A little over a decade ago, the world became acutely aware of the disastrous effects of climate change. During this time, student activists on college campuses sought ways to combat the environmental crisis on a large scale. Surprisingly, they turned to the free market for a solution. The issue at hand was the fact that climate change was the world’s most significant unpriced externality. Fossil fuel producers and consumers did not bear the financial burden of the damage they caused to the environment. Gasoline was too cheap, and the cost was ultimately borne by every living thing on the planet. The activists believed that by pressuring investors to divest from fossil fuel companies, they could force the market to address this externality.
Under the guidance of the nonprofit organization 350.org, students at numerous universities initiated protests at academic leadership and investment offices, urging them to divest from fossil fuel companies. These dedicated students picketed, marched, conducted sit-ins, and even held votes to secure support for their cause. Stephen Mulkey, president of Unity College in Maine, which was the first to divest using 350.org’s guidelines, emphasized the ethical imperative of divesting from fossil fuels, stating that investing in these companies was inherently unethical.
At the time, these demands seemed largely symbolic, full of idealism and energy but lacking a tangible outcome. Companies like Chevron and ExxonMobil continued to be profitable due to the insatiable global demand for gasoline. Dumping stocks would not fundamentally alter their financial success. As Drew Faust, then-president of Harvard, argued in response to the divestment campaign in 2013, these firms would easily find other willing buyers for their shares. Faust pointed out that even Harvard relied on fossil fuels to some extent.
However, divestment had proven effective in other contexts, such as bringing an end to apartheid in South Africa. From a financial standpoint, the argument in favor of divestment was sound. By divesting, a company’s value could be reduced. Some investors would sell their shares, while others would refuse to buy, causing the share price to decline if there weren’t enough interested investors to step in. Moreover, divestment made corporate growth more expensive. Exploration, mining, extraction, and shipping were all costly endeavors for energy firms. With less cash on hand and difficulty raising funds, these companies might abandon certain projects, resulting in higher energy prices and reduced profit margins.
By 2018, less than a decade after the climate divestment movement gained traction in the United States, over 1,000 institutional investors with $6.2 trillion in assets under management pledged to divest, according to estimates by Arabella Advisors. Today, those numbers are significantly higher. The list of entities divesting from fossil fuel investments now includes large pension funds, the country of Ireland, and prominent foundations like Ford and Rockefeller. In 2021, Harvard, under new leadership, also made the decision to divest. Seattle University followed suit in July, and just last month, New York University, despite its ties to Wall Street, committed to divestment as well.
Has this movement been successful? Perhaps to some extent, though some analyses argue that it is still too small to make a substantial impact. However, one comprehensive study examining lending to oil and gas firms in 33 countries from 2000 to 2015 found that divestment was associated with lower capital flows. This effect was particularly significant in countries with stricter environmental policies and less pronounced in nations heavily subsidizing fossil fuels.
However, divestment’s most significant impact goes beyond financial considerations. It strips the fossil fuel industry of its social license, as Bill McKibben, the movement’s leader, aptly describes it. Divestment conveys that extractive companies are socially irresponsible and unworthy of public investment. It makes people think twice about working for such firms and compels all companies to reckon with the environment, recognizing that being a major emitter is detrimental to their business. Additionally, it puts pressure on corporate financiers to take climate change seriously, which is critical for preserving the livability of our planet.
To clarify, a single individual selling their Exxon stock will not single-handedly alter the course of the climate crisis. Similarly, a few families allocating their 401(k) funds to green investments will not singlehandedly expedite the world’s transition to renewable energy. Nevertheless, the symbolism of these actions carries weight. If you are genuinely concerned about the climate and wish to take personal action, moving your investments to green funds is one of the easiest and most impactful steps you can take. It requires minimal effort, just five minutes and a few emails per year. Comparatively, giving up meat, abandoning personal vehicles, or eliminating air travel are far more challenging lifestyle changes.
For those who prefer selecting individual stocks, the choice is simple: divest or invest with intention. Avoid purchasing stocks from major emitters such as coal, oil, and gas companies. Instead, consider investing in brown companies that genuinely strive to adopt greener practices. Make your voice heard at shareholder meetings, demanding that these companies commit to environmental standards. The economists Alex Edmans, Doron Levit, and Jan Schneemeier refer to this strategy as “tilting,” emphasizing that while divestment starves a company of capital and impedes its growth, tilting is more potent in compelling companies to lower their emissions.
Jacquelyn Pless of MIT has conducted studies identifying meaningful corrective actions within a corporate context, ensuring that the companies in which you invest are genuinely committed to environmental preservation. Her research reveals that companies with long-term emissions targets, independent oversight of their emissions data, executive compensation tied to environmental performance, support for government climate-change legislation, and internal carbon pricing exhibit the most significant reductions in emissions.
For those who prefer investing in actively or passively managed funds, the process becomes even simpler. All major asset managers offer green mutual funds and index funds that avoid investments in extractive industries and hold their portfolio companies to specific environmental standards. Switching your funds or investing in these green options only requires a few clicks. Additionally, inform your fund manager or investment adviser that you expect green investment funds. These companies manage substantial pools of money and possess significant shareholder voting power, making them influential agents influencing the behavior of the companies in which they invest.
There is little downside to embracing this approach. Green funds tend to perform similarly to their conventional counterparts, at least for now. The main concern is the potential for greenwashing, where companies in environmental, social, and governance (ESG) funds do not genuinely embody sustainable practices. It is essential for individuals to conduct due diligence and ensure they are comfortable with the destination of their investments. However, this should not deter individuals from taking action. The symbolism of green investment outweighs the mere financial impact. We need as many people as possible to act as though our world is worth saving. Becoming part of the divestment movement and greening your 401(k) is a simple and underappreciated way to contribute to this cause.
This article is part of the Atlantic Planet series, supported by HHMI’s Science and Educational Media Group.
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