On Sept. 15, the Daily Bruin published an editorial claiming that divestment is “about furthering a moral goal” and made a populist argument, presented without evidence, that the University of California investment committee is bending to powerful outside interests.
Divestment campaigns have their history rooted in South African apartheid. That campaign was effective in part because the amount of money that left South Africa, relative to gross domestic product and foreign direct investment – a measure of foreign capital in a country – was large. Divestment from South Africa highlighted a terrible injustice, but it was effective because it helped destabilize the apartheid economy and therefore the regime. Given that US energy and utility stocks are valued at over $5.7 trillion, the same cannot be said about fossil fuel divestment. While moral appeals for divestment may soothe outrage over the U.S. government’s continued inaction on climate change, the policy fails in the only metric that should matter – effectiveness.
Those advocating UC action on climate change should focus on policies that take direct action to mitigate the carbon footprint of the UC, and that strategically aim to institutionalize these types of policies. This policy portfolio, as it relates to UC investments, might include the following:
- Require that all dividends and stock sales from energy and utility companies be invested in solar water heating (SWH) for UC buildings, especially the dorms. Additionally, change UC investment group accounting such that savings due to these programs are counted toward investment performance. The economics of SWH are so favorable that this is a no-brainer. Many companies, such as Nextility, contract with little or no upfront costs and guaranteed savings over 20 years. These risk-free returns exceed those of Treasury bills – 30-day loans to the U.S. government – and would therefore improve the risk-adjusted return of the UC portfolio. Importantly, the accounting change would institutionalize the policy of looking for energy savings as a source of investment return.
- Require that part of the proposed $1 billion investment be made in research and deployment of renewable energy technologies. Deployment should be targeted at later-stage venture capital (VC) – Series B or C – focused on green-tech. These late-stage funding rounds occur when technology is proven and companies are looking to scale deployment. Generally speaking, the technology for renewables is largely proven; but renewables make up only 13 percent of installed U.S. grid capacity. Utilities have large upfront costs, making them very risk-averse. Effective large-scale proof of concepts are therefore critical in showing that investments in renewable technologies can be successfully profitable. Research should be targeted at UC professors in renewables or in seed funding and Series A (VC) funding for green-tech with a focus on energy storage and low-loss transmission. These are the key technological hurdles in renewable energy usage. Seed and Series A funding occur when companies are just starting and both the technology and business model are unproven. These higher-risk investments also have higher possible returns.
Requiring that the investment committee make investments in renewable research and deployment requires the committee to take an active approach to investing, instead of simply passively investing by market cap. It requires the committee to be capable of picking successful businesses and management teams. Effectively, it requires them to earn their paychecks. It also holds them accountable for their performance.
Activists such as Fossil Free UC should not be discouraged by the recent UC decision on divestment. Instead, they should recognize that divestment is not an effective strategy for combatting climate change and should research and embrace alternative solutions. My suggestions are based on minimal research. I fully admit, and expect, that motivated student activists could find equally appealing options.
Whitworth is a graduate student in statistics.