This letter was discussed in a meeting held between Divest Reed and the Board of Trustees on Friday, February 7, 2014. The Trustees were asked to issue a public response.
To the Board of Trustees of Reed College:
Fossil fuel extraction continues to accelerate globally despite increasingly urgent scientific predictions about the pace and progress of climate change. At current CO2 levels above 400 ppm (1), we are almost locked into at least two degrees Celsius of warming, the upper bound on safe warming (2). The total reserves of the fossil fuel sector hold five times as much carbon as remains in our two-degree carbon budget, and if extracted and burned threaten unpredictable and possibly catastrophic climate change (3).
Consumption of fossil fuel energy is not going to diminish without significant global policy action, but the political influence of the fossil fuel industry has immobilized meaningful national and international climate policy. Reed’s investments in fossil fuel industry, likely adding up to tens of millions of dollars, represent political and financial support for such projects. We reject the notion that financing and profiting from fossil fuel industry can be understood as politically “neutral.” The compelling social and moral character of the political impasse of climate change warrants the consideration of divestment under our Investment Responsibility Policy. Moreover, these investments are a breach of our “commitment to the global environment” espoused in the Environmental Policy Statement. We insist that it is dishonorable for our College to profit from the extraction, transportation, and burning of fossil fuels, which cause environmental destruction on a vast scale as well as immense public health issues in areas of industrial activity (4).
In light of these considerations and under the conviction that the investment decisions of our college are bound by the Honor Principle, we make three demands. First, the Board shall freeze new investments in funds that hold stock of the 200 largest fossil fuel companies (5) and to divest existing holdings in these funds within ten years. Second, the Investment Responsibility Policy shall be revised to institute consideration of ethical questions alongside economic concerns. Third, the Trustees shall annually publish the magnitude of its holdings in ethically controversial assets along with a justification for those holdings in order to maintain accountability with the community. Considering student, faculty, and alumni attention to the issue as well as the publication of this document by the Quest, a public report of your decisions is warranted in the form of an open letter to the community.
At the Union on Sustainability at Reed at the end of Fall semester, several community policy documents were discussed for their pertinence to the question of divestment. We are concerned because the Investment Responsibility Policy fails to affect honorable investment behavior by the Board. We are also concerned that the College is failing to follow through on the Environmental Policy Statement. We believe that investing in fossil fuel industry is a clear violation of the Honor Principle, and a closer attention to our policy documents may help address this problem.
As a community of deep thinkers, we are disappointed that the college has been operating under an IRP that espouses political neutrality in investment (6). The assertion that “to own is not necessarily entirely to endorse” is a rhetorical sleight of hand which obscures the reality that to own is necessarily to endorse politically and economically. As a matter of policy this is embarrassing dishonesty for the critically thinking students, faculty, and alumni who help govern this community. More importantly, however, this policy functions to allow our investments to operate without consideration of ethics or honor. We believe this is antithetical to the philosophy of our institution. We demand a redrafted policy that deals more honestly with the ethical complexities of finance and which allows for an explicit and intentional consideration of non-economic matters.
The Environmental Policy Statement outlines three venues of activity to embody responsible stewardship: promoting awareness, the campus environment, and the global environment (7). Divestment from fossil fuels should be understood as part of a comprehensive environmental policy by the college. In recent years the college has made a series of important accomplishments with regards to environmental policy. The establishment of the Sustainability Committee and Fund and the Environmental Studies Program; the commitment to stringent building standards; and the restoration of the canyon all represent important steps toward environmentally conscious best practices. These actions are important, but alone they are not sufficient. As long as Reed College is financing the extraction, refinement, and burning of fossil fuels on the magnitude of millions of dollars, it is only symbolic and relatively meaningless to improve the LEED standards of our buildings and provide small amounts of funding for sustainability projects on campus. We believe that divestment from fossil fuels is a crucial element of environmentally conscious administration of our college.
The challenge that may take the most courage to overcome through the process of divestment, or the project of responsible investment more generally, is the cost to returns. In light of the college’s troubled financial past and recognizing that we are a small, private institution relying extensively on our endowment as well as perpetual fundraising to maintain and expand our programs, we take Reed’s financial security very seriously. We all deeply support Reed’s mission and recognize the necessity of secure financial resources to enable the college’s function. We do not, however, believe that it is honorable to allow financial concern to universally trump moral consequences. This means that, though difficult and complicated, the college must be willing to consider non-economic factors alongside financial incentives in the construction of its portfolio. Eschewing this nuance to strengthen the portfolio is dishonorable and in violation of the college’s nature as a community of engaged and aware citizens.
That being said, it remains unclear whether or not divestment from fossil fuel industry would constitute a significant cost to the endowment’s ROI. From a financial perspective, there may also be significant reason to examine the college’s holdings in the fossil fuel industry. A study done by Impax Asset Management finds that a portfolio divested of the top 200 fossil fuel companies would have outperformed the MSCI world index over the past seven years in four different management scenarios, including both passive and active management approaches (8). Actively diversifying investments in the energy sector beyond fossil fuels improves performance while reducing tracking error in these divested portfolios. The Impax study emphasizes that exposure to the fossil fuel sector includes unpriced risks related to the possibility of climate change policy and the effect of decarbonization on fossil fuel prices. A recent publication from Oxford University’s Smith School of Enterprise and the Environment adds that these risks are “poorly understood and are regularly mispriced,” which may result in portfolios that are significantly over-exposed to environmentally unsustainable assets (9).
Former SEC Commissioner Bevis Longstreth suggested recently that fossil fuel companies are vastly overvalued due to their politically stranded assets, exposing investments to material loss (10). The Bloomberg Carbon Risk Valuation Tool was developed to estimate investment exposure to risks related to stranded assets in the form of fossil fuel reserves (11). Existing fossil fuel reserves are already capitalized into fossil fuel firm equity. Political conditions preventing the development of these reserves will cause devaluations of fossil fuel companies. Accounting for this risk is important in investment portfolios with long time horizons, like our endowment. Divestment should not be dismissed for the sake of the budget without an in-depth evaluation of our exposure to the fossil fuel sector and the financial prospects of socially responsible investment.
Finally, the endowment has grown $500 million, net all expenses, over the past 40 years. This is due to the generosity of Reed’s parents and alumni, but also the hard and pioneering work of Ed McFarlane, the Board of Trustees, and the college’s fundraising efforts. The endowment’s growth represents a choice to save rather than spend, to the tune of an average annual $10 million a year for the past 40 years. Even if incorporating moral considerations into our investments were to cause a reduction in ROI, it would not necessarily translate into a cut to Reed’s budget if we lowered our rate of saving. While a more slowly growing endowment may not meet the ambitions of the Board, we believe that it is well worth the establishment of an honorable investment policy.
Reed College Divestment Campaign
Austin Weisgrau ‘15, Maya Jarrad ‘14, Salish Davis ‘15, Shannon Smith ‘14, and Kate Jentoft-Herr ‘16
1. NOAA 2013
2. UNEP Copenhagen Accord 2009, page 5.
3. Carbon Tracker.
4. Environmental and Energy Study Institute.
5. Unburnable Carbon.
6. Reed College Investment Responsibility Statement.
7. Reed College Environmental Policy Statement.
8. Impax Asset Management 2013.
9. Smith School of Enterprise and the Environment 2013, “Stranded Assets and the Fossil Fuel Divestment Campaign,” page 16.
10. Longstreth, Bevis. “The Financial Case for Divestment of Fossil Fuel Companies by Endowment Fiduciaries.”
11. Bloomberg New Energy Finance 2013, “Carbon Risk Valuation Tool.”