Recommendations on Fossil Fuel Divestment

Recommendations on Fossil Fuel Divestment

The working group adopted the final recommendations on January 10, 2018 and they were presented to the Board of Trustees for further deliberation and consideration on February 22, 2018. The Board is expected to vote on the recommendations in fall 2018, once it has received an assessment from the Investment Committee.


Over the past year, the Socially Responsible Investments (SRI) Advisory Working Group focused on the issue of divestment from fossil fuels. Our recommendations on divestment are a continuation of the work started by the task force that preceded us. They are part of a broader policy approach and build on Seattle University’s established record of leadership on sustainability and environmental initiatives.

As a Catholic and Jesuit institution, Seattle U has long recognized our responsibility to lead the way forward in promoting justice and advancing the greater good. This responsibility is the foundation of our SRI work and the set of interrelated strategies the working group has pursued. They include aligning investment decisions with the mission, integrating environmental, social and governance factors into those decisions, partnering with others to engage companies on moral choices and impacting the greater good through investments with positive social impact.

The university’s mission of educating the whole person, professional formation and empowering leaders for a just and humane world resonates deeply with students, faculty, staff, and alumni and profoundly shapes our campus community. Rooted in Seattle U’s Jesuit education, our mission is the driving force behind all that we stand for, teach and hold ourselves out to be.

Animating the mission is central to our stated values. At the heart of this is putting the care and good of students first. Also important is fostering a concern for justice and the competence to promote it. Few issues are as urgent to our students and all humanity as climate change. We can neither ignore the dire warnings of science nor the moral responsibility to confront climate change in every way possible. Our Jesuit education at its core calls us to act with integrity in discerning and responding to the moral issues of the day.

In the spirit of fulfilling our mission and wholeheartedly embracing our Jesuit values and education, the SRI Advisory Working Group unanimously makes the following two recommendations to the Seattle University Board of Trustees.

Recommendation One

The Board commits, by June 30, 2023, to fully divest the marketable portion of the endowment from any investments in companies owning fossil fuel reserves.

Recommendation Two

As a first step toward meeting the full divestment goal, the Board commits to achieving a 50 percent reduction in the exposure to companies owning fossil fuel reserves in the marketable portion of the endowment portfolio by December 31, 2020. The reduction would be based on the percentage exposure to these companies as of June 30, 2018.

We appreciate the Board of Trustees for your strong support of socially responsible investing, including the adoption of previous recommendations. Below we outline the core reasons for divestment, summarize the potential financial implications and answer several frequently asked questions.

The Case for Fossil Fuel Divestment

Scientific Background

The scientific consensus regarding the importance of action on climate is extremely persuasive. Increases in greenhouse gas concentration are already causing significant changes in global temperature, sea level, glaciers and ice caps, ocean chemistry and ecosystems1. The magnitude of future change will depend almost entirely on current and future releases of greenhouse gases. If action is not taken, warming by the end of the century will be so far beyond normal that it would completely transform the planet’s natural systems. These changes would seriously stress human systems of food production and governance, leading to large scale human migration, social disruption, even war. Fossil fuel reserves are sufficiently extensive that under existing technological and regulatory conditions, it is possible and economically beneficial to extract more carbon than the planet can safely handle. There is no proven technology to prevent the associated emissions from accumulating in the atmosphere. The only way to avoid harmful warming is to leave much of the resource in the ground, thereby forgoing the profits and short-term economic benefits that would accrue if it was exploited.

Moral Imperative to Action

Climate change, and its many consequences, is creating a very different world that we must all prepare for and for which we must prepare our students. The knowledge that a fossil-fuel based economy drives rising sea levels, increasingly extreme weather and unprecedented loss of biodiversity should be a primary consideration in what it means to be “just and humane.” Consequently, for Seattle University to remain a credible force for promoting justice and sustaining the common good, it must continuously re-examine its dependence on fossil fuel exploitation.

