Divest UW Proposal for the University of Washington to Respond to the Risks of the Carbon Bubble
Last year, the Board of Regents, the Treasury and Divest UW worked together to pass 5 Global Climate Change Initiatives. Together we put the University of Washington at the forefront of responding to the challenges of climate change. We are grateful for the important work yielded by this collaborative effort and fully support its continuation. At the same time, the urgency of the climate crisis along with the difficulties and limitations associated with effectively implementing those initiatives have taught us that those initiatives alone will not suffice to adequately respond to the financial and ethical challenges that climate change poses to the University of Washington endowment and to our future.
Through our continued and productive engagement with the Treasury we have learned that the tools needed to address Environmental and Social Corporate Governance and carbon risk in our investment decisions will likely take over a year if not more to be put into place. In the meantime, the UN warns us that the longer we wait the more expensive and less possible tackling climate change becomes. Fossil fuel companies, however, are not countenancing the required transition, thus exposing them to significant financial risks. In particular, the fossil fuel extraction projects with the highest break even costs and most egregious contributions to climate change (namely, oil sands and coal) are set to experience the financial losses associated with this ‘carbon bubble’ first and hardest. Illustrating this, those who have committed to divest from oil sands and coal have already seen themselves avoiding significant financial losses.  Thus, by continuing to invest in these companies, not only are we betting on climate failure, but we are also likely experiencing financial losses relative to an endowment which does not contain such ethically problematic and harmful investments.
The urgency of climate change and the realities of the $21 trillion carbon bubble suggest we need to act now, and that we cannot afford to wait. Stanford University and a growing number of other universities have already taken the lead on divesting from coal and other fossil fuels. By committing to divestment from oil sands and coal, the University of Washington will be joining prestigious universities like Stanford at the forefront of sustainable leadership. Additionally, through our commitment to employ a carbon risk assessment tool we will be one of the first major public institutions with a comprehensive, ethical and fiscally responsible approach to investing in fossil fuels. The University of Washington is committed to leadership in sustainability. This is sustainable leadership at its finest, and we at the University of Washington have a window of opportunity to provide much needed leadership on one of the most important issues of our time.
Thus, building on our past work together, we at Divest UW ask the Board of Regents, along with the Treasury, to continue to situate the University of Washington as a leader in sustainability and fiscally and socially responsible investing. We propose that the University of Washington divest from direct holdings in oil sands and coal while continuing to build on previous global climate change initiatives. This includes the implementation of a carbon risk assessment tool to screen all fossil fuel investments for financial risk and align our finances with a carbon-constrained world. More specifically we propose that the UW Board of Regents adopt the following set of goals:
Immediately Begin and Continue:
- Divest. Divest from carbon assets associated with the highest degree of carbon risk and the most egregious contributions to climate change, namely coal and oil sands.
- Engage. Continue to fulfil the commitments of the Global Climate Initiative by further pursuing shareholder advocacy where appropriate.
- Analyze. Continue working towards adopting a clear set of tools & procedures to evaluate the financial riskiness of carbon assets, along with other environmental & social governance factors.
- Transparency. Make any such decisions, analyses & actions public knowledge or publically available.
- Screen. Through a carbon risk assessment tool or other means, screen all carbon intensive assets which are incompatible with a carbon-constrained world and which are thus at risk of becoming stranded assets.
- Invest. Move towards 5% re-investment in the alternative energy sector.
In the proposal that follows, we offer a more detailed description of the recommendations above, followed by a necessarily lengthy outline of the financial & moral evidence to support the proposed actions.
1) Divest from Oils Sands and Coal – Oil sands and coal are the most carbon- and capital-intensive fossil fuel industries. As a result, as the world acts to constrain greenhouse gas emissions they are likely to significantly devalue, as they have arguably already begun to do so. Divesting from coal and oils sands is thus not only a morally laudable action, but also a fiscally sound response to the financial realities of the carbon bubble and a fulfilment of fiduciary duty. As we shall outline in more detail throughout this proposal we believe that there is ample and growing evidence to support the case that it is in the long-term financial interest of the university to immediately divest from coal and oil sands.
