This guest post is by Fitzwilliam’s Bursar, Andrew Powell.

In October 2014 Glasgow University announced its decision to sell its fossil fuel investments: “Over the coming years we will steadily reduce our investment in the fossil fuel extraction industry, while also taking steps to reduce our carbon consumption.” Last week SOAS, University of London announced that it will divest in fossil fuels within the next three years. Oxford and Edinburgh Universities have deferred decisions on similar motions.

A recent Science Week debate on “The roles and responsibilities of universities in relation to planetary sustainability” (initiated by Fitz Fellow Dr Bhaskar Vira, at which the Master spoke on the panel) and a meeting with Fitzwilliam students involved with CUSU’s Positive Investment Cambridge, have focused my attention on the topic of responsible investing in this sector.

So, what should Fitzwilliam’s response be?

As a charity, our duty is to deploy our resources most effectively in support of our charitable aims. The Charity Commission (which is our regulator) gives the following guidance on ethical investing:

Ethical investment means investing in a way that reflects a charity’s values and ethos and does not run counter to its aims. However, a charity’s trustees must be able to justify why it is in the charity’s best interests to invest in this way. The law permits the following reasons:

  • a particular investment conflicts with the aims of the charity; or
  • the charity might lose supporters or beneficiaries if it does not invest ethically; or
  • there is no significant financial detriment

The College’s first aim is to provide education and learning in the University. As an endowed charity our mission is to continue that ‘in perpetuity’ – making sure at all times that the interests of future students are not damaged by today’s decisions.

Both the College and the University are heavily dependent upon energy to operate– but as things stand, the only alternative that has the ability to substantially replace fossil fuels with a consistent reliable supply is nuclear energy; recent events such as the Fukushima disaster have highlighted how dangerous a large scale switch could be. Renewable technology has a long way to go before it can take over – we are going to be dependent on fossil fuels for a long time to come. And of course oil is the source of a huge number of the chemicals and products that we all use in our everyday lives.

Change is going to have to be gradual, not discontinuous; so whilst investing in renewables we should also be focusing on shifting traditional generation methods from high carbon to low carbon. Ironically the organisations best equipped to drive this change are the energy companies themselves. Amongst all businesses they are the most skilled and focused on planning for the long term.

Companies respond primarily to the needs and behaviour of their customers and the legislative and regulatory environment in which they operate. The recent fall in the oil price has already called into question the value of reserves, and because of that uncertainty the College’s portfolio is already ‘underweight’ in fossil fuel shares. In the policy arena our investment managers are taking a leading role; their formal statement for the 21st session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (“Paris 2015”) calls for:

  • a robust system of carbon pricing/ taxation.
  • phasing out of subsidies for fossil fuel consumption.
  • meaningful energy efficiency targets and emission requirements for the buildings industry and transport.

Divestment is a card that can be played only once; any such campaign therefore needs to be very clear about its practical objective and fully think through the likely consequences. It may satisfy the conscience of the members of the institution and have an effect on public opinion but will it actually make a difference to the economics of fossil fuel production?

The financial logic of mass divestment is that the cost of raising capital should rise to a point where the price of fuel goes up, or reserves become uneconomic to extract. This affects all the activities of the company, not just the ones that are targeted by the campaign. In practice a company faced with such action has many choices:

  • Seek alternative investors – there is no shortage of investors in the world at the moment!
  • Move to a less transparent listing centre – the London stock-market is among the most transparent and accountable in the world but the choice of companies to invest in is shrinking.
  • Sell assets to competitors.

None of the above will lead to a reduction in production.

The two usually quoted examples are the campaign in the 1980s against investment in South Africa, and more recently, the campaign led by the health sector for divestment in tobacco companies.

There is no doubt that the campaign for companies to isolate South Africa was an important contributor to the eventual collapse of the apartheid regime. I worked for Barclays at the time, which had a substantial banking presence in South Africa and found itself in the ‘front line’ of the campaign. For several years we argued strongly, and with conviction, that the morally correct position was to stay invested and apply our ethical principles in running the local business. In the end it was the loss of customers, not the action of shareholders that led to Barclays’ decision to withdraw.

The campaign for divestment of holdings in tobacco companies has been running since at least the 1990s and the College’s investment policy has explicitly ruled out such investment since 2002. The campaign has had little effect on the companies themselves but has certainly cost the College some return – tobacco has been the best performing sector since the FTSE index was created in 1985; over the last 5 years a simple tobacco exclusion would have negatively impacted performance by 0.6% per annum relative to the full index.

An interesting article on the effectiveness of divestment strategies can be found at this link.

I have been impressed by the level of debate in the meetings I have attended. I did not hear unthinking calls for divestment. What I did hear was a desire for more transparency in investment decision making, for open debate and scrutiny of the ethical issues surrounding particular companies, and for positive engagement with the managements of the companies in which we invest, using our shareholder power as effectively as we can. I also heard recognition that there cannot be a sudden transition from high carbon to low carbon, that decarbonisation is a journey with many steps.

As responsible investors it is our moral duty to use the rights we have as shareholders in accordance with our own values. I look forward to a constructive and engaged dialogue on these matters over coming months and years.

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