On 11 August 2015 the United Church of Canada announced that it will divest from fossil fuels. This means that it will sell $5.9 million in fossil fuel assets and commit to building an investment portfolio that promotes renewable energy. This is big news, as the United Church is one of the largest religious groups in Canada.
As an Albertan, I am deeply aware of the trade-offs implied in moving away from fossil fuels: leaving oil in the ground might be necessary to avert climate change but this could have steep implications for many workers in Canada’s resource-dependent economy. The point of this post is not to proselytize about the virtues of divesting from fossil fuels. Instead, I want to use this opportunity to explain divestment; the fossil-free divestment movement; and the likely impact of this move by the United Church of Canada.
This post is a bit different than the previous two, as it does not focus on a specific product (don’t worry: I’ll be putting out a piece on sustainable seafood very soon).
Explaining Divestment
“Divestment” or “divesting” is a socially motivated activity that can be undertaken by private wealth holders. These can be individuals or groups (such as university endowments, foundations, and public pension funds). When actors divest, they withhold their capital from companies that are viewed as contributing to the identified social harm. Perhaps the most famous ongoing divestment movement is the BDS Movement pertaining to Palestine, but divestment campaigns have also targeted Apartheid in South Africa, Darfur, and tobacco.
Evidence suggests that the direct financial impact of divestment is limited, and this is likely to be the case for fossil fuel divestment. However, such campaigns typically generate indirect effects, such as increased public awareness and dialogue, new legislation, and spillover market consequences.
Divestment is often undertaken by groups set up to serve a social purpose, rather than private companies. For this reason, foundations, faith-based groups, governments, and universities have traditionally been key sources of divestment.
Up for debate: is divestment a legitimate choice for a foundation to make, or should endowment managers seek to maximize the financial return that can then be given out as a grant to socially beneficial projects?
There is an ongoing debate about the legitimacy of divestment (and other forms of socially responsible investment) for foundations, an organization type that commonly engages in divestment. Decisions by foundations to divest (or not) matter because these organizations operate by investing sizeable endowments in the market, using the annual return to give out grants for socially beneficial projects. Foundation endowments are sometimes very large: In the U.S., 85 philanthropic foundations have total assets above $1 billion USD. The Gates Foundation, which is the largest philanthropic foundation, has over $41 billion in total assets. These are sizeable funds being invested to serve an ostensibly social mission.
Endowment managers often feel compelled to maximize returns and minimize risk, as the size return that they acquire may dictate how much that foundation can spent on providing grants over the next year. However, it has been increasingly argued that foundations have a responsibility to manage their investments in a way that accords with their social missions. However, it is not always easy to translate this aspiration into practice, partially because the social impact of businesses is often diffuse. This is all linked to the emergence of a similar, but distinct, issue: social finance. If you’re interested in learning more about social finance, check out the articles I wrote here and here.
An example may help to put in perspective how difficult it is to balance the social mandate of the foundation with socially responsible investment decisions. The Gates Foundation – the mission of which is to improve the quality of life of individuals worldwide – has stated that it directs its investment managers not to invest in companies whose activities contribute centrally to egregious activities. As such, it does not invest in tobacco stocks. However, this does not mean that the endowment is only invested in socially responsible companies: the Gates Foundation was recently criticized for investing $1.4 billion USD of its endowment in fossil fuels.
While some foundations have opted to divest from fossil fuels, many others may feel that this issue is not sufficiently close to their social mission; may disagree with the divestment approach; or may feel that maximizing funds available to disburse as grants are most important. These same considerations often influence the decision of other socially-oriented organizations, such as faith groups, non-profits, universities and government agencies, as well.
The Fossil Fuel Divestment Movement
Fossil fuel divestment (going “Fossil Free”) is a divestment movement launched in 2012 under the mantra that “if it’s wrong to wreck the climate, then it is wrong to profit from the wreckage.”[1] The movement has since grown globally to reach $50 billion in divestment commitments from 800 global investors as of October 2014.[2] It is, however, worth noting that many commitments have not yet resulted in the actual reallocation of investment capital.[3]
According to gofossilfree.org, 349 institutions are currently divesting. As the chart below shows, the four largest groups of divesting organizations include: foundations, faith-based groups, governmental organizations, and education institutions (colleges, universities and schools).
