Popping the Carbon Bubble

Last week in Oslo, Marius Holm of the ZERO Foundation presented a report that I co-wrote this summer along with a number of environmental and financial professionals making the case for fossil fuel divestment in Norway’s government pension fund, a portfolio so large that it dwarfs the size of all American university endowments combined. Many of the arguments were specific to Norway, which, as one of the largest producers of oil and gas in the world, is ill-advised to double down on its exposure to shifts within the fossil energy industry. As a fund that already has in place the type of Environmental, Social, and Governance (ESG) criteria for investment missing from Middlebury’s endowment, the debate in Norway is not over whether divestment is an appropriate tool for creating change, but rather how far that tool should be extended. While Middlebury would be well advised to lead the way by creating similar investment screens, even in the absence of concerns about endowment ethics the arguments for divestment in Norway can inform the ongoing debate on this campus.

- Art by Amr Thameen

– Art by Amr Thameen

Over the past six months, many market analysts have revised their predictions for future oil prices from around $110 per barrel to down into the $80 to $90 range. A number of factors are driving this downward trend — increased efficiency of automobiles, uncertainty over future regulations and a Chinese economy far more overleveraged than that of the United States prior to the financial crisis. All of these factors contribute to falling oil demand, which in a world of abundant oil supply means that prices must soon begin to fall.

At lower prices, many of the types of tar sands, ultra-deepwater and shale oil projects currently under development would fail to earn back their investment capital. Any regulatory action that limits carbon dioxide emissions will inevitably require some of these reserves — which have already been factored into the share value of oil companies — to remain in the ground. Expectations about reserves have a significant effect on the share price of fossil fuel companies. When Shell reduced its estimated reserves by 20 percent in January 2004, its share price plunged by 10 percent in a single week. These concerns recently led a large group of investors representing over $100 billion in assets managed by companies that include Boston Common Asset Management and Storebrand Asset Management to issue a call that Norwegian Oil Company Statoil withdraw from tar sands extraction.

World Financial Markets – and, by proxy, the Middlebury College Endowment – are being inflated by a looming Carbon bubble. If you accept that there is a scant one-in-four chance that the world will meet the IEA’s targets to limit global warming to two degrees Celsius, the expected value of the endowment’s position in fossil energy equities is already ten percent inflated.  The loss of value if climate change is defeated would be forty percent, which would affect the College’s ability to pay employees, undergo capital projects and award financial aid to deserving students.

The College Administration and Trustees no doubt have faith that, as professional investment managers, Investure will be able to anticipate the shift in fossil energy share prices before they actually arrive. But that poses a significant risk to the endowment – a risk that we would do well to avoid. When financial markets adjust to reflect the changing reality of fossil fuel use, the adjustment will not be smooth or gradual. It will come suddenly and leave those too slow to act with heavy losses. For some of the market, it already has. After an energy speech by President Obama that pledged increased regulation of power plants and an end to international development aid for non-Carbon Capture and Storage (CCS) coal plants, the shares of coal companies including Peabody Energy and Walter Energy took dives of 3.4 and 10.4 percent respectively, adding to a year in which Peabody Energy has lost half its value and Walter Energy has lost three quarters. The Stowe Global Coal index, which lists coal-producing companies, fell the same day to its lowest level since the 2009 financial crisis. Utilities across Europe have similarly plunged unexpectedly in response to competition from renewable energy.

To be bullish on the future of the fossil fuel industry is the rough equivalent of a bullish outlook on the nuclear industry sometime after the alarm bells went off at Three Mile Island or after the wave headed for Fukushima. It is comparable to a bet on CFC-producing companies sometime between the discovery of the massive hole in the Ozone layer and the ratification of the Montreal protocol, or a bet on fax machines after the invention of the Internet. Coal and oil powered the 19th and 20th centuries. Their glory days are past. To bet on their future is to bet either against the future of humanity or against the overwhelming judgment of science.

Divestment is Good Business

Forget everything you thought you knew about why Middlebury College must divest. It is not about abandoning profitable investments for moral reasons. It is about abandoning investments with little hope of future growth. It is about getting out of a bubble that is about to burst.

