When you enter the new online documentary video game Fort McMoney, created with actual video footage from Fort McMurray, Alta., scenes of doom greet you. The sky is an immutable block of grey, save for immense columns of smoke forming bridges from the factories to the sky. As you speed along the highway, the dark prevents you from seeing anything but the glare of the headlights of incoming traffic. Two pillars of light speed toward you and suddenly the immense bulk of an oil tanker truck is illuminated by your headlights, filling your entire field of vision through the windshield.
Just as fast as it pounded towards you, it disappears, and is quickly replaced by another one. You learn later that Highway 63, the only highway between Edmonton and Alberta’s massive northern oil fields, suffers from harsh prairie winter conditions, is only one lane wide in either direction and carries some of the heaviest and most dangerous loads in Canada. Locals call it the Highway of Death.
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When I first meet Alex Hemingway, he looks me in the eye and gives me a firm handshake. If UBCC350, the student group of which he is a member, wanted to portray themselves as a professional group and shake loose the granola image that so often defines environmental activism, they could not have sent a better representative. With two master’s degrees from the London School of Economics under his belt and a PhD in the works, Hemingway is a credible representative for the group agitating for UBC to clean up its investment portfolio.
UBCC350 wants UBC to divest from oil companies — in other words, to sell all of its shares in oil companies and to desist from buying any more such stocks in the future. The idea behind the campaign is this: as UBC moves to become a sustainable institution, it should not profit from the oil industry while striving for sustainability in other areas of its operations. UBCC350 successfully lobbied to have an advisory question on divestment placed on the recent AMS referendum, and almost 7,000 students agreed it is “unconscionable to fund our education with investments in fossil fuels that threaten our future on this planet and [that] UBC should immediately forgo further investments in fossil fuel companies, and divest from all existing fossil fuel holdings.”
The divestment movement is not unique to UBC. The idea of divesting from oil companies began in the U.S. and has spread across campuses in North America. The idea of divesting from companies as an act of protest also has roots beyond the current climate change debate. In the 1980s, students rallied for divestment in protest of the apartheid movement in South Africa. Divestment has also been used as a tactic more recently, with activists boycotting Russian vodka in protest of the country’s homophobic laws.
UBC has just over $2.5 billion in its investment portfolio, and 12 per cent is invested in energy companies, according to UBC’s Investment Management Trust’s 2013 annual report. The two largest funds in the portfolio are the UBC endowment fund and the staff pension plan, each of which make up two fifths of the portfolio. UBC owns only the endowment fund; the staff pension plan is comprised of contributions from employees and government and is directed by a board of faculty members and advisers. Interest from the UBC endowment fund pays for scholarships, professorships, teaching support and other operating expenses.
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Everyone in the meeting room is dressed to impress. The two twenty-something men standing by the refreshment table are wearing suits and ties, giving them an air of formality. The juxtaposition is odd. We are in a meeting room at a community centre downtown, hardly the most formal venue in the city.
The seemingly incongruous combination of venue and attire makes sense given the context. These people do, after all, spend their time managing the trillions of dollars of the one-percenters, and of the rest of us. These are chartered financial accountants, bankers, fund managers and investors, gathered to hear about a United Nations program to encourage sustainable investment, the UN Principles of Responsible Investment (PRI) initiative.
UBCC350 and UN PRI both want to achieve sustainability, but their methods are markedly different. In an interview with The Ubyssey, Fiona Reynolds, UN PRI’s managing director, said divestment is the last step they advise shareholders consider — only to be taken when all else has been tried and has failed.
Two key groups make the decisions in every major publicly traded company like Enbridge, the Alberta energy giant: shareholders and the management team.
By purchasing shares, shareholders own a portion of the company, and therefore have a say in how the company runs. The more shares you hold, the more votes you get at the annual meeting where the company makes important decisions. Shareholders are essentially the employers of the chief executive officer (CEO), chief financial officer (CFO) and other members of the management team. The stick waved by shareholders in front of the management team is this: make money for us and do as you’re told, or we’ll fire you. The carrot to the management team for maximizing the profits of a company come in the form of payment and bonuses.
“UBC should immediately forgo further investments in fossil fuel companies, and divest from all existing fossil fuel holdings.”
