Divestment Movement Causing Confusion for Economists

The Meaning of the Word Divestment is Being Disputed

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I'm a well-known skeptic of divestment as a strategy to fix climate change, but the growing volume of recent arguments against divestment are increasingly poorly argued or simply wrong, including those featured in the Wall Street Journal.

We have seen an increase in the literature pushing back on the idea of divesting from fossil fuel producing companies, especially leading up to Global Divestment Day, when a website entitled DivestmentFacts.com published this piece by Dan Fischel which was then featured in the Wall Street Journal just prior to Divestment Day, and basically made the case that looking back 50 years, one can make an economic case that divesting could harm future returns.

Much as I am not a fan of divestment to solve systemic problems, Fischel's view ignores many realities, most significantly that fossil fuel transitions take a generation or more, therefore if we are embarking on such a transition right now as would be reasonable to assume, then fossil fuel producer ownership may turn out to have been a very bad investment choice going forward.  Certainly, oil companies have not been strong performers at all of late, as the price of oil has plummeted and is widely expected to stay low.  Those jumping back in have been getting burned badly.  The timing of the release of this piece by Fischel right in advance of Global Divestment Day is somewhat fishy, no pun intended.

It is also increasingly and separately accepted that investors cannot and should not use past performances alone to judge future returns as is argued clearly here in this excellent discussion at Top1000Funds.com.

Regardless, use of fossil fuels will certainly continue with such use expected to accelerate in the developing world.  

The question is to what degree and how profitable will production be in a climate constrained age, which this piece also fails to address.  For example, see Norges Bank’s recent decision to sell coal and tar sands producing companies, on financial reasons alone.

  More on this just below.

Then there is Columbia Business School, whose Dean remains Mitt Romney’s chief economic advisor Glenn Hubbard, which now jumps in with a case study entitled "Stanford Dumps Coal" as is referenced by Top1000Funds.com here.  The problems with this piece from Top1000Funds are many.  

Stanford didn't help with this confusion by entitling this piece "Stanford to Divest from Coal Companies."

When you read this article at Stanford's website, it clearly states that "Stanford will not make direct investments in coal mining companies."  This is not the same as divesting, rather Stanford has seen the coal sector collapse financially and that combined with climate concerns, they choose not to own such companies, not that they already owned them and decided to sell.  

In this regard, Stanford is joined by Norges Bank, the world's largest owner of public companies, who divested from coal and tar sands companies, or did they simply not qualify financially for their portfolio?  Especially important is the reference to the sale of these companies being due to "concerns about long-term financial viability."

The word "divestment" is apparently changing in meaning.  Much like the term "Reality TV," which does not describe the very much non-real circumstances of shows like Survivor and Big Brother, "Divestment" is now another phrase with new meaning behind it.

Divestment now apparently includes any action even remotely or tangentially related to climate change by an investor, as opposed to its original definition of an investor deciding to sell out of a group of companies on moral grounds.

And what about Columbia Business School?  Is Andrew Ang suggesting as per this piece that asset owners should jump into bad investment ideas at all times and that Norges Bank is wrong?   

Take the example of coal producer Peabody Energy which has fallen from $70 to $7 a share the last few years.  It is hardly good economics or investment strategy to ignore secular trends (gas overtaking coal) let alone pollution on the ground in China changing the future energy mix and flows of coal that will not result.

Or perhaps economists believe that dividing the value of your portfolio by 10 is good investment practice.

 It seems as if what we mostly have surrounding the divestment debate are a lot of opinions, and maybe some are better than others.

Costly Tar Sands exploration, for example, is also under increasing pressure to justify the potential profitability of related long-term capital expenditures, such as has been successfully argued by the Carbon Tracker Initiative among others.

Divestment is a hot topic - poorly reasoned arguments won't make the divestment movement go away, but neither will painting protest signs on its own bring about a global energy transition.  More analysis is clearly needed.