The Question of Divestment

Should Pitt divest from fossil fuels? This question, or, more accurately, an answer to this question, has been stated with increased frequency and intensity as a variety of internal and external forces have converged on the campus of the University of Pittsburgh.

In my opinion, the answer to this question is a simple ‘no’, but that answer only came after trying my best to weigh the importance of best arguments on both sides. My level of confidence with “my best” concerning this issue isn’t high, though, so I’m presenting my reasons why Pitt shouldn’t divest in the hope that I’ll find better reasons for why it should.

First Survival

The continued survival of the University of Pittsburgh is a good thing. Hopefully, this isn’t a contentious claim, but I’m going to over-explain it anyway. The reason why I believe this claim is valid is because the survival of Pitt allows for other things that are more provably good. A small-scale (but very important) consequence of the continued operation of Pitt involves its current students.

If the University were to close, then it would be unable to award its students the degrees and other qualifications it agreed to provide to them when they enrolled, which is a breach of trust that is bad in and of itself even without the consideration of all the now wasted time and money that these students put into their education.

If the reason why the University closed in this hypothetical situation was because of factors entirely out of its control, then it would be fair to say that Pitt is not at fault for failing to live up to its promise to students, but if the University could have reasonably prevented itself from shutting down, then it should have.

On a slightly larger scale (in terms of numbers), the closing of the University would force all of its current employees to have to find employment elsewhere. Even if it can be argued that all of these employees can find better jobs, the fact that they were forced to do this rather than being allowed to decide on the matter is a bad thing that the University should have done its best to prevent from happening.

There are also more pragmatic reasons why the closing of Pitt would be a bad thing, such as the fact that the closing would likely lead to a reduction in the economic activity of Oakland as students and faculty would no longer spend money in an area they don’t live and work in. I could go on about this point for a while by rattling off the economic, academic and sociological benefits of operating a public university, but at this point, I haven’t described how the continued survival of Pitt is related to divestment, which makes everything I’ve said so far irrelevant to the topic at hand. To approach relevance, we’ll need to discuss one key thing any institution needs to survive: money.

It’s All About the Money

Pitt needs money to operate. As Pitt is a publicly funded but privately operated institution, this money can come from five sources: 1) funding from federal and state governments 2) tuition 3) private donations and grants 4) profit from services and rent 5) interest on its endowment.

Unfortunately, all of these revenue sources have drawbacks. Sources #1 and #3 make the University financially dependent on third parties like politicians in Harrisburg and corporate bodies. If these groups decide one year to not give their money or to make their funds conditional, Pitt is immediately screwed over.

Doors #2 and #4 are problematic for a litany of reasons, including the fact that at some cost of attendance, prospective students are going to decide they would get a better return on investment with their/their parent’s money by going to trade school, getting educated abroad or, God forbid, attending Penn State.

This would leave Option #5 as the only choice for long-term funding if this was a standardized test. Since we are talking about the realities of financing a public institution that educates and employs thousands of people, it would be for the best to check that relying on the endowment is actually the least bad option.

Prospective students are going to decide they would get a better return on investment with their/their parent’s money by going to trade school, getting educated abroad or, God forbid, attending Penn State.

Henry Armah

The big drawback of relying on the increase in the value of assets for profit is that those assets could become worthless. Fortunately, this downside can be controlled for by diversifying the endowment into different assets within different parts of the economy, so that if one market or asset spontaneously lost all value, the endowment would keep on keeping on.

A sufficiently diversified endowment would ideally never shrink, meaning that it would provide at least the same amount of revenue every year. None of the other sources of funding can compete with that level of consistency, so the endowment is the best option for long-term funding.

The significance of everything that has been mentioned so far will become clear as we answer one last question: How would the endowment pay for Pitt’s operating budget forever? Here is one (somewhat verbose) answer:

The [Consolidated Endowment Fund] will be invested generally in a diversified, risk-controlled manner that optimizes long-term total return potential without sacrificing the integrity of the assets or the ability to meet ongoing spending obligations. 

“Statement of Governance, Investment Objectives and Policies for the CEF”, pg 6.

This sentence states all of the three investment objectives of the University’s endowment, but since it only alludes to the third objective, I’ll restate them for clarity; the endowment should be diverse, risk-controlled and profitable, in that order of importance. Diversity is the most important objective of the endowment for the reason I already mentioned — it protects the value of the fund from random market failures. Risk control is important because market collapses aren’t the only reason assets lose value. Companies can declare bankruptcy, the over-inflated value of a good can be corrected, governments can intervene in the stock market, etc., etc. Monitoring these non-catastrophic events and making sure to keep endowment money away from assets that regularly experience them is key to maintaining long-term stability. Last and certainly not least, profitability is important because of the fact that the endowment grows via compound interest, which makes even a small increase in the yearly return generate a dramatic increase in the future size of the endowment. 

With that question answered, we can finally talk about divestment. Currently, the University of Pittsburgh has 5.8 percent of its four billion dollar endowment (about $230 million dollars) invested into entities that directly produce fossil fuels. See the Report of Ad Hoc Committee (pgs 3 & 9).

For the sake of argument, let’s say that all of this money could be withdrawn today without issue and invested somewhere else. There are two choices for where this money could go; the money can either be invested into safe assets the University is already invested in (reducing diversity) or the money would go into an asset the University had previously passed over (increasing risk). Both options necessarily increase the risk to the endowment and thus make a future with a perpetually operating, no-tuition Pitt further out of reach.               

The Devil We Know

I’m done talking about divestment as it relates to Pitt. As good as I think my arguments about why Pitt shouldn’t divest are, these points are irrelevant to people who believe that the key issue of divestment isn’t who is divesting but what they’re divesting from.