The importance of the issue is highlighted by recent actions taken by the Catholic Church. Care for creation is a central objective of the Vatican’s Office for the Promotion of Integral Human Development. The need to prioritize actions that address environmental degradation was emphasized in the recent Papal encyclical, Laudato Si: On Care for Our Common Home. In Laudato Si, it is clear that our ethical obligation extends beyond our own species:

Each year sees the disappearance of thousands of plant and animal species which we will never know, which our children will never see, because they have been lost forever. The great majority become extinct for reasons related to human activity. Because of us, thousands of species will no longer give glory to God by their very existence, nor convey their message to us. We have no such right (33).

As a Jesuit Catholic institution, we are called to make decisions only after considering the needs of the most vulnerable—the relatively narrow interests of the institution that we direct should not be our only consideration. Investing in industries that cause long-term harm to the planet and to future generations should be excluded, even if such investments could marginally improve the financial position of the university.

Divestment is Actionable

Because there is an opportunity to join forces with other like-minded institutions, divestment from fossil fuels represents one of the most powerful of the many actions we can take in response to the climate crisis. By asking financial managers to consider the long-term implications of investments, divestment raises awareness among the companies, investors and elected officials whose decisions will shape the economy over upcoming decades. Furthermore, divestment done well (i.e., in a way that maintains diversified investments across many economic sectors) can lead to accelerated investment in sustainable energy infrastructure. It also supports investment managers and investors who are interested in supporting the transition to carbon-free energy and the development of efficient and reliable low- and no-carbon investment options. While a decision to divest is unlikely to immediately impact the practices of any single fossil fuel-holding firm, it serves as a form of symbolic speech that could set the stage for the political change that will eventually be required to solve the climate crisis.

Proportionate Response

The university’s investment advisor, Cambridge Associates, indicates that an illustrative roster of managers that exclude fossil fuels has underperformed the university’s current managers. Assuming that similar relative performance patterns continued, the exclusion of fossil fuels could reduce future investment returns as described in the Investment Implications summary that follows. This estimate depends primarily on assumptions regarding continued outperformance by the university’s current investment managers and not on an expectation that fossil fuel companies themselves are likely to outperform the market. While it would be disappointing to forego these returns, should the reduction actually occur, the potential reduction in return is small relative to overall university income, which will remain dominated by student tuition for many years. Such a marginal decrease in return would not prevent the university from achieving its core educational mission.

The consequences of a decision against divestment are also worth considering. At this stage, many would perceive such a decision as support for an economic status quo that uses the argument of “fiduciary responsibility” to justify the maximization of returns despite social or environmental cost. Given the severity of the global warming issue, this would raise questions regarding the university’s commitment to mission, damaging our ability to attract and retain students for whom the idea of mission resonates. On the other hand, divesting would not only respect the institutional governance systems at Seattle U, but also it would highlight the ability of students to make a difference, thereby empowering them to continue advocating for justice.

And isn’t it our leadership toward social justice that we are most proud of? From the earliest days of the university, when women were accepted into night classes, a core part of our Jesuit Catholic identity has been the desire to right the wrongs we see around us, to seek out that “just and humane world.” This higher mission is why students volunteer at more than three times the national average. It is what attracts talented staff, faculty and students from across the world and what inspires so many within the Seattle University community to advocate for positive social change.

Conclusion

In summary, there are five reasons divestment from fossil fuels is the right thing for Seattle University:

  1. Continued development of fossil fuels is an intergenerational injustice that will harm people and non-human life that comes after us;
  2. Alternative approaches to energy development and investing are possible—and our institutional decisions can strengthen these initiatives;
  3. Our Jesuit Catholic identity calls us to care for the planet and to advocate for environmental justice;
  4. The lack of national policy that effectively addresses carbon pollution adds to the sense of urgency and adds to the moral imperative to act where we can; and
  5. We find it unlikely that a decision for divestment would meaningfully damage our ability to focus on mission, while an action against very well could.

