in their divestment FAQs, released earlier this month. Though their tone was somewhat favorable, their claims about the current sustainability practices of the endowment and the virtues of strategic proxy voting could use some unpacking.

As shareholders in fossil fuel companies, Cornell can proxy vote in shareholder meetings to advocate for more sustainable practices. When we sell our shares, we lose this right. In theory, this might be bad; proxy votes can be a valuable tool to affect change. In this case, however, they’re not. Most of our fossil fuel holdings are likely facilitated by asset managers, such as BlackRock, Vanguard and State Street.

Altogether, these three firms manage nearly $300 billion in fossil fuel holdings. The potential CO2 emissions from their investments alone accounted for roughly 38 percent of global CO2 emissions last year. Despite this troubling behavior, according to ProxyInsight, “BlackRock and Vanguard opposed or abstained on more than 80 percent of climate-related motions at FTSE 100 and S&P 500 fossil fuel companies between 2015 and 2019.” By and large, these firms have shot sustainability initiatives down.

When Cornell bragged about our endowment’s Environmental, Social and Governance practices in their divestment FAQs, this was what they were referencing. All three of these asset managers technically have ESG policies.They don’t seem very strong. If Cornell’s proxy votes are managed by these companies, it’s doubtful that they will be used to advocate aggressively for enhanced sustainability practices.

Further, if proxy votes are such a valuable tool, why haven’t we used them already? Our administration loves to flex our sustainability credentials and history of environmental stewardship. If we’ve had these proxy votes in our pockets this whole time, why haven’t we done anything with them?

It’s also important to note that fossil fuel stocks are currently underperforming, and aren’t projected to improve. As the Financial Times’ Henry Sanderson put it, “[i]nvestors who bet on a shift from fossil fuels to clean energy are being richly rewarded as solar and wind stocks outperform oil and gas shares by a widening margin this year.” Bloomberg’s NEO and Deloitte’s 2020 Renewable Energy Industry Outlook both predicted the energy market to shift more towards renewables in the near future. Divestment might hurt the endowment a little in the short run, but the long run effects seem by no means dire.

My point here is that divestment is our best bet. We don’t have time to waste with empty ESG policies or tacit activism. It’s imperative that we do what we can to build a sustainable future, now. The mechanics of divestment are neither perfect nor elegant. For our community, however, it’s the most effective tool available to steer fossil fuel companies away from business as usual. As we see this issue escalate in coming weeks, it’s important that we all speak up, get involved, and urge our administrators and trustees to make the right decision.

 

A correction has been made regarding the process of divestment. 

Julian Kroll is a senior in the College of Arts and Sciences. He can be reached at jkroll@cornellsun.com. Losing My Edge runs every other Wednesday this semester.