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Fossil fuel divestment is emerging as a powerful strategy in the fight against climate change. Right now there are hundreds of campaigns in the US as well as globally. Despite the movements’ successes, there is much confusion about the roles of politics and economics in divestment work. It is crucial that we keep our focus on the political impact of divestment, and not get distracted by the economics of divestment.
Many people in the fossil fuel divestment and climate justice movements are proposing that when institutions divest from fossil fuels, they should then “reinvest” in clean energy and low-income communities. However, the strategy of asking institutions to “reinvest” poses perils that may undermine the divestment movement by focusing attention on economic rather than political goals, and there are more powerful ways to unite climate and social justice concerns than by advocating for reinvestment.
The debate about reinvestment raises important questions about how we bring about social and economic change and how much we should engage with government. Underlying the enthusiasm for reinvestment is a belief that getting institutions to invest in the “new economy” is a way to solve climate and justice issues without engaging government. We believe it will take huge changes to address climate change and achieve a socially just economy, and to make changes at that scale, it is crucial to get government action. Divestment helps move us to large scale changes in ways that reinvestment does not.
Better Ways to Build a Socially Just Green Economy
To address climate change, we clearly need massive development of solar, wind and other clean energy. And we need funding for public transit, and energy-efficient affordable housing, particularly in low-income communities. A “divest and reinvest” strategy seems attractive because it could help to build alliances between the divestment and climate justice movements. Many who are promoting “reinvestment” focus on the positive impacts of investing in low-income communities of color that have chronically suffered from a lack of all sorts of investment. But as we discuss below, reinvestment is an ineffective way to get money to important projects that will move us towards a socially just and green economy.
Rather than asking universities and other institutions to use their endowment money to support environmental justice initiatives, we need to build the political will to have them supported by legislation and government funding: that’s where the really big impacts will come from. For example, California’s landmark climate legislation, AB 32, requires that a major share of all revenues generated from its programs be spent in ways that benefit low-income communities. More recently, California passed legislation which provides funding for a move away from diesel transportation, and directs funding to projects that will improve air quality in low-income communities. And as we write this, the US Treasury department is considering rule changes to the Community Reinvestment Act (CRA) that would allow billions of dollars of CRA bank loans to go into energy efficiency projects in affordable housing and schools in low-income communities. CRA loans are already the source of funding for small community banks and new economy projects in low-income communities. However, to get more of this sort of government action on climate and environmental justice, we need political power. And that is where divestment comes in.
Divestment Is About Politics
The goal of divestment is to change government policy. By divesting, we are stigmatizing the fossil fuel industry, and thereby weakening its ability to influence our political system and block needed climate legislation. The aims of the fossil fuel divestment movement, like the anti-apartheid, tobacco and other divestment movements before it, are to raise awareness, stigmatize a powerful political opponent and win changes in government policy. None of the previous divestment movements asked for reinvestment. For the fossil fuel divestment movement to focus on reinvestment is a mistake for several reasons:
1. Focusing on reinvestment promotes a belief that divestment is about financial impacts – The idea that we should use our money for investing in a new economy rather than the old fossil fuel economy promotes the idea that the strategy of divestment is about hurting fossil fuel companies financially. This is one of the major critiques that people have of our movement. Selling fossil fuel stocks will not significantly hurt fossil fuel companies financially.
2. Reinvestment encourages a market-based, apolitical view of how to bring about change – The call for reinvestment resonates with one of the most pernicious aspects of political culture in the US: the idea that decisions about what we buy in the market, be it consumer goods or stocks, are how to bring about social change. Buying solar company stocks may lead to small increases in the price of those stocks, but that will not be what makes solar take off. Countries that have strong solar sectors have government policies, regulations and incentives promoting solar.