Action by our investment partners on the issue is possible and has the potential to open doors for others who are interested in similar issues. We should be excited to serve as leaders on the issue.

Investment Implications of Fossil Fuel Divestment
Summary of Analysis Conducted by Cambridge Associates

The endowment portfolio has approximately 6.7% ($13.6 million) exposure to securities of fossil fuel companies, as defined by ownership of fossil fuel reserves. These securities are owned indirectly through the university’s investments in funds managed by external investment managers. The university currently has a strong roster of well-established and high-quality investment managers, who have a weighted average track record of 12 years and have in aggregate generated substantial excess returns above their respective benchmarks. Seattle University requested that Cambridge Associates conduct an analysis of the investment implications from fossil fuel divestment in their role as investment consultant for the endowment portfolio.

The universe of fossil fuel-free funds is currently limited, but growing rapidly. Cambridge has completed investment due diligence on several such funds and believe they could construct a credible fully divested fossil fuel-free portfolio for the university within five years of a divestment decision. However, fossil fuel-free funds generally have much shorter track records and more modest historical excess returns. Cambridge presents a potential portfolio of available high-quality fossil fuel-free funds and finds that it has delivered only half the historical excess returns than the current portfolio with about an 80 percent shorter weighted average track record. Based on the assumption that the historical excess returns continue or diminish by half, this full divestment strategy would reduce the annual expected return by 0.6% to 1.2% ($1.2 to $2.3 million), relative to the current portfolio. It is possible that the performance shortfall of a fossil fuel-free portfolio will narrow in the future as more funds are launched and their track records are further established.

Cambridge also presents an alternative strategy of partial fossil fuel divestment in the near-term and a commitment of full fossil fuel divestment over five years that is consistent with the Divest-Invest Pledge. This strategy would meet the objectives put forth in the SRI Working Group recommendation. Specifically, Cambridge details one potential implementation of this strategy where the portfolio is divested with the exception of three equity managers (representing 28 percent of the portfolio) that are closed to new capital, have generated outsized excess returns for the university and have thus far been unwilling to launch fossil fuel-free funds. Based again on the assumption that the historical excess returns continue or diminish by half, this partial divestment strategy would reduce the portfolio’s annual expected return by 0.1% to 0.2% ($0.2 to $0.4 million), relative to the current portfolio. The strategy would reduce the portfolio’s exposure to fossil fuel company securities by 70 percent (to 2.1% of total assets). Cambridge believes that this strategy is very practical and would give the university the benefit of signing onto the well-recognized Divest-Invest Pledge while allowing the additional time needed to identify suitable replacements for a limited number of high-quality investment managers.

Any fossil fuel divestment strategy will also result in lower (or higher) investment performance if fossil fuel company securities outperform (or underperform) those securities where the proceeds are reinvested. This component is not included in Cambridge’s analysis, reflecting studies that suggest that fossil fuel-free portfolios may be optimized to have relatively modest performance divergence from the broad market over the long term.

Fossil Fuel Divestment – Frequently Asked Questions

Common criticisms of divesting

1. Is this debate an unhelpful distraction that prevents faculty, staff, students and board members from focusing on the central educational mission of the university?

Students, faculty and staff have consistently tied the issue of fossil fuel divestment to the university’s mission. Ultimately, reflection followed by action is the best way to emphasize the university’s commitment to “empowering leaders for a just and humane world” and is very closely aligned to the broader educational mission of the university.

2. Isn’t it hypocritical to divest while continuing to benefit in other ways from fossil fuels?

This is not an either/or choice. We can and should address the concern about climate change through both our investing strategy and by addressing other areas where we are presently not acting sustainably. Future investments must be made to enable a transition away from these fuels, which is one reason that divestment and (eventual) re-investment is an appropriate response. Furthermore, it is not a bad thing for us to grapple with areas where we are not ethically consistent because only by reflecting on these inconsistencies is change possible.