2) Engage in Shareholder Advocacy – Building on the Global Climate Change Initiative that calls for UW to engage in shareholder advocacy, we recommend the continued pursuit of shareholder advocacy. We at Divest UW remain committed to working with the treasury on shareholder engagement where appropriate. While there are important places for shareholder advocacy, there are certain carbon- and capital-intensive industries, such as coal and oil sands whose business models are arguably not compatible with a carbon-constrained world, and who are thus not susceptible to meaningful shareholder advocacy and are also too financially risky and ethically problematic to maintain investments in. As we shall outline below we believe that the university should use shareholder advocacy and divestment as complimentary tactics, while recognizing the limitations of each.
3) Continued Transparency – Make analyses, action on, and discussions of carbon risk available to students and the public so that we may be kept up-to-date of the university’s actions on this important issue. We believe this transparency is important not only so that we can continue to assist the university on this important issue, but also in order for us to be able to demonstrate and communicate UW’s leadership on this issue.
In the short-to-medium-term:
4) Analyse and Implement Carbon Risk Assessments – We recognize that as of yet there are few if any sophisticated enough investment tools available to properly address carbon risk, while also thoroughly incorporating environmental and social governance factors. Thus we are requesting divestment from oil sands and coal while the Treasury continues to work towards the development of or adoption of a tool which can adequately screen their investments for the requisite companies whose business models are not compatible with a carbon constrained world. Relatedly, we would like to see a thorough incorporation of carbon risk & climate change concerns into the ESG principles to which the university has agreed.
5) Screen Commingled Fund Based on Carbon Risk – With regards to commingled funds we would like to see the university strongly encourage their fund managers to incorporate a thorough analysis of the risks the carbon bubble poses to investments, along with appropriate action on such risk. If fund managers are resistant to doing so we encourage the university to move towards fund managers that are properly countenancing the risks posed by the carbon bubble.
6) Invest More in Renewable Energy – The Global Climate Change Initiative which saw UW commit to have 1% of its investments in alternative energy was a highly laudable step which we applaud the University for. Building on this success we would like to see the university continue to decarbonize its assets and invest in a renewable energy future by university increasing that amount to 5% as other institutions such as Yale and Princeton have done. We believe such an investment can not only help to spur on the clean economy, but when done wisely can be a financially sound investment as the emerging alternative energy sector provides an increasingly profitable investment in a carbon-constrained world. 
In the analysis below we respond to a number of possible concerns that those opposed to divesting might have. First we challenge the claim that divesting will harm our investments, showing that it relies on outdated modes of financial evaluation which are arguably inadequate in assessing the risks associated with the carbon bubble. We then go on to illustrate the financial case for divestment, followed by an analysis of why oil sands and coal are particularly susceptible to the carbon bubble. This analysis illustrates that because coal and oil sands are the most egregious contributors to climate change they are therefore both highly financially risky and deeply ethically problematic investments. Finally, we highlight the limitations of shareholder advocacy and argue why divestment and shareholder advocacy should be used as complimentary strategies. In previous reports to the Board we have highlighted the moral case for divestment, and thus we do not highlight the case again here. However, should reading on the moral case for divestment be desired we recommend the following reading: http://bit.ly/bettingonfailure
A Problematic Financial Analysis
Having thus outlined our recommendations we now move on to present the case for why we believe these recommendations to be not only financially prudent and a fulfilment of fiduciary duty, but also important positive steps for the university in its aim to be a leader in the fight against runaway climate change. We outline, firstly, the problems with typical financial analyses of divestment and why the carbon bubble requires us to look at financial risk differently. We then provide the broader case for why based on this, our outlined recommendations are sensible responses to the carbon bubble and the climate crisis that we face.
Firstly, we salute the treasury’s attempt to come to terms with the financial impacts that divestment from the fossil fuel industry might have on the endowment. However, we are worried that the analysis performed by the treasury represents an outdated form of analysis which is not adequate in coming to grips with the risks associated with the carbon bubble. Among other issues the major problems with such standard analyses are that they are primarily backwards looking, basing their projections of the performance of the fossil fuel industry on historical trends. It is precisely such backward looking analysis which the carbon bubble challenges and more than likely makes inadequate. The carbon bubble is a forward-looking, unprecedented aspect of financial risk which cannot be ascertained through looking backwards to historical trends. As such we encourage the university to reconsider this analysis and to begin to use tools which are forward looking and incorporate these sorts of considerations which the carbon bubble makes necessary.
