USS have argued that an increasing body of academic research shows that divesting from fossil fuel has no effect. When we first asked for this body of evidence, they sent us a single research paper [1]. This paper was funded by a grant from a university centre which has received extraordinarily large donations from the Koch Foundation, which has major holdings in fossil fuels and has funded climate change denial. See below for more detail on this.
In response to our criticism that USS was apparently basing a key element of their investment strategy on a single research paper directly linked to fossil fuel funding, in December 2023 USS sent us a summary of the literature [2], highlighting six particular works [3-8]. We give a critique of these below but the summary is that four of these papers do not even mention climate, the fifth contains no direct evidence that engagement leads to a demonstrable adherence to a strategy of carbon reductions in line with the Paris goals, and the final paper has conclusions that in fact directly refute USS arguments.
Finally, we give some simple reasons why divestment has an impact.
1. CRITIQUE OF THE “ENGAGEMENT WORKS” EVIDENCE
The review that USS recommended [2] concluded that “In short, there is reason to believe that voting against the (re-)election of directors of companies is likely to prompt company behaviour change, and that a Vote No campaign [voting against a particular Director on a particular issue] has an even greater chance of success.”
But this conclusion related to a wide variety of Environmental, Social and Governance (ESG) issues, for example executive pay and diversity. Climate-related motions calling for a major reorganisation of a fossil fuel company focused on the energy transition have a far greater impact on the economic issues driving company strategies and are arguably much more likely to be resisted due to their impact. Successful engagement on votes against high levels of executive pay is not evidence that engagement works for climate change.
This conclusion also relates to the first four [3-6] of the papers that USS highlighted as of most interest from the review paper. These papers contain no reference at all to climate or fossil fuels, and concern separate issues like executive pay.
The fifth [7] paper is a detailed analysis of over 30 projects under the Principles for Responsible Investment umbrella. It reports a high success rate for an engagement strategy on Environment and Social issues. There are 14 environmental projects with success data, only six of which concern carbon reductions. “Success” is defined as a company setting a target, or answering a questionnaire about emissions reporting (the actual emissions are not relevant to this), or starting an emission reduction programme a year after the engagement.
Setting some “target” is not a success, setting the right target and adhering to it is. There are no examples in this paper where engagement has led to a demonstrable adherence to a strategy of carbon reductions in line with the Paris goals.
The final paper [8] notes that despite all past engagement by shareholders, “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 ”, and “on the basis of its [sic] historic evidence it [shareholder engagement] would not appear to be a sufficient tactic on its own for the scale and speed of change required to decarbonise the fossil fuel sector”.
This paper also notes that evidence “suggests that divestment may directly affect fossil fuel companies’ cost of capital from these [bank lending and bond issues] main sources”. Finally, it states that “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.”
All of these statements point to the opposite of USS’s conclusions.
2. BACKGROUND TO THE FIRST PAPER USS SENT
The first paper recommended by USS [1] was funded by a grant from the Law & Economics Center at the George Mason University Antonin Scalia Law School in Virginia USA.
George Mason University has received over half of the funding given to US universities by the Koch Foundation since 2005, with most of this going to the Economics Department or Law and Economics Centre. Various members of the Koch family and Koch Industries have positions at the university [9]. Koch Industries has large holdings in fossil fuels and the Foundation has funded climate change denial.
In 2016 $30m was given to the Law School ($10m from the Koch Foundation and $20m anonymously). In 2018 it was revealed that the “university granted the conservative Charles Koch Foundation a say in the hiring and firing of professors in exchange for millions of dollars in donations” [10]. In 2019 $50m was given from a different estate to the Law School, in conjunction with its name change to honour a conservative member of the supreme court. The money was given to promote “conservative principles” [11]. Fossil fuel companies have close links with US universities generally and provide significant funding [12].
This does not prove that the research is wrong, and it should be assessed it on its merits, but quoting anti-divestment research, financed by an organisation which is heavily funded by the fossil fuel lobby and its friends, is hardly a credible basis for a major and controversial investment policy. It is reminiscent of tobacco-funded research that argued that smoking was not harmful [13]. USS divested from tobacco in June 2020 [14]. The links between smoking and cancer were first proved conclusively 70 years earlier in 1950, although evidence had been mounting prior to this [15].
3. WHY DIVESTMENT DOES MAKE A DIFFERENCE
USS argues that divesting makes no difference as others will buy the shares. We noted above that the reference [2] concluded that divestment did have an impact. To substantiate this, we simply quote Shell itself [16] – “Certain investors have decided to divest their investments in fossil fuel companies. If this were to continue, it could have a material adverse effect on the price of our securities and our ability to access capital markets. Stakeholder groups are also putting pressure on commercial and investment banks to stop financing fossil fuel companies. Some financial institutions have started to limit their exposure to fossil fuel projects. Accordingly, our ability to use financing for these types of future projects may be adversely affected. This could also adversely affect our potential partners ability to finance their portion of costs, either through equity or debt”.
DivestUSS
March 2023
Updated February 2024
References:
[1] https://www.gsb.stanford.edu/faculty-research/working-papers/impact-impact-investing
[2] E. Quigley, Review of Literature on Shareholder Dissent in Board Elections, University of Cambridge 2022. Link.
[3] Del Guercio, Seery and Woidtke, 2008; Do Boards Pay Attention when Institutional Investor Activists ‘Just Vote No’? Journal of Financial Economics (JFE), vol 90, 84-103 2008.[4] Ertimur, Ferri and Muslu, Shareholder Activism and CEO Pa,y The Review of Financial Studies, Volume 24, Issue 2, February 2011, Pages 535–592;
https://academic.oup.com/rfs/article-abstract/24/2/535/1582262?redirectedFrom=fulltext
[5] Aggarwal, Dahiya and Prabhala, 2019; The power of shareholder votes: Evidence from uncontested director elections, Journal of Financial Economics, 2019, vol. 133, issue 1, 134-153. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2609532
[6] C. Liu, A. Low, R.W. Masulis and L. Zhang, Monitoring the Monitor: Distracted Institutional Investors and Board Governance. The Review of Financial Studies, Volume 33, Issue 10, October 2020, Pages 4489–4531.
[7] E. Dimson, O. Karakaş and Xi Li, Coordinated Engagements, European Corporate Governance Institute – Finance Working Paper No. 721/2021. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3209072
[8] Quigley, Bugden and Odgers, 2020, Divestment: Advantages and Disadvantages for the University of Cambridge.https://www.cser.ac.uk/resources/divestment-advantages-cambridge/
[9] https://www.desmog.com/koch-and-george-mason-university/
[10] https://www.nbcwashington.com/news/local/koch-foundation/53560/
[11] https://www.nbcwashington.com/news/local/conservative-string-attached-to-50-million-gift-to-george-mason-university/131962/
[12] https://www.theguardian.com/education/2023/mar/27/fossil-fuel-firms-us-universities-colonize-academia?CMP=Share_iOSApp_Other
[13] Brandt AM. Inventing conflicts of interest: A history of tobacco industry tactics. Am J Public Health 2012;102:63–71. doi:10.2105/AJPH.2011.300292. https://ajph.aphapublications.org/doi/full/10.2105/AJPH.2011.300292
[14] https://shareaction.org/news/uss-members-see-milestone-as-scheme-divests-from-tobacco-coal-and-weapons
[15] https://www.thelancet.com/journals/lanonc/article/PIIS1470-2045(09)70401-2/fulltext
[16] Shell “Powering Progress: Annual Report and Accounts 2022”, p.16, https://reports.shell.com/annual-report/2022/