Last week, the Finance Committee of the UBC Board of Governors voted to endorse the recommendation of its Responsible Investment Policy Committee and reject fossil fuel divestment. The principal rationale for rejecting divestment is that “it would not be consistent with the board’s fiduciary obligation to endowment donors.” This conclusion relies on a faulty definition of the Board’s fiduciary obligations with respect to the endowment, and rests on assumptions about financial returns under divestment that are unsupported by any evidence presented by the committee (and, in fact, are directly contradicted by the publicly-available literature). Furthermore, the Finance Committee’s interpretation of fiduciary duty appears to contradict research from the UBC Allard School of Law and an external legal opinion sought by the University of Toronto President’s Advisory Committee on Divestment.

The Board’s narrow definition of fiduciary duty is not supported by law

My expertise is in environmental policy, and not the law of trusts. But the literature review that I’ve done about fiduciary responsibility reveals that the Finance Committee’s statement that the Board’s fiduciary duty is the donors is unsupportable. The Association of Governing Board’s defines fiduciary duty like this: “Fiduciary responsibility entails three particular duties to the institution, commonly known as the fiduciary duties of care, loyalty, and obedience. Taken together, they require board members to make careful, good-faith decisions in the best interest of the institution consistent with its public or charitable mission, independent of undue influence from any party or from financial interests.”

Fiduciary duty has its origins in common law, and in some jurisdictions is codified in statutes. British Columbia has a Trustees Act that codifies as the law on fiduciary duty as embodying a standard of care whereby “a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.”

The Board’s duty is not to donors per se, but for the purposes for which the endowment was established. That purpose is guided by the University Act, s. 19.1, which states that “The members of the board of a university must act in the best interests of the university.” Board policies also clarify the endowment’s purpose. The Board’s Endowment Management policy states that “The University is committed to ensuring that the endowment funds maintained in the endowment pool are used in such a way as to maximize their benefits for the advancement of education at the University, including educational and research activities carried on by the University which benefit society generally.” The Board’s Endowment Responsible Investment Policy defines its “primary fiduciary responsibility” as “acting in the best interest of the University and its stakeholders.” It continues, “When  considering divestment, the University must consider the interest of its multiple stakeholders, which include students, faculty, staff, alumni, donors, the government and taxpayers.” [i]

Traditionally, fiduciary duty has been understood to emphasize financial criteria, particularly pursuing the best possible return over the long run with due consideration to risk. Investment criteria, however, are not limited to financial gain. UBC, for example, has broadened its criteria to include Environmental, Social, and Governance (ESG) principles. The normal expectation is that such screening will either increase or at least not jeopardize financial returns. In principle, screening investments for non-financial criteria, even if it did sacrifice financial return, could be consistent with fiduciary duty as long as the beneficiaries of the trust made this value choice explicit (see the Richardson memo cited below). But that’s not the issue for fossil fuel divestment as there is no evidence divestment will materially decrease returns, and indeed growing body evidence that maintaining fossil fuel investments may decrease returns (see next section).

As a side note: The legal opinion solicited by the Board states ”Divestment is compatible with the fiduciary standard if alternative investments are available with a higher rate of return having regard to the relevant risk.” This statement must be an error, as it is inconsistent with the understanding of fiduciary duty in the literature, which states that such screening should be permissible so long as it does not jeopardize financial returns.

The Board’s assumption that divestment creates a financial risks is not supported by evidence

The Finance Committee appears to assume, without citing any evidence, that divesting the endowment of fossil fuels would create financial risk. Our Responsible Investment Proposal, and our September 15 research update, both cite a substantial body of research showing that fossil free funds would have experienced either similar or higher returns.  Given the weight of this evidence, the burden of proof should be on the Board to demonstrate that there would be a financial risk. Yet no such analysis has been provided.