As Generation Foundation points out, “the presence of a bubble is often not recognized by the market due to classic behavioural finance decision-making biases, such as endowment bias and system justification theory” (Generation Foundation, 2013, p. 2). Furthermore, “In the context of a declining carbon budget, [current] valuation models provide an inadequate guide for investors and need to be recalibrated… [as] the markets appear unable to factor in the long-term shift to a low carbon economy into valuations and capital allocation”(Carbon Tracker & Grantham Research Institute, 2013, p. 5). Despite this, many investors remain sceptical about the impacts that sustainability considerations play on the performance of their portfolio, a scepticism that in many cases “has blinded them to the risks they presently face by investing in stranded assets and the unsustainable companies that maintain them” (Generation Investment Management, 2012, p. 14). Indeed as the Asset Owner’s Disclosure Project’s Global Climate Index Report illustrates, close to 80% of asset-owners are failing to properly manage climate risks, making them vulnerable to the risks of the carbon bubble. A risk blindness which could amount in losses of up to US$8 trillion for investment funds by 2030, according to scenario analysis done by Mercer’s responsible investment team (Mercer, 2011). Given the unprecedented nature of the carbon bubble and the size of the associated risk, relying on standard financial analyses to come to terms with this issue seems be a rather risky strategy to adopt, and points to the urgent need to understand the risks posed by the carbon bubble.
The Financial Case for Divestment
In order to illustrate the importance of reconsidering the analysis provided by the treasury, and developing a new analysis with some of the tools mentioned above, it is worth outlining the recent evidence which reconfirms what we, as students, highlighted in our previous report. In that report, we found that fossil fuel divestment, far from being harmful to the university’s endowment, will quite likely end up helping to ensure healthy financial returns, especially in the long-term. Indeed, the university might be sustaining significant losses through its continued commitment not to divest.
The Aperio Investment Group released a report entitled Do the Investment Math (Geddes, 2013), which essentially debunked the idea that divestment would cause substantial risks to an endowment’s portfolio. The report examined the difference between the ordinary risk an investor faces in the stock market and the risk an investor runs if it excludes the stocks of the thirteen publically traded stock of the Filthy Fifteen – the Filthy Fifteen is a selection of companies that are involved in either coal mining or burning coal to generate electricity that were so named because U.S. companies As You Sow and the Responsible Endowment Coalition judged them as the most harmful based on the amount of coal they mined and burned, as well as other metrics. The report also analyzes the risks when excluding all fossil-fuel companies altogether. For the Filthy Fifteen the report concluded that the additional absolute risk to investors as factored into ordinary market risk rose by 0.0006%, which the Aperio Group states is statistically irrelevant or, in other words, “has no real impact on risk” (Geddes, 2013, p. 3). The risk from broader divestment of the fossil fuel industry worked out to be 0.0101%. Statistically, that figure is “basically noise”, according Patrick Geddes, the Aperio Group chief investment officer (Gardner, 2013).
Skeptics could point out that even for such trivial amounts of increased risk investors are technically bearing additional risk for which they are not compensated. Indeed, as the Aperio report points out, “if the [excluded] industry outperforms the overall stock market, a portfolio with these exclusions will perform worse” (Geddes, 2013, p. 4). However, as we will point out, that ‘if’, especially when it comes to the future of the more carbon- and capital-intensive sectors of the fossil fuel industry, is a very big if indeed, and it seems much more likely that they will significantly underperform.
Consider that a recent study by Eccles, Ioannou, and Serafeim “indicates that sustainable companies outperform a matched group of firms in the long term… The study found that US$1 invested in a value-weighted portfolio of sustainable firms at the beginning of 1993 would have grown to US$22.6 by the end of 2010. In contrast, US$1 invested in a value-weighted portfolio of unsustainable firms at the beginning of 1993 would have grown to US$15.4 by the end of 2010” (Generation Investment Management, 2012, p. 10). Similarly, a study done by Standard & Poors showed that if universities with a $1 billion endowment had divested 10 years ago their endowment would have grown by an extra $0.12 billion when compared to an endowment that had not divested (Begos & Loviglio, 2013).If such this trend is generalized to the University of Washington this would indicate a loss of approximately $0.24 billion over the last ten years.