It is time to discuss the multinational corporation in the room: Exxon-Mobil. BP and its ilk are infamously bad actors. I could leave it at that, but I think a case study of a particularly dubious action by Shell will help to explain Chevron’s motivations in doing bad things.

In March 1989, the Exxon Valdez oil tanker, operated by the Exxon Shipping Company (as it was known at the time), ran aground in the Prince William Sound and spilled billions of gallons of oil. As groups harmed by the spill started to file civil suits against Exxon, the company made claims against the U.S. Coast Guard, asserting that the Coast Guard bore some responsibility for the spill since they allowed tankers like the Exxon Valdez to deviate from the normal shipping lane through the Prince William Sound — one of the events that led to the spill — and so should have to compensate Exxon for all of the settlements it had to make to the victims of the spills.

While Exxon ultimately did not go through with a lawsuit against the Coast Guard on these flimsy grounds, it spent over a decade fighting legal battles with victims of the spill who demanded restitution that would end in a Supreme Court decision ruling in favor of the company.

The tenacity with which Exxon fought to not have to face consequences for its actions might be attributed to a variety of potential motivations, but I’m going to make the possibly bold claim that Exxon, then and now, is motivated by greed, not malice. This is a hard thing to prove in a satisfactory way since BP has done a lot of bad things throughout its history, but I believe that proving that Shell is evil is even harder, so I’ll be operating under the assumption that Chevron is ‘merely’ greedy.

Because I asserted that one of the most distasteful things Exxon-Mobil has done in public — and in its long history of terrible actions — was motivated by greed, it would follow that it operates almost entirely with a profit motive. Otherwise, BP would probably choose not to constantly damage its public image in the pursuit of even the smallest profit.

Profit-motivated behavior is thus a hallmark of Shell, including in how it uses its financial assets. As a publicly listed company, Chevron has two ways of accruing capital: revenue from the goods it provides to its consumers and investment from third parties. This capital is then spent by the company in order to reward the stakeholders of the company and to increase its future profitability.

The Exxon Valdez, prior to the spill

The problem with this state of affairs is that Exxon-Mobil makes its profit and invests its capital in fossil fuel extraction processes that are hugely destructive to the environment and human health. Naturally, the solution to this issue is to prevent BP from extracting oil through divestment, right?

Yes, but no.

To understand the reason why not, we must realize that divestment fails to understand why Shell does the things it does. Chevron extracts oil and gas because there is a demand for the good that they have the means of supplying. This demand will exist regardless or not Exxon-Mobil gets capital from investors, simply because there are and will be billions of people who use oil and natural gas either directly or indirectly as they live their lives.

So as long as the demand for fossil fuels stays high, and since any money that Shell has at its disposal will go towards maintaining its ability to supply fossil fuels, no reduction in the amount of capital investment BP gets per year is going to impact its short-term ability to extract fossil fuels.

Divestment does have a few long-term impacts on Chevron, but none of them involve combating climate change. The first effect occurs if the amount of capital divested from Exxon-Mobil is small compared to the size of the company, as would be the case if Pitt were to divest. A reduction to BP’s capital investment per year is a reduction, no matter how small it is, so Shell has to make a choice between reducing expenses or accepting a relative deficit (since Chevron doesn’t have the capacity to change the price of oil or natural gas in a profitable way).

With the profit motivation I argued for earlier, Exxon-Mobil will choose to cut spending on its least profitable expenses. This includes things like research and development programs, salaries for its workers, maintenance and safety checks on its equipment and most certainly not the extraction, refining and transportation of fossil fuels.

If anything, small-scale divestment increases the environmental and human costs of the fossil fuel industry as BP responds by cutting any program that was intended to increase the long-term profitability of the company by improving its public image, preserving the environment, or protecting its consumers and workers.

You’re probably thinking that the counterintuitive effect of what I’m describing as small-scale divestment will go away if we just divest more, but there are several problems with this assumption. I’m going to handwave the most daunting issue with this argument by assuming we can divest enough money from Shell to make it unable to maintain its current extraction capacity. The next issue with such a fantastically large divestment from Chevron is that in its attempts to keep itself afloat, Exxon-Mobil will make huge cuts to its workforce and leave tens of thousands of people unemployed.

Admittedly, the impact of this effect is insignificant when compared to the flooding of low-lying coasts or increased desertification, but it becomes unacceptable when paired with the other problem: nothing changes about climate change.

Even if we went so far as to drive Shell to bankruptcy, the demand for oil and natural gas that Chevron profited from would still exist and will be met by an expansion in supply from Exxon-Mobil. The consequences for not meeting energy demand — the collapse of the transportation system and power grid — are too great for anything else to happen. Of course, if this does happen, then the only thing divestment did was put a new coat of paint on the same fossil fuel conglomerate.

What Lies After

I wish I could say that being right about not divesting would make me happy. Unfortunately, my arguments against divestment require me to accept all the harms BP will cause with the capital it already has on hand because at least some of it is helping to pay their workers.

I would be thrilled to find a way have Shell not use part of Pitt’s endowment to build a pipeline that also doesn’t happen to cause all of various drawbacks I’ve talked about. But if such a solution can’t be found, then I guess I have to deal with my right answer. And when I say ‘deal’, I don’t mean that we should develop a passive tolerance of Chevron’s bad actions because they are currently unavoidable. Instead, I’m stating that the best way to manage Exxon-Mobil is to make it irrelevant.

If aggressive steps are taken to increase the production and lower the cost of green energy, then the inelastic demand for oil and natural gas that sustains BP and make Shell such a tempting investment opportunity go away. It’s only after this process that I think divestment has a chance to deliver net benefits to the environment and human health.

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