Time for Diversification In Investment By Universities

Time for Diversification In Investment By Universities

An extensive campaign was recently set in motion in recent years, for “diversification” away from fossil fuels, for investors to withdraw their money from this industry. Many universities are concerned, because they manage their own private funds from donations (often much more than several billion US$) which brings them nice sums each year, and because they are under pressure to divest their actions.

Even in public universities, where education is normally funded by the government, campaigns for diversification are emerging on some campuses – especially at Harvard, MIT, Berkley in the USA and in McGill in Canada. A few weeks ago four very prominent Physics professors at McGill university urged the academic institutions to diversify their funds and in particular asked them to move away from fossil fuels

The movement has become so widespread that the very prestigious scientific journal Nature had to take sides and ended up devoting an article and an editorial to this topic. The findings presented by Nature are in conflict with the opinion of those professors who wrote an open letter urging the universities to move away from fossil fuels.

Nature summarized its findings as saying that the call for diversification of assets is nothing more than a thinly veiled attack on the petroleum industry which has an image problem in the intellectual community which in turn is hypocritical enough to criticize the petroleum industry while at the same time enjoying all the benefits that a fossil-fuel economy brings to them. Although Nature and the petroleum industry have a point, the opposition coming from the academia is not only ideological.

In fairness, we should add here that the divestment supporters also put forward an economic argument. Thus, the McGill physics teachers who wrote the open letter argue that the stock exchange value of the fossil-fuels sector is currently overestimated, because markets do not take into account the fact that we can not simply burn all the reserves on which these companies sit, and that this “bubble” will burst when we really restrict the amount of carbon that is returned to the air.

And they are not the only ones to see this sword of Damocles hanging over our heads. In a recent memo that was supposed to remain private, but which has become highly publicized, the banking giant HSBC has warned its customers of the ‘high risk’ that hovers over the fossil-fuels sector. The improvement of green energy, the success of Europe to “decouple” economic growth from consumption of coal / gas / oil and the stricter rules in the near-future on greenhouse gas emissions (GHG) are all factors that increase the risk – “long-term”, should we emphasize – for investors.

But all are not convinced, obviously, and it seems to us in any case a rather secondary argument. On the substance, as stated in Nature, these divestment stories seem to us to put the cart before the horse: as long as we need petroleum products at a large scale, the industry business will go well, and their shares will trade at high prices.

It is not by encouraging some minor players in the stock market to turn their back on fossil-fuels that we’ll get the Exxon or Shell stock to nosedive or get Total to collapse. And even if the diversification succeeded in diminishing the stock values of energy giants, this would not in any case diminish the emissions of GHG by one iota.

In fact we’ll only solve this problem if we replace petrol used by our energy hungry society by some other alternate energy source. The calls for diversification would remain by then only an ideological solution divorced from reality.

The author has an engineering background with major interests in renewable energy, start-ups, technology, automotive, sociology, modern political history and languages.