3. Is divestment consistent with fiduciary and ethical responsibility to donors?

We find it unlikely that donors expected the university to follow a completely amoral approach to investing and the university has already decided that social issues should be incorporated into its financial planning. This is why the SRI committee was created in the first place. In light of our mission, it is important for the university to consider more than just maximization of financial return.

4. Since divestment is in many respects a symbolic activity, isn’t it another form of “Greenwashing” that allows us to avoid other hard choices without really accomplishing anything?

Divesting is symbolic, but the symbolism has power. For instance, because the fossil fuel divestment movement is global in nature, it has motivated our investment managers to find ways to collaborate with us on SRI issues in ways that might not have been possible otherwise. Furthermore, this action can and should lead to advocacy for change in other areas.

5. Why not positively invest in clean energy instead of divesting from fossil fuels?

At this time, it is more practical and less financially risky to direct managers to exclude a relatively small number of companies from their portfolios than it is to direct them to make specific investments in new, sometimes unproven technologies. Furthermore, while divestment and positive re-investment are not mutually exclusive—we would be surprised if our managers do not look carefully at clean energy—we recognize that we should first “do no harm” before transitioning into the positive investments that will help fund a clean energy future. Finally, there is presently significant social momentum behind the divestment movement, meaning that it is an action that can be taken in the near term. Planning a separate, practical re-investing approach could take years and is something that will be easier to do once the issue of divestment is resolved.

6. Doesn’t taking official positions on politically charged issues suppress the freedom of students and faculty to voice dissenting opinions?

This is more a criticism of socially responsible investing generally rather than just a critique on fossil fuel divestment. We are not a value-neutral institution, so our actions should be taken in light of our best assessment of consistency with mission, even if the action reinforces a political or cultural point-of-view. This is not suppression of speech. In any case, for the most part, the discussion on campus surrounding fossil fuels has been respectful. Those who have expressed reservations have not been “shouted down.” Furthermore, because our investment advisor has been willing to work with the SRI Working Group on the issue, a decision to divest could open doors for faculty, staff and students to participate in broader discussions related to what managers may see as an appropriate role for fossil fuels in the economy, although the onus would be on investment managers to make the case for particular investments. While these conversations may not be visible to all students, we suspect they represent opportunities to expose students to a broader set of ideas than what they might otherwise encounter on campus.

Institutional Precedents

1. What other organizations have divested?

A large number of organizations have made decisions for divestment. There are too many to list here, but some of the most noteworthy that have divested from all forms of fossil fuels include:

Regional organizations committed to divestment from direct investment in fossil fuels:

  • The Bullitt Foundation
  • Oregon State University
  • Russell Family Foundation

Other notable organizations committed to full divestment from all forms of fossil fuels:

  • The Country of Ireland
  • The Evangelical Lutheran Church in America
  • Rockefeller Family Fund & the Rockefeller Brothers Fund
  • Union of Concerned Scientists
  • University of Dayton (a peer Catholic University)
  • University of Hawaii
  • University of Massachusetts Foundation

Many other institutions have committed to a partial form of divestment. This usually involves divestment from coal and/or tar sands. Committed organizations include:

  • The City of Seattle
  • The City of Portland
  • The City of San Francisco
  • Church of England
  • Oxford University
  • Stanford University
  • University of California
  • University of Washington
  • Yale University

A relatively complete list of organizations that have made decisions for divestment from fossil fuels is available here: https://gofossilfree.org/divestment/commitments/

2. How has divestment been defined at other institutions?

This is an issue that we cannot fully answer, but in many cases, the institutions have simply developed statements that they will not support direct investments in fossil fuels. By this definition, Seattle University could probably join the lists of “divested” institutions tomorrow, but faculty, staff and students have pointed out that this approach to the issue seems somewhat disingenuous. Addressing the issue of how our commingled funds are managed has the potential to support many other organizations in the management of their own commingled funds.