In most cases, however, the management makes all the decisions itself, and only comes under fire if it fails to make the company money or becomes embroiled in major scandal.
The UN group essentially encourages shareholders — like UBC — to engage with the management teams of companies in which they invest, encouraging them to act more responsibly and sustainably. The threat if management refuses to play ball is implicit rather than explicit, but still hangs over any negotiations: if you’re really not listening to us, we’ll fire you.
However, like most organizations, the theory of who has control over the operations of a company doesn’t always play out in real life as predicted on paper. Apple CEO Tim Cook demonstrated this earlier this month. During a board meeting, shareholders told Cook they did not want him investing their money in activities promoting sustainability. Cook balked and effectively told shareholders to sell their shares in Apple if they disagreed with his vision of corporate responsibility to the environment. Shareholder engagement, in this case, failed, and divestment became the only option.
But while trying to change corporate behaviour as a shareholder may not always work, critics say divesting from oil companies altogether, as UBCC350 advocates seems to be throw the baby out with the bathwater. Without any shares, anyone advocating for change in corporate behaviour might as well be a fly in a tent: the buzzing of the fly may be annoying, but its presence is of no real consequence.
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If divestment loses former investors their clout with a company, is it still worth doing not just to inflict financial pain on the corporation or industry, but because it’s a wise financial move for institutions? Hemingway brought up the concept of a “carbon bubble.”
To understand this concept, we can think of Wile E. Coyote. During my childhood, I watched Wile E. Coyote try to chase and trap Roadrunner, his efforts always in vain. Many episodes ended with the iconic cliff scene: Roadrunner speeds along in front of Wile E. Coyote and, defying gravity, races straight across an immense gulf between the faces of two cliffs. Wile E. Coyote is in hot pursuit. He runs straight at the gap. He races past the edge.
And then, of course, the fantasy ends. Wile E. Coyote inevitably pauses, looks down, and realizes that, unlike Roadrunner, he cannot defy gravity. He looks at the camera, blinks twice and waves. He plummets downward, and all viewers see of the aftermath is the dust cloud ballooning across the bottom of the canyon when gravity is done pulling Wile E. Coyote toward his doom.
Advocates of the carbon bubble theory suggest that the stock prices and returns of oil companies are analogous to the run and fall of Wile E. Coyote. Look at the amount of carbon reserves oil companies count as assets that scientists agree cannot actually be used, they say. According to two papers published in the scientific journal Nature, three quarters of all known fossil fuel reserves must stay in the ground to avoid crossing the threshold to catastrophic climate change.
Once the stock market becomes fully cognizant of this inconsistency, investors will rush to sell the overvalued stocks. At that point, share prices plunge. The lucky ones will sell their shares at a loss as prices fall. The unlucky ones will remain unable to find buyers for their shares at decent prices and the weight of their immense loss will add to the cloud of dust that rises from their collective fall.
If this were to come true, it would be the obvious financial move for UBC to divest sooner rather than later. But assuming that continuing to invest in energy companies is in a fact a smart financial stance for the university to take — the prevailing view among many on both sides of the divestment debate — what should the folks in charge of UBC’s money do? Is it even possible that the divestment of public institutions will lead to concrete change in the behaviour of companies?
Suppose divestment campaigns successfully persuade UBC and other public institutions to divest from oil companies. This divestment will not directly harm the companies very much, given the size of investments from private individuals and corporations. However, suppose other investors are persuaded that oil companies are undesirable investments for financial and environmental reasons. More investors sell their shares. Such a large amount of shares of oil companies would become available on the market that share prices would fall significantly.
Remaining shareholders, alarmed by the falling value of their shares, might then put fierce pressure on company management teams to develop more sustainable practices and appease the market. If they continue placing pressure on management until the public is satisfied with the degree of sustainability of the company and purchase the company’s shares again, that could result in real change.
“The financial divestment is important in the sense that that’s the mechanism through which people can take joint action and through which the stigmatization can happen,” Hemingway said.
I, however, am skeptical.
In 1972, Stephen Ross, an associate professor of economics at the University of Pennsylvania, laid out his economic theory of agency that has since, with great fecundity, become the foundation on which many analyses of social and market issues have been conducted. He termed it the “principal-agent problem.” The mathematical proofs in his paper reinforce a point that one can intuitively grasp: having someone else do work for you is difficult if they do not have the same incentives as you.
