Stanford University divestment is a warning to coal industry

Stanford’s divestment from the coal industry could mark beginning of a new wave of investor action on climate change

Pic: Light Brigading/Flickr

Pic: Light Brigading/Flickr

By Gerard Wynn

Stanford University endowment fund is the biggest to divest from coal in a slowly gathering movement among US universities which bears some hallmarks of the anti-apartheid campaign in the 1980s.

The US coal industry has complained of a “war on coal” as it lobbies against tougher air quality and carbon emissions standards, but Stanford’s decisions shows that the industry should be wary of a threat from grassroots public opposition.

Divestment by university endowments will initially not move the needle on demand for or prices of shares in coal mining companies, given they are such small players in global capital markets.

But that would miss the point. Universities can raise public awareness of reputation harm and so gradually reduce the attractiveness of companies to mainstream investors, who might incrementally extract a risk premium which in turn raised financing costs for such companies.

US universities were early actors in the anti-apartheid divestment movement which targeted companies active in South Africa and ultimately contributed to the downfall of the regime.

University divestment could therefore be an early step in the evolution of a wider campaign which can ultimately undermine an entire sector, argued a seminal report by Oxford University’s Smith School published last October.

The question is whether other investors follow Stanford, or whether this is an isolated case, to be viewed in the light of Harvard University’s decision last year not to divest from fossil fuels.


Stanford University’s decision to divest from coal is a big step, as the country’s fourth biggest university endowment fund, valued at $18.7 billion, behind Harvard ($32.3 billion); Yale ($20.8 billion); and the University of Texas system ($20.4 billion), show data from the National Association of College and University Business Officers and Commonfund Institute.

However, the grounds for coal divestment are still not clear cut.

Divestment from coal depends on an acknowledgment by fund trustees of the contribution of coal to and the global risk posed by climate change. And trustees should be confident that the financial returns of the fund will not be seriously impacted.

A recent report by the UN climate panel and this week’s US National Climate Assessment left no doubt that global warming was happening, was mostly a result of human activities, and if left unabated would cause serious, escalating damage to the global economy through this century.

Fossil fuels are the biggest source of carbon emissions, and coal is the most carbon-emitting fossil fuel, and so the link between coal and climate change is clear.

However, fund managers must also weigh their responsibility to their clients, such as pension fund members, and in particular financial returns.

Stanford University dealt with the issue in the first paragraph of its six-page “Statement on Investment Responsibility”, adopted in 1971 and continuously updated since.

“The primary fiduciary responsibility of Stanford University Trustees in investing and managing the University’s endowment assets is to maximize the financial return on those assets, taking into account the amount of risk appropriate for Stanford’s investment policy,” it says.

“However, when the Trustees adjudge that corporate policies or practices cause substantial social injury, they, as responsible and ethical investors, shall give independent weight to this factor in their investment responsibility policies and proxy voting practices related to endowment investments.”

The university said in a press release on Wednesday that the trustees had decided that divesting from coal would not impact financial returns, since there were less carbon-emitting energy sources available to invest in, taking the advice of an advisory panel which included staff and students.

However, Stanford’s decision to divest from coal mining companies may not fulfil the requirement, stated in the university’s statement on investment responsibility, first to exhaust its power as an active shareholder.

It was partly to retain such shareholder influence that Harvard University decided not to divest, according to its President Drew Faust, speaking last October.

“If we and others were to sell our shares, those shares would no doubt find other willing buyers.  Divestment is likely to have negligible financial impact on the affected companies.  And such a strategy would diminish the influence or voice we might have with this industry,” she said.

Faust was also unconvinced that divestment would not hurt returns.

Various US cities which have committed to divest from fossil fuels last year reported problems regarding their fiduciary responsibility. For example the City of Seattle found that it was difficult to prove that divestment would not impact returns.

The launch last month by the FTSE Group of an index which specifically excluded fossil fuels could go some way to tackling the problem, by demonstrating over time the financial returns to such a portfolio.


Oxford University’s Smith School of Enterprise and the Environment last year identified an evolution in divestment campaigns, based partly on the 1980s South Africa and tobacco divestment campaigns.

That evolution started with religious groups and public organizations which raised awareness, and gathered pace with the involvement of universities, before reaching the wider market, the report said.

For example, regarding tobacco, public health organisations divested in the 1980s, followed by universities led by Harvard in 1990, and then the wider market.

Regarding apartheid, the Catholic Church in 1980 pledged to divest from banks active in South Africa, followed by Harvard and Columbia universities in 1986 and 1987, and US public pension funds in the mid-1990s.

“The first wave begins with a core group of investors divesting from the target industry,” the Smith School report said.

“All previous divestment campaigns have found their origin in the United States and in the first phase focus on US-based investors and international multilateral institutions.

“The amounts divested in the first phase tend to be very small but create wide public awareness about the issues.  Both in the case of tobacco and South Africa the campaigns took some years to gather pace during the first wave until universities such as Harvard, Johns Hopkins and Columbia announced divestment in the second phase.

“In the third wave, the divestment campaign goes global and begins to target very large pension funds and market norms, such as through the establishment of social responsibility investment (SRI) funds.”

The report considered that the fossil fuel divestment campaign was already entering it second phase, with universities, a view supported by Stanford’s decision on Wednesday.

The Smith School report considered that tipping points which led to lower valuations of coal companies could follow the withdrawal of bank lending, especially in countries dependent on a smaller pool of banks, and stigmatization, where divestment leads to the expectation of further bad news among mainstream investors.

Once firms are stigmatized, they may be vulnerable to shareholder pressure, restrictive legislation, freezing out from public funding and tenders, and greater scrutiny in private contracts and acquisitions.

The apparent effort by European coal buyers to avoid such stigmatization through their formation in 2012 of the lobby group, Bettercoal, may prove the point.

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