Last year, we watched as the movement grew from a niche concern into the mainstream of campus dialogue. The rationale initially focused on the need to send a signal to the oil companies and to the world that we will not profit – that it is abhorrent to profit – from their conscious engineering of a warmer, more dangerous planet. It was moral crusade and, so, a quixotic one; in a world driven by quarterly or even hourly investment numbers, concern over the bottom line usually wins out. Early on in the divestment movement, even the most diehard supporters conceded that there had to be some financial cost to sustainable investment paradigms. This concession was based on a consensus belief about the absurd profitability of the oil industry.

This belief does not hold up to reality.

Research done by Standard and Poors, MCSI, the Associated Press, and other respected sources has shown that fossil fuel companies were mediocre investments all along. They do well in boom times but are extremely volatile, too connected to the whims of dictators, the news of the day, or even the weather. An endowment that excluded the stocks of oil majors over the last decade would have grown by a larger amount than one that included them. Continue reading

Why Divestment is the Right Cause For College Students

Many of the opponents of fossil fuel divestment on college campuses, including here at Middlebury, like to attempt to counter arguments in favor of action by claiming that the whole process is a waste of time. I have to admit that I originally fell into this camp. A year ago, it seemed like the latest quixotic cause du jour: something that would inflame the activist crowd for a few weeks and then fade away.

It didn’t, and it shouldn’t.

To be fair, a lot of the arguments initially made by divestment supporters played right into this case. They’d say that divestment would affect the share price of oil companies or cause their CEOs to take climate change seriously. Or they’d argue that divestment will somehow lead to a renewed interest in cap-and-trade in Congress. Unfortunately, neither of these arguments make much sense. So opponents would point out the lack of a connection and use that to claim that the whole issue was a waste of time. They’d suggest that we leave our investments to the ‘professionals,’ and focus on those actual issues.

But the truth is, the fossil fuel divestment is an effective use of the time and passions of collegiate climate activists, partly because of a lack of better options. What issue should we fight for, if not this one? Raising climate change awareness? It’s 2013. We are aware. You are aware. Even Steve King is aware; he just chooses to ignore reality. Replacing light bulbs and appliances with more efficient versions? Schools like Middlebury and Hobart and William Smith have already taken a lead on this. They’ve created positions for sustainability directors to oversee these efforts. Getting to carbon neutrality? Again, forward-thinking liberal arts colleges have already made carbon neutrality goals and plans, and getting there is now a technical challenge rather than a matter for continued lobbying of the Administration and Trustees.  Continue reading

President Obama’s Divestment Drop-In

On Tuesday, President Obama gave a speech on energy and the environment at Georgetown University. Scheduled between major Supreme Court decisions, in the middle of a work day in the summer during a high-profile criminal case and an international manhunt for Edward Snowden, the speech unsurprisingly – and probably intentionally – got somewhat lost to the non-environmental media. It was truly a speech for supporters, designed to be overlooked by the public at large.

It was noticed by energy markets, though; stocks in coal companies plummeted significantly on news of more regulation for existing power plants and an end to international development aid for non-CCS coal plant construction. The Stowe Global Coal Index fell to its lowest level since the 2009 financial crisis in a sign that investors are beginning to see the writing on the wall. Fossil fuel companies are almost categorically overvalued and as economies begin to account for their full costs, their profits will fall.

It was also noticed by hard-core supporters. At the end of the speech, the President said two words that got environmental groups extremely excited:

“Convince those in power to reduce our carbon pollution. Push your own communities to adopt smarter practices. Invest. Divest. Remind folks there’s no contradiction between a sound environment and strong economic growth.”

305.org’s divestment campaign was launched just this year; in a matter of months, a brand-new issue received a tacit endorsement in a major presidential address. That’s huge. It’s also not particularly surprising given the President’s roots.  Continue reading

The Middlebury College Student Divestment Panel

On Sunday, April 28th, I had the opportunity to join six other Middlebury students for the student panel on divestment. If you missed it, the college has posted it online so that you can watch it here.

Note: the opening statements are way too long (I had pushed for them to be capped at 3-4 minutes, but they were much, much longer) and that part of the panel is somewhat deadly. (It’s also hard to hear the student reaction to the statements, so it sounds like literally nobody laughed at my jokes.) If you want to see what I had to say, skip ahead to 34:40. I speak again at 1:06:15 to rebut some of the claims made by the other panelists. Starting from 1:19:00 onward, it moves onto a Q and A and gets slightly more lively.

Continue reading