3. What are the precedents for Seattle University supporting other environmental causes in its operations?

Divestment from fossil fuels is similar to our LEED building policy. In 2001, before LEED buildings were as common as they are today, students requested that their Student Center be LEED certified. The university took their requests seriously and ended up with a more energy efficient and beautiful building. We built the first urban campus composting facility in the state—another investment in sustainable operations that addressed social concerns and expectations at the time. The university also banned styrofoam from campus nearly five years before the City of Seattle did the same and was the first campus in Washington State to ban plastic water bottle sales.

Scientific Facts

1. I’ve heard there isn’t that much fossil fuel left to burn (remember peak oil), so aren’t we likely to run out of fossil fuel before we do too much damage?

According to the Intergovernmental Panel on Climate Change, between 1,002 and 1,940 billion tons of carbon are present within existing fossil reserves. This is many times the roughly 200 billion remaining tons that can be burned while still maintaining a two in three chance of limiting warming to 2°C above pre-industrial levels, which is a level accepted as a potentially but not entirely safe target. Much more carbon is present in resources that could come online as exploration and extraction technologies become more efficient and as economic conditions change.

2. Hasn’t warming slowed in recent years, thus implying that simulated future change is overblown?

This was an argument made several years ago, when natural variability in the climate system had resulted in a few years that did not produce record global average temperatures. However, both 2015 and 2016 were extremely hot years, indicating that there was never any real “hiatus” in warming. Unfortunately, this factually baseless talking point continues to be made by those who deny warming.

3. I’ve heard that market forces are leading to the development of green technology that may address the problem on its own. After all, doesn’t the U.S. now emit less carbon than it did a decade ago?

There have been some reductions in emissions, partly because it has become economically beneficial in the past several decades to use natural gas instead of coal for power generation. However, given the increased efficiency of extraction of natural gas (partly through hydraulic fracturing, or “fracking”), it will probably remain economically beneficial to extract fossil fuels like natural gas and oil for many years. And there are enough available reserves that the associated emissions would, over the next 20 to 30 years, significantly hinder our ability to limit warming to a safe level.

4. There are no other good alternatives to fossil fuels to run the economy.

It will be challenging to develop resources that can completely replace fossil-fuel based energy, at least in the near term. Existing green technologies will need to be scaled by many orders of magnitude. This is one reason why investment decisions are important—Investments now will make alternative energy resources more affordable and accessible and allow us to move away from fossil fuel dependence in the future. The deployment of green energy at the required scales would itself be an engine of economic growth and even without achieving a fully carbon-free energy sector, any reductions we make in global carbon emissions will help us avert the worst-case scenarios.

5. Aren’t fossil fuels necessary for the growth of economies and the associated reduction in poverty in the developing world?

Fossil fuel extraction is known to have major impacts on those who live near the resources undergoing exploitation and there are important social justice issues tied to this type of development. Those who make the argument that fossil fuel use is necessary for economic development in the developing world are often the same groups who stand to profit the most from further fossil fuel development. In fact, many rural communities in developing countries are finding solar power and other fossil-free energy sources meeting their needs better than traditional fossil fuel-based energy sources.

Working Group Members

  • Jill Blackburn, Alumni Representative - Program Manager, Wells Fargo Bank
  • Eric Elliott, Staff Representative - Recycling Coordinator & Compost Technician
  • Joseph M. Gaffney, Board of Trustees and Investment Committee Representative (SRI Advisory Working Group Chair)
  • Bob Grimm, S.J., Board of Trustees and Investment Committee Representative
  • Wes Lauer, Ph.D., P.E., Faculty Representative - Associate Professor and Director of Environmental Science, Civil and Environmental Engineering
  • Jason Malinowski, Investment Committee Representative - Chief Investment Officer, Seattle City Employees’ Retirement System
  • Scott McClellan, Cabinet Representative - Vice President for Communications
  • Emily McCrite, Undergraduate Student and Sustainable Student Action Representative
  • Surbhi Saxena, Graduate Student Representative
  • Valentina Zamora, Ph.D., Faculty Representative - Associate Professor, Accounting