Fossil Free PSU Update – Larkin on Divestment, the Carbon Bubble and Stranded Assets

To my knowledge, the Sustainability Institute has yet to weigh in publicly on the divestment issue. Corrections on that point welcome.

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Lori Falce recently covered the Fossil Free PSU campaign at the Centre Daily Times:

I followed up with an email to Lori, cc’ing Fossil Free PSU student leader Nathan Larkin:

As you continue to cover this issue, you may want to ask PSU leaders about their understanding of “stranded assets.”

Excerpt from Betting on Climate Failure – The Ethics and Economics of Fossil Fuel Divestment, by Alex Lenferna, published at scribd.com

“…The examples highlighted above represent a growing body of evidence that divestment from fossil fuels is not the harmful practice that has been painted to be, but rather should be seen as an important step for an endowment to fulfill its fiduciary duty by not taking on unnecessary risks. These studies were done, furthermore, in a time when the carbon bubble is a concept that is only just coming to the fore, and the implications of which are only beginning to ripple through the financial industry.

In the long- term, however, the likelihood of the carbon bubble causing significant revaluations of fossil fuel assets poses considerable risks to those who continue to invest in the fossil fuel industry, especially in those industries that are most capital- and carbon-intensive. In the long-term it seems highly likely that as broader recognition of the risks posed by the carbon bubble plays out through the market and broader society responds to climate change that many fossil fuel assets will indeed become stranded.

Thus, recalling again that given their investment horizons endowment managers are meant to think about these issues in the long-term, it seems that given divestment may increasingly be considered proper fulfillment of an endowment manager’s fiduciary duty.

As Longstreth points out, fiduciaries of endowments are charged with a duty of care, which is outlined in the American Law Institute’s 1991 Restatement of Trusts, Third, Section 227 as such: “This standard requires the exercise of reasonable care, skill and caution, and is applied to investments not in isolation but in the context of the …portfolio and as a part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the [purposes of the endowment]” (Longstreth, 2013). (11.2.13 Longstreth on Divestment)

Nathan replied (2.6.15 Larkin to Falce Re PSU Divestment, Carbon Bubble) attaching his April 15, 2014 paper on the Financial and Social Basis for Fossil Fuel Divestment at Penn State (4.15.14 Larkin on PSU Divestment):

A university endowment is, put simply, a savings account for a school that is used for funding various operations of said institution. Penn State’s endowment is the 27th largest among all U.S. colleges; it represents nearly $3 billion (Top 50 Endowments, 2013).In order to increase the size of the endowment, the funds contained within it are invested in various industries. According to Penn State’s Office of Investment Management, “The endowment pool is a commingled fund of endowment assets that is broadly diversified among stocks, bonds, venture capital,  private equity, hedge funds, and real estate.”

Although the Office of Investment Management claims to be “committed to the growth and preservation of the endowment for the future of Penn State,” an examination of its actual investment habits indicates the opposite—that short-term payoffs are prioritized above long-term sustainability (Office of Investment Management, 2010). Specifically, the school’s investments in the risky fossil fuel industry reveal a preference for quick payoffs and a disregard for Penn State’s financial health into the foreseeable future.Investments in the fossil fuel industry are inherently risky because of the effects of its products on the Earth’s climate system.

In 2009, world leaders at a United Nations conference agreed to support “the scientific view that increase in global temperature should be below two degrees Celsius” in what has become known as the Copenhagen Accord. In order to reach this goal of limited increase in global temperature, scientists have estimated that the “carbon budget” of the Earth is roughly 565 gigatons by the year 2050.In other words, in order to avoid causing devastating and irreversible damage to the planet, humans can afford to emit no more than 565 gigatons of carbon dioxide into the atmosphere before midcentury.

For perspective, at the current rate of growth of worldwide carbon dioxide emissions, 565 additional gigatons of carbon dioxide, our allotment until 2050, will be emitted in about 15 years. Currently, the fossil fuel industry holds about 2,795 gigatons of carbon dioxide worth of fossil fuels in its known reserves (McKibben, 2012). The extreme difference between amount of currently held reserves and the  “carbon budget” is likely to spell financial disaster for the industry due to the likelihood of stranded assets.

In determining their stock prices, fossil fuel companies operate under the assumption that they will utilize the totality of their reserves, despite the scientific consensus that doing so is not physically feasible (Gore, 2013). The likely outcome of companies’ accounting for resources that will never come to fruition is an impending surge of stranded assets—assets that, according to the University of Oxford’s Stranded Assets Programme, “suffer from unanticipated or premature write-offs, downward revaluations, or are converted to liabilities (Ansar, 2013).”

This concept is actually not such a complicated one: logic dictates that if the fossil fuel industry is unable to sell as much of its product as it expects to, then its profits will be lower than expected as well. Failure to account for potential stranding of assets results in artificially inflated stock prices that plummet when said assets do,  indeed, become stranded. Because investments in the fossil fuel industry rest on the unrealistic assumption of emitting 2,795 gigatons of carbon dioxide, roughly five times more than is physically permissible, the industry and its fiduciaries are especially susceptible to the financial wreckage brought on by stranded assets  (Ansar, 2013).

Thus, Penn State would improve its financial security and reduce risk by removing its investments from the fossil fuel industry before the burst of the sob called “carbon bubble” that will occur when fossil fuel assets become stranded. The long-term security that divestment promotes makes it a financially sensible policy for Penn State to implement. However, the goal of fossil fuel divestment is not simply to financially strengthen Penn State and its endowment. Penn State’s financial security is merely a positive side effect of an investment portfolio that is  free of fossil fuels, which is, in fact, principally aimed at combatting climate change  by hindering the world’s dirtiest industry.

I’ve urged the Board of Trustees to carry out Fossil Free PSU’s demand, via Steady State College editions (1.20.142.3.14) and most recently in a December 18, 2014 PSU Energy Strategy Update, :
…The Fossil Free PSU divestment campaign may be of increasing interest to you but you should probably act quickly, assuming there are still dupes to whom you can sell the university’s fossil fuel investments…
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