Posted in: Campus

Does Divestment Work?

By | October 2, 2012

A coalition known as Students for a Just and Stable Future (SJSF) has called for the Harvard Management Company to divest from fossil fuel companies. Citing concerns about the environment and the energy industry’s outsized lobbying influence, they’ve started a campaign known as “Divest for Our Future.” Their goal is to persuade university endowments to wind down positions in firms that have large reserves of oil, coal, and natural gas.

In the past, I’ve been skeptical of student activism surrounding how Harvard runs its endowment. In particular, I’ve argued that it is in the university’s best interest to offer competitive compensation to its top fund managers. However, the fossil fuel divestment campaign certainly has some merit. There is a strong case to be made that America’s universities have a duty to shape public debate on energy policy and climate change. Divestment from fossil fuel companies certainly fits the bill. But could this strategy help change the face of the energy industry?

The South African Case

Divestment occurs when institutions remove financial support from select companies in order to promote certain behavior or policy. Recent divestment campaigns have targeted a host of issues, such as sweatshop labor, use of landmines, and tobacco advertising. But undoubtedly the best known example of divestment occurred in the 1970s and ’80s in response to the apartheid regime of South Africa. Retirement funds, mutual funds, and investment institutions across the country sold off the stocks of companies that did business in South Africa.

The conventional wisdom is that divestment from South Africa was a success; public pressure lowered targeted companies’ stock prices and forced them to comply with the divestment activists’ demands. However, the true impact of divestment from South Africa is unclear. In a 1999 study, Ivo Welch and C. Paul Wazzan examined the impact of divestment from banks and corporations active in South Africa and found that these campaigns had almost no impact on public market valuations:

Despite the prominence and publicity of the boycott and the multitude of divesting companies, the financial markets’ valuations of targeted companies or even the South African financial markets themselves were not easily visibly affected. The sanctions may have been effective in raising the public moral standards or public awareness of South African repression, but it appears that financial markets managed to avoid the brunt of the sanctions.

Welch and Wazzan argue that companies targeted by the campaign experienced no discernible financial pressure, as shares were simply reallocated from ‘‘socially responsible’’ to more indifferent investors. When funds were pressured to sell off the stock of companies active in South Africa, other buyers generally stepped in to pick up the pieces.

However, the divestment campaign likely had a different, non-financial impact. Divestment greatly increased public visibility surrounding the injustices of South Africa’s apartheid government. It is almost certain that worldwide popular opposition in the 1980s contributed to the decline of apartheid, and divestment was an important piece of this puzzle.

Divesting Today

The evidence from South Africa suggests that divestment, while ineffective in a financial sense, can have an impact by shaping public discourse. If universities across the country divested from fossil fuels, this would again be the case. Exxon Mobil’s sky-high valuation is unlikely to come down any time soon; however, the gesture could help to reignite public debate on climate change and energy security. We certainly need it. In the wake of the 2008 financial crisis, the issue of climate change has largely been left by the wayside.

That being said, it may be unwise for the proposed divestment campaign to impose a wholesale ban on all fossil fuels. SJSF’s campaign has targeted 200 oil, coal, and natural gas companies for divestment, covering the majority of the world’s known reserves. We must acknowledge, at the very least, that  some fossil fuels will be necessary for the 21st century energy mix, though we may favor those fuels that best suit our goals. Additionally, many argue that natural gas can serve as a “bridge fuel,” providing a lower-carbon alternative to coal as renewable energy sources continue to develop.

I’d personally advocate an approach similar to that of “Divest Coal,” an online initiative that specifically targets 15 large producers of coal for divestment. There is strong evidence that coal has the most negative environmental and public health impacts of any fossil fuel. Therefore, by divesting from coal specifically, universities could signal their support for a responsible, gradual transition towards truly clean energy.


Divestment from select fossil fuel producers would send a powerful message to the energy industry and the nation. It would signal that America’s universities take the climate-energy challenge seriously. Harvard has made significant strides in the area of sustainability, and our professors are also doing great work in this area. Adopting an investment strategy that encourages the development of renewable energy and lower-carbon fossil fuels could be an important piece of our university’s response to the coming energy challenge.

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