Fossil Fuels and Olin

As alumni we were excited last May to read about the efforts of several students to engage the administration and work towards divestment. If Olin divests we would be in good company, joining other schools like BU, Stanford, Yale, RISD, UMass, and over 500 institutions with total assets of over $3.4 trillion dollars. But important questions need to be answered. Is divestment a sound financial decision? Is it an effective way to accomplish anything?
I hope to make it clear that investing in fossil fuels is almost certainly an unsound financial decision. Fossil fuel companies live and die by a measure called the reserve replacement ratio, which is the ratio of proven fuel reserves added to a company’s reserve base to the amount of fuel removed from these reserves (the amount of fuels produced). A ratio above 100% means that a company is adding as much or more than it’s using, and so will stay stable or grow. A ratio less than 100% means that the company will eventually run out of reserves and die. Dropping below that 100% mark can be disastrous for the value of a company’s stock. In summary, an accurate reserve replacement ratio is a huge determiner of the value of a fossil fuel company’s stock.
Scientifically speaking, it is clear that if we want to meet global warming targets set out in international agreements like the Paris agreement then there is a limit on how much CO2 we can emit, a so-called carbon budget. Current projections suggest a budget of around 800 GtCO2 (gigatons carbon dioxide) to have a 66% chance of staying below warming of 2°C (closer to 500 GtCO2 for an 80% chance), the current agreed-upon target. At the same time, proven reserves (which go into the calculation of reserve replacement ratio and thus the value of fossil fuel companies) are estimated to represent around 2,800 GtCO2 in potential emissions, or around 3-4 times the carbon budget (5-6 times for 80% chance). In other words, in order to meet current globally agreed warming targets, about 66-75% of what fossil fuel companies are valued by needs to remain in the ground, becoming so-called stranded assets. This suggests a market value for these companies that is far, far below the current market valuation, making continued investment in this bubble a very risky proposition.
Unless, that is, you believe that these companies will be able to dig up and burn all of these reserves, which would pretty much guarantee warming >2°C, with unpredictable but potentially catastrophic consequences. It is likely that this scenario would be exceedingly bad for global markets, and thus making an investment in this scenario is a very poor long-term investment for a school that, I assume, wishes to still be around for the later half of the century.
On the moral side, we are already seeing the negative effects of CO2 emission driven climate change in lives and livelihoods, from superstorms to increased droughts, fires, floods, famines, and war. The fossil fuel companies themselves are associated with large-scale destruction of ecosystems (think BP oil spill and tar sands) and blatant racism in the placement of fossil fuel infrastructure (think rerouting of the Dakota Access Pipeline through Native American land because of concerns about the impacts on predominantly white communities). Since the profits of these companies don’t account for these many externalities, Olin’s profiting off of these companies is tantamount stealing from everyone, including its students, who are and will continue to live their lives in this world affected by climate change.
A desire to “Better the World” is baked into Olin’s Vision and Mission, but these risky investments put that mission in jeopardy. Either the carbon bubble pops and Olin loses a lot of money again (recall what happened last time), or all of that fuel is burned and a better future is exceedingly unlikely. No matter what your belief or preferred argument I hope that I have made it clear that these investments are a threat to Olin’s mission and should be removed as quickly as possible.

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