Illustrating that the above study was not just due to investor skill or luck, IMPAX Asset Management, an investment group focused on sustainability, conducted an analysis to determine how a fiduciary should compare the risks to portfolios presented by stricter carbon regulations (IMPAX Asset Management, 2013). IMPAX compared four different investment strategies with varying aggressiveness towards reducing carbon risk, using the MSCI index from 2008-2013. The study concluded that each of the fossil-free strategies offered equal, if not slightly better, returns. These studies do not isolate the skills of particular investors, but rather show broader investment trends which it would be unwise and arguably financially irresponsible to ignore.
Indeed, the examples highlighted above represent a growing body of evidence that divestment from fossil fuels is not the harmful practice that has been painted to be, but rather should be seen as an important step for an endowment to fulfil its fiduciary duty by not taking on unnecessary risks. These studies were done, furthermore, in a time when the carbon bubble is a concept that is only just coming to the fore, and the implications of which are only beginning to ripple through the financial industry. In the long-term, however, the likelihood of the carbon bubble causing significant revaluations of fossil fuel assets poses considerable risks to those who continue to invest in the fossil fuel industry, especially in those industries that are most capital- and carbon-intensive. Confirming this, “through Deutsche Bank, WWF swapped its coal and tar sands-related stocks for returns from the S&P 500 index. The hedge has already worked, producing a net annualized gain of 21.7 percent over the last three years.”
This is particularly important for our endowment managers, for as Bevis Longstreth (2013), former commissioner of the SEC points out, “As long term investors, fiduciaries of endowments need not worry unduly about short-term results. Anticipatory divestment should be viewed as having unknown short-term consequences for the portfolio, which could involve loss as well as gain. In the long run, those short-term results are unimportant. The financial case advanced [above and below] rests on the claim that fossil fuel companies will prove to be bad investments over the long term and, therefore, with foresight that anticipates this result, should be removed from the long-term holdings of an endowment before the strengthening likelihood of this result becomes commonplace in the market”.
A Hierarchy of Risk
As Generation Foundation highlights, “In the hierarchy of fossil fuel asset stranding, it is reasonable to assume that in carbon-constrained scenarios, the projects with the highest break even costs and emissions profile (e.g. oil sands and coal) will be stranded first” (Generation Foundation, 2013, p. 18). Consider, for instance, that the ratings agency Standard and Poor’s recently concluded that the business models of tar and/or oil sands could be invalidated in a world acting to constrain carbon (Redmond & Wilkins, 2013). Similarly, (Carbon Tracker & Grantham Research Institute, 2013; Lelong, Currie, Dart, & Koenig, 2014; Lenferna, 2014; Robins & Keen, 2012; Vorrath, 2013) jointly provide a comprehensive overview as to why coal, especially US Coal (Celebi, Graves, & Russell, 2012; Lowe & Sanzillo, 2011; Union of Concerned Scientists, 2010), is largely incompatible with a world acting on carbon constraints and highly financially risky as a result – a look at the Dow Jones U.S. coal index will tell you a story of plummeting coal industry stock prices with an approximately 70% decline in value over the past 36 months as of November 2013. Indeed, it seems highly likely that in the near future coal, oil sands, and other similarly carbon and capital-intensive industries will become stranded assets, situated as they are, on the top of the hierarchy of potentially stranded fossil fuel assets.
Recently, Carbon Tracker Institute concluded that oil companies risk wasting $1.1 trillion of investors’ money through 2025 on expensive, uneconomic projects from the Arctic and deep seas to tar sands. Similarly, for the coal industry, Paul Gilding points out that “even with the modest goal of giving us just a 50 per cent chance of not crossing the agreed 2°C threshold, two-thirds of proven reserves of coal, oil and gas can never be burnt, with the loss of income for the coal industry estimated at around $1 trillion per year by 2030.” Looking forward Carbon Tracker concludes that through 2050, the value of potentially uneconomic projects by private companies potentially reaches $21 trillion.
