Recent weeks have seen an increase in the literature pushing back on the idea of divesting from fossil-fuel-producing companies.
Prior to last week’s Global Divestment Day, a website entitled DivestmentFacts.com published this piece by Dan Fischel, which was first featured in the Wall Street Journal. Basically, he claims that by looking back 50 years, one can make a case that divesting could harm future returns.
This view ignores many realities, most significantly that fossil fuel transitions take a generation or more, and therefore if we are embarking on a transition now, then fossil-fuel-producer ownership may well be a very bad investment choice. One cannot fully use past performances to judge future returns, as is argued clearly here in this excellent discussion at Top1000Funds.com. Regardless, use of fossil fuels will certainly continue, especially 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 for financial reasons.
Columbia Business School, whose dean, Glenn Hubbard, remains Mitt Romney’s chief economic advisor, jumps in now with a poorly argued and researched paper from Andrew Ang and Bruce Usher (as referenced here). The problems with the piece are many. Stanford is believed not to have owned the companies they announced their intentions not to own, and so they did not “divest.” Much like Norges Bank, those companies simply didn’t qualify financially for their portfolio. Are Ang and Usher suggesting that asset owners should jump into bad investment ideas? Given the example of Peabody Energy having fallen from $70 to $7 a share over the last few years, it is hardly good economics to ignore secular trends (gas overtaking coal), let alone that pollution on the ground in China will change the future energy mix. Or perhaps economists believe that dividing the value of your portfolio by 10 is good investment practice.
Tar sands exploration is also under increasing pressure to justify the potential profitability of capital expenditure, as argued by the Carbon Tracker Initiative.
Divestment is a hot topic. Watch for a Call for Papers soon from the JEI on this topic.