Lazaridis School of Business and Economics
In January of 2016, a number of Laurier faculty signed a letter (hereafter “The Letter”) urging the University to divest from fossil fuel companies in all endowment funds and the employee pension.1 This research note addresses a number of issues related to the divestment strategy—in particular, the stranded asset thesis, financial strategy alternatives, implementation challenges and the financial effects of divestment strategies. This note does not consider alternative strategies for decarbonizing the economy. The Letter itself does not explain why divestment is superior to alternatives like promoting research into clean energy generation, renewable energy sources, climate science, and environmental economics.
The Letter articulates two goals. The first part of The Letter argues that, “Sooner or later, the world is going to get serious about regulating carbon emissions and when it does assets will likely be stranded.” This argument supports a risk management goal: that portfolio managers should hedge the risk of stranded assets. The second goal, articulated later in The Letter, is more revolutionary. In particular, that “the present generation…have a duty to help decarbonize the global economy as rapidly as possible.”
Establishing the goal is important because the goal informs the optimal financial strategy. If the goal is to hedge stranded asset risk, then the best risk management strategies are: 1) diversification; or 2) portfolio reweighting. If the goal is to decarbonize the economy, then diversification and reweighting will have little effect. The financial strategy with the most potential to influence corporate behavior is full divestment.
The remainder of this note is organized as follows. The second section defines the stranded asset thesis and contrasts it to another thesis. The third section defines two alternative financial strategies: divestment and reweighting. The fourth section discusses the challenge of using GHG emissions data to implement divestment or reweighting. The fifth section presents the financial theory of divestment and empirical evidence on the impact of divestment on risk and return. The sixth section concludes.
McNally, William J., "Divestment and Climate Change" (2017). Economics Faculty Publications. 3.