Moreover, concern has been increasing in the investment community about the long term financial risks of exposure to fossil fuel stocks, given that most of the reserves on the books for fossil fuel companies will become stranded assets as the world moves to address the climate crisis.  Arguably, fiduciary duty requires that the Board examine the long-term financial risks from holding fossil fuel stocks (See the Kosky-Minsky report, especially p. 25).

The Finance Committee rejects divestment on the grounds that it is inconsistent with their fiduciary duty. Yet their legal standard for fiduciary duty is flawed, and they do not support their concern of the financial risk of divestment with evidence. Fiduciary duty requires the the Board “exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.” The Board does not seem to have done the due diligence necessary to fairly consider the divestment proposal.

Further Reading

An external legal opinion (pg. 18) obtained by University of Toronto contradicts UBC, instead finding fiduciary duty does allow for divestment.
“After considering all the evidence and given the long-term nature of the University’s obligations with respect to the Funds, the Committee concludes that divesting from the University’s direct holdings in fossil fuels companies whose actions blatantly disregard the 1.5-degree threshold (or any evolution of this standard, upwards or downwards, as the best scientific and policy evidence produces a new consensus) would be consistent with the University’s fiduciary duties and the long-term financial best interests of the beneficiaries of the trusts. “

Professor Benjamin Richardson, “Legality of Socially-Responsible Investing (SRI) by University Endowment Funds,” Memorandum to UBC Board of Governors Finance Committee, August 3, 2013. This Memorandum states “because SRI emphasizes a long-term approach to investing financial capital in a manner that addresses ongoing and emerging concerns such as climate change and respect for basic human rights, SRI is arguably quite compatible with the purpose of an endowment fund. To manage and preserve the endowment in perpetuity for the benefit of current and future generations of students, staff and other stakeholders in the university requires being attentive to ESG issues of long-term financial salience.” The Memorandum concludes, “there is no insurmountable fiduciary or trusts law barrier to UBC’s endowment funds practising SRI. Rather, the legal imperative is increasingly that these funds must be managed for SRI purposes – SRI should be viewed as a way to legally fulfill the purpose of endowment funds and to nurture the wider best interests of the university and its members.”

The Shadow Impact Calculator and Divestment: Data and Model LimitationsGeorge Hoberg*

A White Paper released by the Pacific Institute for Climate Solutions last month argues that fossil fuel divestment campaigns are based on a set of unfounded assumptions. The authors, Hadi Dowlatabadi and Justin Ritchie of UBC, make some valuable contributions to the debate over divestment. But their criticisms of the divestment advocates’ core arguments are off-base.

The PICS paper makes two important contributions to the debate. The authors provide a series of recommendations about policies and financing that can provide effective support to the divestment movement. Second, the authors emphasize the challenge, frequently lost in the divestment dialogue, that a very high fraction of the world’s fossil fuel reserves are owned by governments and not traded in financial markets, and therefore relatively immune to pressure tactics focusing on financial markets.

But the paper’s challenges to the core assumptions of the divestment movement are unfounded, both because they are not addressing the actual theory of change guiding the fossil fuel divestment movement, and because their methodology, and the way they applied it, does not actually allow them to effectively measure what they are trying to analyze.

First and most important, the PICS paper attempts to examine the direct impacts of divestment, either on the greenhouse gas emissions associated with portfolios, or on directly reducing carbon pollution because divestment “will keep fossil fuels in the ground.” This is not an accurate representation of the theory of change underlying the divestment movement. As our colleagues at the University of Victoria have highlighted already in response to this study, “The divestment movement’s primary goal is to challenge the social license to operate oil companies enjoy, making it harder for them to successfully lobby against needed government action.” (For similar responses to the PICS study, see here, and here.)  An influential report from Oxford University argues: “The outcome of the stigmatisation process, which the fossil fuel divestment campaign has now triggered, poses the most far-reaching threat to fossil fuel companies and the vast energy value chain. Any direct impacts pale in comparison.” The same study, which also looked at past divestment efforts, found that “in every case [they] reviewed, divestment campaigns were successful in lobbying for restrictive legislation.”

