In Response to “Put Your Money Where Your Mouth Is, UC, and Fully Divest from Fossil Fuels”

Photo courtesy of Gerry Machen. Link to photo license.

This article is in response to a piece originally published in November 2018.

While I agree that the UC system is often hypocritical and tone-deaf, there are financial realities that restrict the divestment of fossil fuels.

I want to first address the line, “[t]he Board of Regents wants us to think this is complicated.” The author never actually explains how divesting is not complicated. For example, the public equity portions of both the UC Retirement Plan (UCRP) and General Endowment Pool (GEP) funds that the UC Office of the President (UCOP) manages are almost entirely in externally managed funds. The UCOP does not pick individual stocks to invest in; rather, it allows other financial firms to make investment choices that match a certain risk and return profile. Fully divesting from fossil fuels while maintaining a reasonable risk profile and investing entirely in managed funds may be more difficult than simply selling stocks in problematic companies.

Furthermore, the London School of Economics (LSE) study cited is not wrong, but it is also not completely applicable to this situation. The first issue is that the study approaches divestment purely from a stock price perspective, discounting other effects like dividends or other asset classes. Dividends are payouts that companies pay out to holders of their stock. At a basic level, this means that the stock price does not need to skyrocket for a holder to make money over a long period of time. Warren Buffett’s Berkshire Hathaway earns hundred of millions of dollars in dividends every year by simply holding on to shares, largely independent of the stock price. The LSE study also only uses public equities as an example of investment performance. As mentioned earlier, the UC system does not pick individual stocks to invest in, it hires a spectrum of external managers to meet a specific risk appetite. Even then, public equities only make up 3 percent of assets invested.  

In addition, the definition of fossil fuels must be further defined by the author. For example, investing in utility companies that have fossil fuels in their generation capacity could be included in the definition of investing in fossil fuels. Investors in utility companies generally need steady cash flow over long periods of time that stable dividends supply (read: retirement and pension plans). Beyond their financial benefits, many of these utilities are investing in adding new, cleaner energy and retiring older fossil fuel capacity. Again, looking at the UCRP and the GEP, both funds invest in bonds issued by Florida Power & Light (FP&L), a utility. FP&L has some fossil fuel generation but is actively investing in retiring coal generation and expanding its solar fleet. Should these companies be divested from as well?

The UC system is far from perfect and there is growing momentum in Environmental Concerns, Social Impact, and Corporate Governance (ESG) investing (taking into account environmental concerns, social impact, and corporate governance when making investment decisions). I agree with those points, but there are more nuances and complications that the author must consider to better spearhead a fight against climate change.

Dennis Yeh graduated from UCSD in 2017.

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