The University of Cambridge holds assets of approximately £3.5 billion, the largest university endowment in Europe. Within the University there is broad agreement about the urgent need to reduce carbon emissions. However, whether full divestment of University funds from fossil fuel assets is the best way to make that happen has been the subject of intense debate. Based on a review of the academic literature, interviews and focus groups with relevant stakeholders inside and outside the University, records of University and college discussions, and some further primary data collection, this report explores the advantages and disadvantages of a policy of fossil fuel divestment across its moral, social, political, reputational, and financial dimensions, ending with a summary of costed divestment scenarios for the University.
Divestment campaigners cite three main reasons for divestment. The first is that divestment is a moral imperative, the second is that divestment promotes necessary societal and political change, and the third is that investments in fossil fuel companies make poor financial sense. Failing to divest would, as a consequence, negatively affect the University’s reputation.
The moral question is addressed in Section 3 of the report. Proponents of divestment argue that any investment in fossil fuel companies is inconsistent with the beliefs we hold as a university community. Opponents of divestment, while sharing substantially the same overall objectives of achieving rapid decarbonisation, argue that divestment is a hollow gesture that is unlikely to be effective and that the moral position would be to do something that is more likely to achieve substantial change.
Different theories of change are considered in Section 4 regarding the social and political advantages and disadvantages of divestment. Proponents of divestment consider that the stigmatisation of fossil fuel companies that divestment brings counteracts the political and financial power of these companies and helps to achieve a change in public discourse that in turn creates the conditions for political change. They argue that divestment has reinvigorated the environmental movement, especially among young people; brought “stranded assets” and “carbon budget” into the public lexicon, contributing to a decrease in investors’ confidence in fossil fuel companies’ long-term prospects; and drawn needed attention to frontline communities and the supply side of the fossil fuel equation. They further claim that shareholder engagement with fossil fuel companies has not, and will not, lead to change on the scale and in the timeframe necessary. Opponents of divestment are uncomfortable with the stigmatisation of individuals and companies and the politicisation of endowments, which they argue would create a precedent for the University to take overt political actions on a wide array of topics in the future. They consider that other forms of environmental campaigning and concrete decarbonisation action, combined with shareholder engagement with fossil fuel companies, could harness the capabilities required to achieve the energy transition faster. They also object to selling holdings to investors who do not share the University’s concerns about climate change.
Preceding this, by way of context, Section 2 discusses the extent to which large fossil fuel companies are changing strategy and practices, whether in response to the changing business landscape or the existing divestment and shareholder engagement campaigns. It notes that while there have been welcome statements of intent and some initial steps moving towards an energy transition by some companies, within the industry as a whole there has been limited action on the short-term targets or changes in current investments that would provide evidence of a commitment to an energy transition consistent with a “well below 2˚C” pathway. The section identifies further short-term steps that fossil fuel companies could take to demonstrate commitment, including in the realms of lobbying, executive compensation, and capital expenditure, inter alia. This section also points out
that economics now favours renewable energy in most countries, meaning there is a sizable investment opportunity in renewables for fossil fuel companies, and that one (albeit mid-sized) fossil fuel company has successfully transitioned to a renewable energy company, helping to transform the UK offshore wind sector while generating high returns for its investors. On the investment side, evidence suggests that most new financing for fossil fuels comes from bank lending and bond issues, not equity, while at least one divestment-specific study – and other supporting evidence – suggests that divestment may directly affect fossil fuel companies’ cost of capital from these main sources (see pages 11-12; see also Appendix IV).
Section 5 considers the reputational arguments for the University, concluding that more evidence is needed but that there would likely be reputational gains from taking bold action on climate change, within constituencies spanning prospective employees, donors, alumni, and students. Divestment advocates point to the reputational benefits of avoiding unwelcome media attention over divestment and related issues, while divestment critics point to concerns about damage to relationships with Cambridge’s present and future research partners and donors.
The financial arguments for and against divestment are considered in Section 6. There is much literature on the impact of sector exclusion on index fund investment returns and the risks to fossil fuel investments from the energy transition. Overall, there is little evidence to suggest that a global portfolio invested to exclude fossil fuels would underperform one that included them and such a portfolio might avoid the volatility that is likely to affect the fossil fuel sector in the coming years. On the face of it, therefore, the financial implications of divestment might appear to be slight for the University. However, the University operates a fund of funds model, investing through dozens of carefully selected third-party managers rather than investing directly in companies or through generally available funds that are geared to the wider public. As at 31st December 2019, the Cambridge University Endowment Fund (CUEF), which significantly supports the University’s research and teaching activities, had only 2.8% of the fund invested in fossil fuel companies. In Section 7, analysing the last decade of out-performance of investment indices, the Investment Office explains that a policy of full divestment would necessitate a change in investment model, which would eliminate its ability to achieve above-market returns. Applying the historic 1.2% annual outperformance to the CUEF’s entire value as at 31 December 2019 would imply a reduction of c£40 million per year of investment returns. This could in turn breed scepticism on the part of major donors regarding the safeguarding of the value of their benefactions. For the University of Cambridge, then, the primary cost of full divestment would be in the abandonment of its investment model.