Ross attempted to prove in his paper that given a very specific type of personal preference and a complex compensation scheme, one might be able to convince someone else to do a task with as much earnestness and effort as you would. However, the corollary of Ross’s theory naturally holds as well: most of the time, you can’t.
Imagine you have been hired by College Pro Painters. You are assigned to paint the garage of someone you don’t know. All your supervisor is concerned about is that you finish the job by 4 o’clock, and all you know is that you are paid by the hour and that you are meeting friends at the Norm afterward. Are you going to finish the job as efficiently as possible? Probably not. If you can extend your work all the way until 4, you’ll maximize your profits.
Similarly, the primary objective of any corporate team is to maximize profit. When profits are high, shareholders receive large cheques in the mail and their bonus is correlated with the size of their cheques. Unfortunately, sustainability and profits are often orthogonal goals.
For UBC’s part, Roger Polishak, director of manager relations and investment operations for UBC Investment Management Trust Inc., declined to be interviewed for this article. He simply provided a link to a statement from the summer announcing a “responsible investment strategy.”
“In adopting its new responsible investment strategy, the university consulted widely with leaders in the responsible investment field,” the divestment portion of the press release read. “These leaders did not favor divestment.”
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I sit down with Hugh Neary, a UBC economics professor who has always reminded me of Santa Claus. I wanted to hear Neary’s opinion not just as an academic, but also as a father with dependents and a pension that would be directly affected by university divestment — and unlike Santa Claus, he has a very real mortgage.
His response surprised me. His primary concern with the divestment movement was not the risk of a drop in his pension, as I had expected. I had probed Hemingway on the topic in great detail in preparation. But only about 10 per cent of UBC’s portfolio is invested in energy companies. Divestment would protect UBC and its employees from the popping of the carbon bubble, and some studies have shown minimal to no impact on return given divestment.
He sat in his chair and looked at me, holding his glasses in one hand and shaking his head slightly as I repeat Hemingway’s assurances. No, the potential drop in his return wasn’t his primary concern. Instead, he gave an example that illustrated his fundamental doubt of the divestment movement. Look at Walmart, he said — so successful it opened 37 new Supercentres in Canada in 2013. Despite its reputation for poor treatment of workers, among other accusations, people still shop at Walmart because of its cheap prices. If knowledge of a problem did lead to people taking action at their own expense to mitigate the problem, Walmart would have much quieter aisles than it does now.
“In adopting its new responsible investment strategy, the university consulted widely with leaders in the responsible investment field. These leaders did not favor divestment.”
This is the crucial puzzle we must solve in order to succeed in responding to climate change. How do we persuade ourselves to resist the siren song of short-term personal gains and long-term detriment? The success of the divestment movement hinges on our ability to translate knowledge into action. If we know more about the consequences of our actions, will we really give up some of our personal gains for the sake of future good? Will we accept lower profits? Drive less? Buy fewer clothes? Eat less meat? Or will we only change the way we act if we personally benefit from it now?
Hemingway pointed out that the ultimate goal of the divestment movement is increasing public awareness; divestment itself is only a means to that end. The crucial assumption of the divestment movement is that lack of knowledge is the largest barrier preventing action on climate change. I don’t think that’s true. Climate change is known to the vast majority of people. The Walmart example shows us that the largest barrier is not lack of knowledge, but our unwillingness to change our behaviour despite knowing the consequences of our current lifestyle. Increasing public awareness is only the first step that has already been done well; the challenge now is to convince ourselves to accept the uncomfortable knowledge we have and act on it.
The sun is just beginning to set as Hemingway and I finish our conversation. For close to an hour, I had grilled him on the ambiguity of the actual impact divestment would have on climate change, the amount of risk to its return the university would face and technicalities of the finance industry. Hemingway answered my questions with clarity and precision and, at some points, frank acknowledgement when he had no answer. At one of those points, he looked at me and said that, eventually, we have to make a choice between questioning and researching, and actually choosing a course of action.
And at some point, we do. For to not make a choice is to have made one as well.