Second, the PICS report analysis of the more direct impacts of divestment is based on a methodology that does not effectively measure what the authors are trying to analyze. A new critique posted on the PICS website takes the PICS report to task for several methodological and analytical problems. The authors of the PICS report develop a methodology called the “shadow impact calculator” designed to show the “carbon shadow” of investments. The shadow impact calculator relies on an input-output model using historic greenhouse gas (GHG) emissions intensities and single-year snapshots of the economy. As a result, it is just not particularly useful in illuminating the future carbon footprint impacts of changing investment decisions, which is exactly what the climate-focused investors are trying to do.

Finally, the way the authors applied their method to a sample university portfolio (UBC’s) dramatically underestimates the carbon impact of divestment. Their analysis substituted the six fossil fuel companies in which UBC has direct holdings for a sample of six renewable energy firms. They come up with the surprising result that the carbon shadow of that investment shift is only reduced by 22%. Their sample of renewable firms was selected randomly, but the six they ended up with had a major outlier in it which led, unintentionally, to a terribly unrepresentative sample. As shown in the figure, a re-analysis using the average carbon shadow of renewable companies – a more representative approach – reveals a much larger 90% reduction in the carbon shadow.

The PICS White Paper is off-base for two reasons. First, it does not address the theory of change actually guiding the fossil fuel divestment. Second, a more careful analysis shows that the direct impacts of divestment on the carbon shadow of investments can be much higher they find.

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*Double disclosure statement: As any reader of this blog would likely know, the author is the faculty coordinator of UBCC350, the group leading the divestment campaign at UBC. The author also received research funding from PICS on forest carbon policy.

This letter was submitted to the Sun today:

Your February 26 editorial relied heavily on a study that concluded that divestment from fossil fuels would not have a significant impact on the “carbon shadow” of UBC’s endowment. Unfortunately, that study significantly underestimates the impact of divestment.

The renewable firms the authors used to assess the impact of reinvestment turn out to be outliers. Using average renewable firms yields a 90% reduction of the carbon footprint of the fossil fuel component of UBC’s endowment, not 22%. (Technical critique here.)

The study compares investments based on firms’ emissions only to the point of sale. For a solar panel producer, that approximates emissions over the product’s full life cycle. For fossil fuels companies the PICS study excludes the vast majority of emissions, which occur when those fuels are burned by consumers. The moral justification for divestment lies in the much larger differences over the full life-cycle that are not captured by the study’s methods.

If we are to live in a world with a safe climate system, “the vast majority of [fossil fuel] reserves are unburnable,” Bank of England Governor Mark Carney recently warned. UBC should not fund its students’ education by investing in industries whose products inevitably harm their future.

Kathryn Harrison, Political Science, UBC
George Hoberg, Forest Resources Management, UBC

(A text of the remarks I made at the Faculty Association introducing the motion to call for a referendum on divesting the UBC endowment of fossil fuels. A more detailed rationale with extensive references can be found here)

Good morning everyone and it is so great to see you all here today. I’m especially grateful to see so many of the more than 190 faculty members who signed our open letter.

I’m George Hoberg, a professor in the Faculty of Forestry. I’ve been at UBC now for 27 years, the first 14 in the Department of Political Science, and the remainder in Forestry. My research is on environmental and natural resource policy, including energy and climate policy. Among other things I teach courses on sustainable energy policy to 150 undergraduates and 30 graduate students.

It’s as a result of these three things — my identity as a UBC faculty member, my research into the problem, and especially my teaching – that I’m here today to make a motion that UBC should divest its endowment of fossil fuels.

Last January, our students voted overwhelmingly, almost 4 to 1, to call on the university to divest. It’s time that UBC faculty join that call.

