By Frank Jotzo, Australian National University
Is the Australian National University's decision to sell its shares in some resource companies merely tokenistic? Far from it. The outrage from the affected companies shows how much influence universities can wield when they put their money where their mouth is.
The question is, will other universities follow suit, having seen the considerable criticism that greeted ANU's decision?
When ANU announced earlier this month that it would divest shareholdings in seven resources companies - Santos, Oil Search, Iluka Resources, Sandfire, Sirius, Newcrest and Independence Group - it initially offered only a sparse explanation. The decision, it said, was the result of a review commissioned as part of the university's Socially Responsible Investment Policy, with (unpublished) environmental, social and governance ratings provided by the firm CAER.
The outrage has been fanned by a week-long campaign in the pages of the Australian Financial Review (see here, or any other edition of the AFR between October 6 and 11).
On Saturday, Australia's Treasurer Joe Hockey weighed in, describing ANU as "removed from the reality of what is helping to drive the Australian economy and create more employment".
On the flip side, resource companies that escaped the divestment list have seized the opportunity to claim sustainable credentials. BHP Billiton's president for environment Mike Henry hailed his employer's resilient, diversified portfolio, and reiterated the company's support for a price on carbon.
Why so upset?
It is an astonishingly intense response to a relatively minor shift in a smallish investment portfolio. ANU's divestment list represents just 5% of the university's domestic equity, and the value of shares to be sold is around A$16 million.
The seven companies' combined market capitalisation is A$45 billion. So the divestment amounts to 1 in every 3,000 shares, on average, for these companies. Any direct impact on their share prices will be negligible, and ANU hasn't ruled out reinvesting if their ratings improve. Why, then, has it been so controversial?
First, divestment from fossil fuels seems to hit a strong nerve with the public. Many people feel satisfaction or pride if their employer or super fund adjusts investments in line with their personal values.
Second, divestment can bring great negative visibility for individual companies. ANU certainly named names in its initial media release.
Third, it puts the spotlight on risk: fossil fuel reserves far exceed the amount that the world can use if climate change is to be addressed, and so there is a fundamental question mark over the future of fossil fuel industries.
Values and leadership
It is not only the strength of the companies' response and the fieriness of the AFR's campaign that is remarkable, but also the fact that the government is getting involved in the way it has.
The Australian government seems to believe that national prosperity is tied to fossil fuels, and that "Team Australia" ought to be backing the sector.
Many people feel that Australia should embrace a low-carbon future rather than ride the fossil fuel wave to the end. For some, it is a question of Australia's economic prospects. For others, it is a question of values.
ANU Vice-Chancellor Ian Young clearly intends to lead, telling ABC Lateline:
For a university like ours, which is, for instance, a major researcher in environment and alternative energy, we need to be able to put our hand on our heart when we talk to our students and to our alumni and to our researchers and be able to say that we're confident that the sort of companies that we're investing in are consistent with the broad themes that drive this university.
Power and money
One lesson from this episode is that Australian universities have significant power (perhaps even more than they realised) in the debate over corporate responsibility. Who would have thought that a small divestment of A$16 million would draw fire from the federal treasurer and garner a week of front-page coverage in the country's leading business newspaper?
That kind of power obviously brings responsibility.
Of course, there is no obligation on any investor to explain the reason for buying or selling a particular stock. Yet in divesting, universities need to make doubly sure to consult extensively, explain rationales, set clear benchmarks, define criteria, and make their assessments open to scrutiny.
A snowball in the making?
ANU is the first Australian university to divest publicly. But it is a fair bet that the issue is on the agenda for most major Australian universities, or will be soon.
Sydney University announced a review of its investment portfolio, provoking strong responses by the coal industry.
The Asset Owners Disclosure Project, chaired by my ANU colleague John Hewson, has been pushing large asset owners, including universities, to reveal their fossil fuel interests.
In the United States, where the divestment movement originated, Stanford University is among many organisations that have pledged not to invest in coal, although America's richest university, Harvard, has resisted calls to join them.
The boldest recent divestment decision came not from a university, but a philantrophic trust: the Rockefeller Foundation, built on old oil money, announced that it will divest all investments in fossil fuels, and that is has already sold its investments in coal and tar sands.
The question is, will other Australian universities follow suit, emboldened by the lead from Canberra? Or will they fear to tread where ANU has, having seen the backlash from industry and government?
The divestment train is moving
Universities should take heart in the fact that there are much larger capital movements under way away from fossil fuels. Initiatives such as the Portfolio Decarbonization Coalition are growing; this Coalition alone has a divestment target of US$100 billion by December 2015.
As Nathan Fabian, chief executive of Australia's Investors Group on Climate Change, explained at a forum last week, institutional investors increasingly see that fossil fuel companies' aspirations are incompatible with the global goal to limit climate change.
As a result, investments with companies that are stuck in the carbon business and have no viable plans to evolve their business are increasingly seen as risky. As Fabian put it: "Companies need a low carbon transition story that is fair dinkum. Investors are tired of denialism and obfuscation".
If divestment grows large, then fossil fuel companies' stock market values will tend to be lower - and early divestment will not only be a statement, but a strategy to increase university's returns on financial investments.
Frank Jotzo has grants from the Australian Research Council and the Australian government. None of his grants relate to divestment. He is in no way involved in ANU investment choices.