In response to the carbon bubble and the risks of climate change, coal and oil sands are increasingly being seen as the ‘New Tobacco’ and are sparking an ‘investor backlash’ with significant investors beginning to divest. For instance, Storebrand ASA which manages $74 billion sold out of 24 coal and oil-sands companies. Similarly Scottish Widows Investment Partnership divested from all pure-play coal producers (Riseborough & Biesheuvel, 2013). Jeremy Grantham, a billionaire fund manager who oversees $106bn of assets and who has made his fortunes predicting financial crises, has said that his company is on the verge of pulling out of all coal and unconventional fossil fuels, stating that “the probability of them running into trouble is too high for me to take that risk as an investor” (Carrington, 2013). Similarly, billionaire asset manager Tom Steyer has directed his investment team to divest from coal (Steyer, 2013) and famed short-seller Jim Chanos of Kynikos Associates shorted all but one coal producer in the US due to his belief that they are and will continue to be unattractive investments (Scheyder, 2013).
As Longstreth (2013) argues “betting against the stranding risk materializing is arguably an irresponsible, hard-to-defend, position for a fiduciary, who will have to demonstrate a sound basis for doing so, something that seems hard to do”. This is especially the case when it comes to assets on top of the carbon risk hierarchy and thus we ask the university to commence its divestment from such industries. However, going beyond coal and oil sands, there also exists an increasingly strong case for divestment from the broader oil industry, albeit not as straightforward a case as coal and oil sands given that oil is not as fungible or environmentally damaging (Cf. HSBC, 2013; McGlade & Ekins, 2014; Morse et al., 2013; Styles, 2013). Divestment from natural gas is a more tricky and controversial question due to its controversial role as a potential bridge fuel (Cf. Jenner & Lamadrid, 2013; Lenferna, 2013; Morse et al., 2013). Thus while divestment from broader fossil fuel industries is important to consider and we believe that for financial and ethical reasons it should be pursued in some form in the long-term, in the short-to-medium term coal, oil sands and other capital- and –carbon intensive industries are arguably the most urgent and clear cut targets for divestment for both financial and ethical reasons as they are the most egregious contributors to climate change and thus the most likely to become stranded assets.
We believe that if UW undergoes a financial analysis which properly takes into account the risks posed by the carbon bubble, it will become clear that, especially in the long run, the risks from continuing to invest in high cost carbon-intensive industries will far outweigh the likelihood that they will remain profitable. Given that UW aims for long-term profitability, then it seems divestment may often be the fiscally responsible response to the realities of the carbon bubble. These conclusions are supported, furthermore, not only by the work of ethically-motivated students, but by the analysis of many respected and authoritative institutions such as Ceres, the Carbon Tracker Initiative, Oxford University, UNEP, Standard and Poors, HSBC, Citi, Goldman Sachs, and more. Thus we recommend that before the carbon bubble plays out, in the short-to-medium term, the university divests from coal and oil sands, which are situated on the top of the hierarchy of potentially stranded assets. From this starting point we recommend that the university gradually but aggressively works its way down the hierarchy of potentially stranded carbon assets through the use of a carbon risk assessment tool or other means, in order to protect our endowment from the financial risks of the carbon bubble, and to proactively tackle climate change.
Shareholder Advocacy and Divestment as Complimentary
The University has taken on an important commitment to engage in shareholder activism. For this we salute the University and we look forward to working together on this front to engage in meaningful shareholder activism. As outlined in our recommendations we recommend UW join up with institutions such as CERES, The Investors Network on Climate Risk, and others who are pushing the broader financial and fossil fuel industry to take the carbon bubble seriously. There are also a number of shareholder initiatives outlined in the 2013 Proxy Review (Welsh & Passoff, 2013) onto which we believe UW should consider signing. These resolutions aim to push some of the major fossil fuel users and producers to switch to more climate, and environmentally friendly practices. However, while these are important steps towards responding to the realities of the carbon bubble and the climate crisis we face, we also believe that there are limits to shareholder activism, and that these should be recognized and acted upon in the form of divestment.
As highlighted in the above section the business model of certain industries, such as coal and oil sands, are, to recall the words of Standard & Poors, likely to be invalidated in a world acting on carbon constraints. Thus, not only would continued shareholder engagement with such companies prove potentially futile, as a proper response to the carbon bubble would entail many of them going out of business. Furthermore, given this reality, continued shareholder engagement instead of divestment, would expose the university to the substantial risks posed by the increasing likelihood of such industries becoming stranded assets. Given this it seems that the most carbon/capital intensive companies are both financially risky assets arguably not worth the continued risk of staying invested in, and likely beyond the reach of shareholder activism. Thus we argue that they should be divested from as soon as possible.