Academic researchers understand all too well that climate change presents an urgent crisis for humanity. The science is clear: the evidence is overwhelming that we are hurtling towards a future that is dangerous for humankind. Immediate actions are required to restructure our energy systems away from fossil fuels and toward clean energy. Luckily, research by engineers and economists also shows that such a transition is both technologically feasible and affordable.

Some are concerned that divestment might reduce the income UBC receives from its endowment, but this need not to be the case. Concern that divesting would hurt the performance of portfolios is not supported by the best available data. Studies designed to measure the impact of divestment have found little or no impact on returns. Indeed, there are increasing concerns, from the likes of the Governor of the Bank of England and major pension funds, that a “carbon bubble” could pose a significant threat to fossil fuel investments.

Just as UBC has undertaken renewal of its facilities and operations as a “living laboratory” for sustainability, we call on our university to apply its expertise and values with the same vigour to its endowment. UBC should devise a profitable fossil-free portfolio that inspires sustainable investing by other institutions.

Others argue that UBC should maintain ownership so that it can exercise leverage as a shareholder. However, because the business model of fossil fuel companies relies fundamentally on exploiting carbon reserves that humanity can’t afford to burn, working through shareholder channels is inadequate to achieve the transformative changes required. These urgent times demand rapid and significant changes in our energy system, and we believe those changes would be better fostered through the more dramatic action of divestment. Moreover, divestment rejects the dissembling tactics of the fossil fuel industry, including efforts to mislead the public about climate science and to delay the adoption of cost-effective policies that draw on social science research.

Given the extraordinary size of the fossil fuel industry and the nature of global capital markets, many argue that the divestment movement is largely symbolic. Divestment by a single investor, acting alone, cannot be expected to make a significant dent in addressing climate change. In fact, the very structure of the climate problem makes it a challenge to demonstrate that any particular action by an individual entity can be effective. The climate crisis is a global “tragedy of the commons,” created by millions of individuals and organizations around the world, all acting in their short term economic interests.  Emission reduction by any individual, or even any country, cannot solve this immense collective action problem. To insist that any individual action or organization must be demonstrably effective accepts a logic that dooms the planet to dangerous climate change. If we continue to be guided by short term economic interests, humanity will simply be incapable of rising to the challenge.

In fact, the symbolism of the demand for divestment is what gives it power and makes it effective. The divestment movement is inspired by the anti-Apartheid movement of the 1980s. The impact of the anti-Apartheid investment campaign was less on the value of shares of companies doing business in South Africa than on how it altered the climate for economic and political relations with the racist South African regime. Fossil fuel divestment can play the same role in providing policy-makers the political space to take decisive actions to address the climate crisis.

There’s a strong scientific and economic justification for divestment, and research shows that divestment is unlikely to affect the financial performance of the endowment’s portfolio. But at the end of the day, the most important rationale for divestment is a moral one. It’s an opportunity to do what we can to address a shared problem with the resources we have at our disposal.  When faced with daunting collective problems like climate change, people are often unwilling to act unless they are sure others are willing to do the same. To that end, divestment is, more than anything else, a signal to each other that we recognize the scope of the problem and we are willing to start taking actions to address it. As part of a rising global movement on divestment, UBC can show leadership by divesting, and inspire others to follow suit.

As teachers, we are reminded of our moral duty to future generations. We interact daily with today’s youth, who will suffer the greatest consequences should we fail to address the climate crisis. We believe that it is inconsistent with UBC’s core values of sustainability, global citizenship, and innovation to support an industry whose products are driving us toward an unsustainable future. And it is disturbing to us that our students’ education, an investment in their future, should be funded in part by profits from an industry that harms that same future. In his installation address, President Gupta said “Each generation has a responsibility to take the world as we find it and do our utmost to make it better.” UBC cannot live up to that promise when it is invested in an industry that poses a direct threat to the well-being of future generations, including our own students.

Divestment is an act of leadership. We are proud of UBC’s commitment to sustainability. We support the overwhelming call by our students for divestment from fossil fuels. The time has come for UBC to take the next step in living up to its ideals.