The Economics of Cambridge University’s Fossil Fuel Divestment Agenda

This trend of boycotts and divestments is rapidly gaining traction among non-profits. The University of Leeds and Christian Aid have already swapped Barclays for Lloyds, driven by similar environmental concerns. The National Trust’s top donor is urging it to follow suit. Cambridge’s latest move aligns with its broader strategy “to divest from all direct and indirect investments in fossil fuels by 2030”. But does this make sense as a matter of economics?

One rationale for restrictive investing might be that fossil-fuel-ensnared banks or companies simply provide worse banking services or investment returns. Yet Cambridge expresses no displeasure with Barclays on those fronts. Even the popular notion of an unpriced “climate risk” or “investment risk” that might threaten banks in future lacks substantial evidence. In fact, Alex Edmans, a finance professor at London Business School, has shown with co-authors that emitting firms earn higher returns and it’s due to outperformance rather than higher risk.

In his book Sustainable, Terrence Keeley, a former managing director of BlackRock, illustrates how self-imposing crude bans on where to invest unsurprisingly limits your opportunities to make money, especially tactically, like during recent jump in oil and gas prices. While Cambridge downplays this prospect of underperformance, its own Ellen Quigley, Emily Bugden and Anthony Odgers admit that it’s fuller divestment agenda will force the university to abandon its “fund of funds” investment model that has generated above-market returns. The cost? Up to £40 million per year.

Now a second rationale says “stuff the risk of lower returns, at least we’ll save the planet”. Cambridge wants to “support and encourage the global transition to a carbon-neutral economy” and its leadership might set an example for other funds. Yet Keeley points out that Cambridge’s main Endowment Fund, valued at £4 billion, is only 0.3 per cent the size of Norway’s sovereign wealth fund value. That fund has rejected adopting such a restrictive investment strategy.

Just because you give up on fossil fuels doesn’t mean everyone else will. When you sell shares through divestment, the buyer may care far less about global warming than you do. Fossil-fuel projects with good returns will find finance somewhere while the demand remains. The net global emissions impact of such divestments and disassociations are therefore tiny.

The final rationale rests on the belief that investing in fossil fuels is simply immoral in the context of global warming. One bursar said, revealingly, that Cambridge’s students were “leaders of tomorrow … and the biggest of their concerns is climate change”. As a self-governing charitable corporation, entities such as Cambridge are obviously (and should be) free to invest those values, even if it amounts to virtue-signalling.

Students with a keen sense of justice should ponder, however: What “values” are expressed by leaving £40 million per year in returns at the table that could fund student bursaries or research in new carbon technologies? What is moral about pressuring banks to end new fossil-fuel investment, when 600 million people in Africa have no electricity, people at home are dying of cold and adversaries in Russia and Opec stand to benefit? To call for the cessation of new fossil-fuel supply, before alternative technologies can effectively serve demand, is counterproductive.

Unfortunately, this one-dimensional thinking flows logically from the government’s own global warming policy. Instead of merely accounting for carbon’s social costs through a price, allowing us to adapt to it, the “net zero” agenda turns decarbonisation per se into a moral crusade. The outcome is this childish protest economics.