Written by Anand Balaji [Dec 2018 Alumni]
In less than a decade, the divestment movement has fundamentally transformed the asset management industry. Divesting refers to the process of ending investment in an industry or company that is considered harmful to society. Divestment campaigns have a long history, most notably in the 1960s when American universities and eventually the federal government divested from South Africa as a protest to apartheid.
Currently, the divestment campaign gaining the most significant traction is focused on ending investment in the fossil fuel industry. The impact of this movement has been staggering: reports estimate that the assets under management (AUM) of investors that have pledged divestment is over $6 trillion compared to just $50 billion in 2014. The tangible effects of this shift continue to be debated but it is undeniably a trend forcing many to rethink what it means to be a responsible investor.
The fundamental aims of divesting vary depending on which sources you consult. NYU Divest, a student-run campus organization, frames divestment as a moral issue stating, “we can raise the issue of the impacts of the fossil fuel industry… and make a statement with our money.” It is hard to believe that divesting NYU’s $4 billion endowment would have a financial impact on the industry but the sheer size of the movement is having tangible economic effects. Oil companies are now stating divestment as a material risk on their financial statements and a recent Goldman Sachs report directly attributes the severe contraction in coal company valuations to divestment.
Many institutional asset managers are willing to drop fossil fuel investments from their portfolios because they do not see them as bringing long-term profits. Academics have described a “carbon bubble” in fossil fuel valuations in which investors fail to price the negative externalities caused by carbon emissions. Many predict that eventually, society will be forced to make a severe shift to alternative energy sources, leaving trillions of dollars of investment worthless.
However, many fiduciaries are wary of the growing politicization of asset management. Increasingly, the trend of social activists seems to be more focused on the societal impact of investment decisions rather than on the returns they generate. In recent years, universities have witnessed a rapid proliferation of divest movements on campus. NYU itself has several different divestment groups including Boycott, Divest, Sanction Israel, NYU Prison Divest, and NYU Divest (fossil fuels). The rise in mass shootings has also spawned pushes to divest from gun manufacturers.
Despite growing student activism, NYU has firmly resisted calls for divesting across the board. In 2015, the NYU Senate passed a resolution calling for the Board of Trustees to divest the school’s endowment from fossil fuels. The Board issued a statement stating that they would not support “using the endowment as a tool simply for making statements.” Last December, the NYU Senate passed a resolution calling for the divestment from all companies that do business with Israel after an extremely contentious debate. The next day, NYU issued a statement reiterating its opposition to all forms of divestment. With the growing support of these movements both at NYU and across the country, it seems likely that the university will be forced to contend with the divestment issue again.
The rise of the divest campaign raises several critical questions about the role of asset managers in today’s society. While several of these efforts are aimed at correcting legitimate social injustice, the implications of acquiescing to all divestment demands is more complex. With the rapid expansion in divestment activism, it remains to be seen if investors will continue to change their investment strategies. What is clear is that this a trend which is not going away anytime soon in the field of finance.