Many have argued that divestment entails giving up our ability to influence companies whereas shareholder resolutions are a more effective way for an institution to use their power to influence the fossil fuel industry, and thus the more effective way forward (Cf. Billenness, 2013; Welsh & Passoff, 2013). Thus shareholder resolution proponents often argue that divestment should be abandoned as a strategy or used as a means of last resort (Cf. Ansar et al., 2013). In response it is worth surveying some evidence of the effectiveness of shareholder resolutions as provided by Nguyen and Rissman (2013):
In May 2008, 73 of 78 descendants of Exxon Mobil founder John D. Rockefeller, Sr., filed a resolution suggesting Exxon pursue cleaner energy alternatives. Their resolution failed 89.6 percent to 10.4 percent. In 2010, the California Public Employees’ Retirement System — with an endowment almost nine times that of Yale — filed a resolution only asking BP to draft reports on the risks of its oil sands projects. It failed 85 percent to 15 percent. These cases are not isolated incidents. Lately in response to shareholder pressure both Shell and Exxon have released reports on their response to the carbon bubble concept, neither of which illustrated that these companies were properly countenancing the risks associated with the carbon bubble.
While not all companies may be as obstinate as BP and Exxon, and it may be easier to shift more diversified and/or smaller companies through the use of shareholder advocacy, nonetheless it is important to remember, as Bill McKibben points out, that the business model of much of the fossil fuel industry is based on the burning and exploitation of fossil fuels, and for this reason it is unlikely that for many such industries a shareholder resolution will suffice to deviate them sufficiently from their core business activity, even if it is incompatible with a world acting on carbon constraints. Furthermore, the Securities Exchange Commission restricts shareholders from engaging with firms on operational issues and limits shareholder engagement to “requesting information and attempting to engender change in corporate policies on related issues, but does not allow shareholders to modify the business model or to engage with firms directly on the problem of keeping oil reserves in the ground” (Goodridge & Jantz, 2013, p. 5).
For those who are resolute about maintaining their ability to engage in shareholder advocacy it may be worthwhile pointing out that they could “retain the $2,000 of stock that enables them to introduce resolutions, as Greenpeace and the Institute for Policy Studies do” (Collins, 2013). This may be important, for as Billenness (2013) points out there have been some victories on the shareholder advocacy front, even in the halls of Exxon which has partly as a result of shareholder advocacy agreed to (at least on the face of it) take global warming seriously, promoted a carbon tax, and agreed to (at least publically) stop funding fossil fuel denial (although it may have been doing so secretly any way (Cf. Greere, 2013). However, those small victories may not be enough in the face of the carbon bubble, for recall, as Bill McKibben points out, that “the big fossil fuel companies have five times as much carbon in their reserves as any scientist says it would be safe to burn, and yet their business plan calls for them to burn it” (Gram, 2013). Yet, as McKibben went on to say, “there’s been no sign, over the last twenty five years, of them bending from this path, despite lots of appeals from [shareholder advocates]”.
Given this one may be inclined to agree with the McKibben and organizations like the Christian charity Operation Noah who have argued that the window of opportunity to engage with such firms to get them to improve their environmental and social performance has passed (Cf. Revell, 2013). Indeed, as Green Century Funds has pointed out, “In the decades that some socially responsible investors have held coal, oil, and gas companies, no significant direct reductions in the production of fossil fuels have been achieved through shareholder advocacy. Getting fossil fuel companies to reduce their extraction, refining, or production is a challenge for any campaign, and reaches beyond the scope of shareholder advocacy” (Green Century Funds, 2013).