3. Investing in clean energy can be used as a less controversial alternative to divestment – Recently, the University of California and the California State Teachers Retirement Systems, both under pressure to divest from fossil fuels, decided that instead of divesting, they would invest in clean energy. Calls for reinvestment by divestment activists, give legitimacy to these decisions, and by focusing on money rather than politics undermine the rationale for divestment.
A divest-reinvest strategy is not likely to lead to the clean energy economy we need. To understand why, we first need to clear up confusion around different meanings of the term “investment.” There are three main types of investment: financial, private capital and government investment. With private capital investment, actual buildings, supplies, etc. are purchased for a particular business venture such as producing solar panels, with the expectation of future profits. Private capital investment is highly risky in that it may produce huge returns or it may produce large losses if a venture fails. Financial investments are the purchasing of stocks, bonds or other investment instruments such as real estate. These are the typical investments made by college and university endowments, and by pension funds. Financial investments result in changes in ownership of a share of a company, a bond, or land, but do not create new economic activity as do capital investments. Financial investments are made with the expectation of steady, fairly secure, but modest returns. They involve much less risk than capital investments because returns are tied to the profitability of an entire company and the general state of the economy, rather than to the success or failure of a specific business venture (e.g. a particular factory producing a particular type of solar panel). A third type of investment is government funding, spending for such things as education, infrastructure, or energy research, in which there is no expectation of a financial return (and often no asset owned by the government as a result of the spending).
Reinvestment and a Clean Economy
There are a number of reasons why “reinvestment” of institutional funds is not a promising way to build the clean energy economy:
1. Small impact of financial investments – Buying stock of clean energy companies does very little to help those companies or increase clean energy production. Buying clean energy stocks is different from government funding for, or private capital investments in, clean energy, both of which directly help increase clean energy production. Financial investments in clean energy companies may lead to increases in stock prices which in turn may make it easier for these companies to raise money for future projects. But this is a fairly weak channel for increasing clean energy production.
2. Risk avoidance of institutional investors – While some endowments invest in high risk “alternatives” much like a venture capitalist, most endowments put their money in places that provide modest returns and very low risk. For example, the endowment at California State University East Bay has a policy that prohibits investments in “private placements, venture capital investments, real estate properties, futures contracts, options, short sales, or margin sales.” Some in the divestment movement have proposed that divested funds go into community cooperative banks that would support local new economy food, housing and clean energy projects. However, endowments not already investing in high risk alternatives would likely be hesitant to put funds in new, small, local organizations that may fail, and for which risk would be hard to evaluate.
3. Scale – Money from divestment is generally too little to make the impact needed to build a new clean energy economy. This is especially the case for US college and university endowments, which total about 450 billion dollars. Fossil fuel holdings account for roughly 3-5% of that total. Even if half of all universities divested, that would result in a one-time pot of less than 12 billion dollars potentially available for reinvestment. The city of San Francisco alone needs 10 billion dollars over the next five years for transportation infrastructure. The federal stimulus package in 2008 had 39 billion dollars for clean energy. Rather than looking to financial investments to build a clean energy economy, we should look to direct government funding, and government policy and regulation that can direct private capital investment. For example, renewable portfolio standards, which require public utilities to provide a certain percentage of their electricity from renewable sources, attract huge private capital investments in new clean energy infrastructure.
If divestment activists can get their institutions to invest in green revolving funds to support campus energy efficiency, or projects that benefit nearby low-income communities, that is great and should be supported. In their article “Where Should the Divestors Invest,” Smith, Brecher, and Sheeran give good examples of colleges and universities that have invested positively for a new economy. What we are arguing is that reinvestment should not be a main focus of the fossil fuel divestment movement, and that the divestment movement needs to be clear that its goals and effects are political and not financial.
This is not to say that changing government policy will be easy, given the political power of fossil fuel and other corporate interests. And yet, this is an important arena of struggle that offers the possibility of change at the scale that is needed to address climate change and build a more just economy. Changing the political equation is the whole point of the fossil fuel divestment movement. That is something worth fighting for.
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