Challenges to fossil fuel divestment at Penn, explained

For nearly a decade, students at Penn have demanded that the administration divest from fossil fuels. 

In November 2021, the University pledged to achieve a net-zero greenhouse gas emissions, mainly through terminating emissions associated with the endowment's underlying investments. However, Penn has not committed to divest from fossil fuels, though student groups on campus have repeatedly spoken out against the University’s climate policy for falling short of divestment. 

Chief Investment Officer Peter Ammon, who oversees the University’s endowment, said in 2021 that the net-zero goal is broader than divestment because it accounts for the emissions produced by all businesses within Penn’s endowment portfolio. In response to a request for comment, Ammon directed The Daily Pennsylvanian to Senior Executive Vice President Craig Carnaroli, who wrote that the net-zero goal addresses “not only the supply of fossil fuels but also the demand for and consumption of energy.”

“[T]he University also holds a growing number of investments in companies focused on climate change solutions and the green energy transition,” Carnaroli wrote. 

Student activists' calls for the University to divest have persisted. Most recently, Fossil Free Penn stormed Penn’s homecoming football field on Oct. 22 during the game’s halftime demanding that Penn divest from fossil fuels. The demonstration led to 19 arrests. The protest was the last event the group’s 39-day encampment on College Green. 

The Daily Pennsylvanian spoke to eight experts and three Penn students about what fossil fuel divestment would entail from an administrative standpoint, the challenges of divestment, as well as the potential environmental impact.  

A recent history of calls for Penn to divest from fossil fuels

Members of the Student Sustainability Association at Penn, with the assistance of faculty and professionals, have estimated that about 1% of the University's endowment is invested in fossil fuels. This would translate to about $207 million out of the $20.7 billion endowment, though Ammon previously said that the exact environmental footprint of Penn’s endowment is difficult to calculate.

Penn announced in November 2021 that it would halt commitments to private equity vehicles dedicated to investments in fossil fuel production, an update to its existing practice of not directly investing in companies engaged in the production of fossil fuels, such as thermal coal or tar sands. 

Faculty and student groups have called for bolder action on climate change, emphasizing that Penn is investing in fossil fuels via mixed funds. 

Engineering sophomore Ahmed Abdellah, an Eco-rep with Penn Sustainability, said that Penn needs to make investments in the renewable energy industry now in order to have an impact on the transition.

“The most important part of the transition is right now,” Abdellah said.

Many of Penn's peer institutions have announced plans to divest from fossil fuels. After Princeton voted to dissociate from 90 fossil fuel companies and divest from all publicly traded fossil fuel companies, Penn and Yale became the only two Ivy League institutions that have yet to divest. 

Carnaroli wrote that Penn has “reviewed peer statements” and that Penn's policies are “quite consistent.”

What is divestment, and how much has Penn invested in fossil fuels? 

According to Wharton management professor Witold Henisz, who serves as the vice dean and faculty director of the Environment, Social, and Governance Initiative, divestment is “the liquidation or the selling of any shares that you have in a company, as an act often of moral protests.” 

Divestment can entail withdrawing invested assets from a firm, set of companies, or an entire sector. One application is divestment from fossil fuels, which is particularly salient as universities attempt to be more environmentally conscious, University of Louisville law professor Christopher Ryan said.

Environmental science lecturer Jane Dmochowski, who helped create the VIPER program and is involved in sustainability projects across campus, wrote to the DP that divestment from fossil fuels is about “mitigating our rapid, anthropogenic climate change emergency” and moving away from harmful non-renewable resources. 

Abdellah said that the step that matters most to Penn’s climate response is “where the money is going” and that protests like those held by Fossil Free Penn help hold Penn accountable for its actions.

In his statement to the DP, Carnaroli wrote that Penn has no “direct holdings” in any of the 200 companies that have the highest carbon content in their fuel reserves.

“I think the much more important conversation — and one that often gets drowned out in debates over divestment — is around how Penn can use its great strengths of teaching and research to actually help to catalyze the energy transition,” Carnaroli wrote. 

How does divestment affect fossil fuel companies?

Wharton finance professor Luke Taylor said that divesting from fossil fuels may help mitigate climate change by pushing down the stock prices of fossil fuel companies, which makes it costlier for the companies to raise capital. 

Taylor said that the divesting from fossil fuel companies could have two beneficial effects for the environment. If it is costly to raise capital, an affected company may shrink, and lower stock prices could also incentivize companies to become greener. 

However, Taylor said that the scope of the environmental effects of divestment is unclear, citing a recent paper that found that divestment has extremely small effects on influencing “dirty companies” to change.

Henisz argued that divestment from fossil fuel companies gives other parties with less environmental conscience easier access to fossil fuels stocks, which means a divestment campaign may not have economic impacts. 

“There's very little evidence that driving divestment campaigns actually has an economic effect on the sector, because there's so many people like the Saudis and the Russians and the Koch brothers who are willing to step in and buy the stock,” Henisz said.

College junior and FFP coordinator Megha Neelapu wrote to the DP that keeping "the vast majority of fossil fuels" in the ground is necessary to successfully fight climate change, because it would make fossil fuel companies act "against their self-interest."

What would Penn’s divestment look like from an administrative standpoint? 