We do not believe, however, that it is fair to make a blanket generalization that shareholder advocacy is completely inefficacious in the face of the carbon bubble, especially given that as of late (at least partly spurned on by the divestment movement) there has been an unprecedented scale of shareholder activism aimed at getting fossil fuel companies to analyse and report the risks posed by climate change and the carbon bubble (Simpson, 2013; Cf. Welsh & Passoff, 2013). For instance, the Carbon Disclosure Project “announced that a record number of 722 investors, which make up around a third of the world’s invested capital, demanded that listed companies disclose their emissions and climate change strategies” (Saxon, 2013). Similarly, “a group of 70 global investors managing more than $3 trillion of collective assets have launched the first-ever coordinated effort to spur the world’s 45 top oil and gas, coal and electric power companies to assess the financial risks that changes in demand and price pose to their business plans” (Leaton & Pickering, 2013). We recommend that UW join with these important shareholder initiatives, and in doing so become one of the first, if not the first institute of higher education, to become actively involved in shaping this important discussion.
Indeed, given this unprecedented level of shareholder advocacy and the fact that the direct impact of divestment may be quite limited (Cf. Ansar et al., 2013), there is certainly a case to be made for maintaining investments in certain companies in order to be able to engage with them as shareholders. However, considering, a) that shareholder advocacy can be quite ineffective; b) the combined direct and indirect impact of divestment; and c) that the business model of certain industries is incompatible with a carbon-constrained world, then it seems that divestment may be the more efficacious and fiscally responsible strategy to employ in certain circumstances, especially when it comes to industries such as the tar-sands/oil-sands and the coal industry whose business models could be invalidated in a world acting to constrain carbon. Divestment’s indirect impacts include influencing market norms, decreasing finance and debt flows to fossil fuel companies, decreasing their intrinsic value and reputation, and even spurring on restrictive legislation – all of which is comprehensively outlined in Ansar et al (2013), who also recognized that divestment would be more effective against coal and tar- and oil-sands and less so against the broader gas and oil industries.
Furthermore, as has been suggested, divestment may bolster remaining shareholder advocates by the boldness of the divestment highlighting both the seriousness of the issue and the financial and ethical infeasibility of the practices of companies from which one divests. Thus divestment and shareholder advocacy can be seen as complimentary strategies. Indeed, we would argue that jointly they should be seen as highly complementary tools necessary to respond to the carbon bubble’s risks and to attempt to deflate those risks in the long run. As Simon Billenness has pointed out, both divestment and shareholder advocacy should be used as complimentary tools with the long-term aim of not only getting the broader market to realize that these assets are over-valued, but also, perhaps, to eventually get the SEC to regulate that companies down-value their assets to be consistent with their actual value in a carbon-constrained world. 
Many who have agreed with us up to this point might argue that although all we have said is all good and well, in the bigger scheme of things universities are just too small to make a difference. However, this is arguably an erroneous assumption which needs to be challenged for universities that think their individual commitments won’t make a difference are giving in to the same type of thinking that has led us into the climate crisis in the first place and which underlies most tragedies of the commons. For, in the words of Martin Bunzl, “the Tragedy of the Commons invites the idea that unilateral action is an act of folly. But…we should be wary not to be seduced by its logic. For to do so may hobble our idea of what is possible and thereby end up creating a self-fulfilling prophesy” (Bunzl, 2009, p. 64). Indeed, contrary to the claim that universities are just too small to make a difference by divesting, the case for divestment is particularly pertinent when done by influential institutions such as universities as is highlighted in (Ansar et al., 2013) and (Lenferna, 2014).
Of course, as shown by analysis from both Ritchie and Dowlatabadi (2013) and Ansar et al (2013), and as many divestment activists realize, the direct emissions reduced through divestment are relatively small – however, arguably not negligible. More importantly, however, are many of the indirect impacts. As Oxford University’s Stranded Assets Programme argues in more detail, when thinking about the impacts of divestment “the outcome of the stigmatisation process, which the fossil fuel divestment campaign has now triggered, poses the most far-reaching threat to fossil fuel companies and the vast energy value chain” (Ansar et al., 2013, p. 13). Indeed, part of the problem with thinking that a university endowment is too small to make a difference is that it focuses solely on the direct impacts of divestment and thinking that the effects of a university endowment’s actions are limited to merely the financial transactions it makes takes a rather limited view of the university’s broader role in society, and arguably one which does not match up with the more noble ideals upon which most universities were built upon. Thus not only can divestment help to financially protect the university’s endowment but furthermore the impacts of divestment can help shape a response to the carbon bubble and climate crisis which helps us to protect our planet for UW students and future generations.
As we have outlined in this paper divestment can be justified through the lens of fiscal responsibility. In adopting the lens of responding to the fiscal risks inherent in continued investment in fossil fuel the Board of Regents and Treasury can divest on fiscal grounds alone. However, we at Divest UW believe divestment to be an important decision to make not only as a passive response to the financial risk posed by the carbon bubble but also as a pro-active, ethical decision which illustrates the University of Washington’s continued commitment to being a leader in sustainability. Thus with our promise to continue work together with and support the UW Board of Regents, the Treasury and anyone within our esteemed institution willing to craft a financially and ethically responsible response to the risks posed by climate change, we respectfully request the Board of Regents to consider our recommendations above, as we believe they represent an ethically and financially sound institutional response to the climate crisis we jointly face.
For more information or communication with Divest UW/Confronting Climate Change, please contact us on email@example.com
Ansar, A., Caldecott, B., & Tilbury, J. (2013). Stranded assets and the fossil fuel divestment campaign : what does divestment mean for the valuation of fossil fuel assets ? Retrieved from http://www.bsg.ox.ac.uk/stranded-assets-and-fossil-fuel-divestment-campaign-what-does-divestment-mean-valuation-fossil-fuel
Apfel, D. (2013). Why Investors Must Do More Than Divest From Fossil Fuels. The Nation. Retrieved June 17, 2013, from http://www.thenation.com/article/174770/why-investors-must-do-more-divest-fossil-fuels#axzz2WX8pHXIj
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 For instance, “through Deutsche Bank, WWF swapped its coal and tar sands-related stocks for returns from the S&P 500 index. The hedge has already worked, producing a net annualized gain of 21.7 percent over the last three years.” (http://www.cnbc.com/id/101669392).
 As Achim Steiner and Julie Gorte (Steiner & Gorte, 2013) argue, “if institutional investors do not systematically reallocate capital from high-carbon to low-carbon investments, particularly in corporate equity and debt, a transition to a low-carbon economy will be virtually impossible”, as we simply will not have the financial wherewithal to fund the transition. Of course sufficient funds for a global transition won’t be provided solely by universities, but consider that if US Universities alone redirected 5% of their investments into clean energies then that would equal an investment of approximately $20 billion, one of the biggest investments in the green economy to date, and a much needed one given that the International Energy Agency forecasts that additional investments of USD 1 trillion per year are needed in energy technologies to achieve an 80% chance of limiting long-term global temperature increase to 2˚C (International Energy Agency, 2013b). Furthermore, 5% reinvestment represents only one of the weaker feasible pathways to divestment and reinvestment (Cf. Humphreys & Electris, 2013)
 As Joshua Humphreys of the Teller Institute pointse out, “To make their case, some endowment managers – and studies commissioned by the American Petroleum Institute, the oil and gas industry’s main lobby – have cited the relative, historical outperformance of the energy sector when compared to broad stock market indices or to other asset classes commonly found in a diversified endowment portfolio” (2013, p. 2). As Humphreys highlights and we are emphasizing, such a challenge is flawed, firstly, on empirical grounds as the studies cited above show that endowments that had divested would have outperformed relative to those that hadn’t, and, relatedly, because the carbon bubble challenges exactly the proposition that the API cites in their favour, that we can base future performance of fossil fuel stocks on past performance. With the restraints from the carbon bubble in place we are entering a radically different investing environment and thus we cannot rely on historical trends as reliable indicators of future performance. In the words of Humphreys “analysts and investors are beginning to grapple with the prospect that the historical outperformance of fossil-fuel companies may be as illusory as the tech boom of the 1990s and the housing bubble at the beginning of this century” (Humphreys & Electris, 2013, p. 3).
 Interestingly a recent report by the Carbon Tracker Initiative, which highlights the importance of the Keystone XL pipeline for the expansion of the tar sands industry, concludes that “absent a material expansion in Alberta’s export capacity over the rest of this decade the commercial viability not only of planned new oil- sands projects but also of existing plays will become increasingly questionable, with most new projects simply unviable and existing plays at risk of having to shut in a growing share of their production” (Carbon Tracker Initiative, 2013, p. 1).
 A comprehensive list of relevant research for divestment is listed in the bibliography of Lenferna (2014).
 Excuse McKibben’s hyperbole.
 Simon Billenness made this point in a workshop hosted by the University of Washington.