Penn’s Board of Trustees controls all investment decisions of the University endowment. The Trustees have a financial obligation to “maximize University resources” but may view divestment as appropriate in “extraordinary circumstances” depending on social responsibility concerns, according to the Guidelines and Procedures for Consideration by the Trustees of Proposals for Divestment. 

Members of the Penn community can initiate the process of divestment by bringing a proposal for divestment of specific corporate securities to the University Council Steering Committee. The proposal is required to meet the “social responsibility” guidelines before it can be considered for the formation of an advisory committee, which will make a final determination depending on an “extraordinarily high standard.”

The advisory committee will also examine whether there are alternative means by which the University can resolve the social responsibility concerns. 

Social responsibility issues that may prompt divestment consideration must include a “moral evil implicating a core University value that is creating a substantial social injury.” The proposal for divestment must also have broad and sustained support of the University community over a sustained period of time.

If the Trustees receive a proposal and decide to divest, they will direct the divestment from relevant companies either unconditionally or for a limited period of time. They may also share the University’s investment preferences with investment managers of funds in which it invests, according to the Guidelines and Procedures.

Besides divestment, the Trustees may also express the University’s view through the proxy voting process or through other means, such as a management letter, in an effort to change the behavior causing “substantial social injury.”

If the divestment proposal is deemed to be inconsistent with the University’s mission or interests at any point, the proposal may be referred back to a previous committee for review, and could be tabled. 

The challenges of divestment

The professors that The DP spoke with outlined several potential drawbacks that may be discouraging Penn from fossil fuel divestment, centered around weighing moral and ethical concerns against economic responsibilities. 

First, many of the asset management companies that run buyout funds that Penn invests in would have to be convinced to divest on Penn’s behalf, since part of the endowment may be invested in a buyout fund.

“[An asset manager] might say, well, you're just one of many investors in our buyout portfolio right now, and we're not going to change the portfolio just because of you,” Taylor said. 

Green investing refers to investing activities focused on environmentally friendly business practices and the conservation of natural resources. According to Taylor, fossil fuel divestment can also come at a cost to the University endowment because if the University is holding a greener portfolio than expected, the portfolio will yield lower financial returns. 

Taylor said that there is a contradiction between having high returns and reducing the cost of capital for green firms. He said that if someone holds a green portfolio, they cannot expect to reduce the cost of capital for green firms and at the same time, expect high returns on their own portfolio. This is because the cost of capital and expected return are the same thing. 

One way that the University could offset this cost is to take on more risk to earn a higher expected return, Taylor said. 

However, Ryan wrote to The DP that he believes economic concerns may be overstated, at least for universities like Penn that have larger endowments.

Abdellah hopes that if Penn divests from fossil fuels, it can diversify its investments in the renewable energy sector, such as solar, hydrogen, and waste management technologies.

Another concern with divestment, according to professors The DP spoke with, is that if Penn sells the fossil fuel stocks, it also gives up any control over the companies from which it divests and where those stocks end up next. Henisz said that research on divestment is “very cautious” on whether doing so is beneficial or only serves to make the divestor “feel better.” 

“If all the people who care about climate transitions sell, who's left owning the stocks? People who don't care about climate transition,” Henisz said. 

Henisz added that if an institution divests its stocks from fossil fuels, he believes another investor will buy them, and the institution will not know if the new investor will care about the environment. 

“If you're the person who cares about the issue, you're giving up your voice,” Henisz said as he drew a comparison between divesting and sitting out on an election, and thus disengaging from a given issue. 

Henisz said that rather than divesting, he believes institutions could focus on “engaging” with fossil fuel companies, a practice also known as activist investment. This involves holding a stake in a publicly traded company in order to influence or change the company’s practices. According to Taylor, it is using one’s influence as a stakeholder to “clean up” the company.

Henisz serves as an advisor to Engine No. 1, an investment firm that utilized the engagement strategy to effect change within Exxon Mobil. Last year, Engine No. 1 won three seats on Exxon Mobil’s board and has pushed Exxon Mobil to implement and make progress on a “strategic plan for sustainable value creation in a decarbonizing world.”

“All of us who have shares — all the universities, all the pension funds — should be coordinating our activity to push fossil fuel companies to get serious about the climate transition,” Henisz said. 

College junior Julian Marquez, who also serves also an Eco-rep, said that Penn should prioritize divestment from fossil fuels but recognized that financial challenges may hinder an immediate divestment and the importance of maintaining Penn’s endowment. Marquez added that he believes employing people “who will follow through on the work that they're doing” at the Office of Sustainability will, in turn, help Penn follow through on its sustainability goals.

Penn is continuing to invest in fossil fuel companies because it believes its investment can "be used to affect progressive change," Neelapu wrote to the DP.

"This principle is bogus — there have been 160 shareholder resolutions filed between 2012 and 2018 against top fossil fuel companies, and [Penn administrators] have done nothing," Neelapu wrote. "If it hasn’t been working so far, why would it start working now?" 

Dmochowski said that Penn has a large environmental responsibility to decrease carbon emissions and send a message about what the University believes in and values. 

“It sends a message to everyone, from our students to our donors, about who we are and what we value,” Dmochowski wrote.