Shorting the Devil

By Hunter Bosson

One of the few places where student protesters are taken seriously is the institution that takes their money: universities. The university, with its resources, publicity, and networks, offers a praxis for political and social change far beyond campus.

One tactic for wielding the academy’s power is divestment: selling stocks, bonds, and investment funds of businesses that engage in ethically ambiguous practices. Since their genesis in the 1970s, worldwide campaigns for divestment have been as varied as they have been contentious, tackling such issues as South African apartheid, Big Tobacco, climate change, and the Israeli-Palestinian conflict. The debate continued onto Cornell’s campus when the Board of Trustees recently rejected a proposal to divest from the 100 largest oil companies for their contribution to climate change. The divestment campaign has its limits and costs, but as universities increasingly acknowledge the legitimacy of financial activism, students must be the ones who define that role.

One issue plaguing divestment campaigns is that misinformation abounds as to how it works. By selling shares and bonds in a company, the divesting institution does not actually take money away from said company, but merely sells the equity or debt that it holds to someone else. The idea is that by liquidating positions in a firm, it raises the cost of borrowing and lowers the value of the company, the latter being of great importance to company executives compensated in part by stock options. As prominent institutions divest, it raises awareness for the issue it addresses and provides movement catalysis. Despite its circuitous nature, divesting has shown real results.

Divestment began as a particularly promising student political strategy. The first major campaign began in the 1970s, as campus protests pressured universities into selling shares in firms that did business in or with South Africa in protest of apartheid. Large firms, including IBM and GM, were targeted by institutions such as the University of Michigan, Columbia, and the University of Wisconsin Madison. The movement’s momentum snowballed, eventually dragging nonprofits, counties, and states into the fray until its culmination in 1986 with the Comprehensive Anti-Apartheid Act, banning new investment in South Africa. By the time the apartheid regime fell shortly thereafter, 155 universities had divested. Even today the anti-apartheid movement is the godfather of divestment campaigns; one is hard-pressed to find an activist who does not pay homage to its success.

Divestment’s popularity soon began to fall as the morally dubious issues started hitting closer to American homes. The next major divestment campaign focused on the American tobacco industry, a similarly distasteful lot, but this time the social crusade was less decisive. While numerous high profile universities, including Harvard and CUNY, divested from America’s original poison peddlers, the movement faced stronger opposition. Critics argued that shares should be retained so that responsible investors could wield shareholder power for good, such as preventing tobacco advertisements directed at children. Although tobacco divestment won press, little evidence has emerged that the divestment campaign applied noticeable downward pressure on stock prices.

The most prominent divestment campaign today targets fossil fuels. The coal, oil, and gas industries have inherited the title of societal boogeyman and are paying the price on college campuses. Over a hundred universities have divested, including Stanford, Cambridge, Oxford, and the University of California System. Divestment has been much more popular, and successful, among smaller colleges and educational institutions (perhaps in part due to a lack of financial exposure). However, the reasons for divestment provided by larger institutions are damning: Stanford invoked its investment responsibility policy, established in 1971, barring investments in firms whose actions could pose a “substantial social injury.” A particularly vocal group of proponents are scientific academics, many of whom fear the coal and oil lobby’s impact on climate change research. Opponents, with dazzling predictability, called the movement pointless and unproductive. However, in addition to the usual tropes, some investors have raised valid points: energy sector firms’ stock price movements have the lowest correlation with other industries, making their shares a key tool for diversification, arguably the most important component of an endowment’s investment strategy.

Perhaps the most polarizing target of divestment campaigns today is Israel. In 2005 the Palestinian Civil Society called for a campaign of boycotts, divestments, and sanctions (BDS) against Israel and firms with ties to the Israeli military or Israeli control of the West Bank. Unlike other major divestment campaigns, this BDS campaign faces the challenge that Israel’s actions do not receive the same level of condemnation as South African apartheid and Big Tobacco. Proponents claim that BDS is justified due to Israel’s occupation of the West Bank and the Gaza Strip, even going so far as to call it an “apartheid state,” making companies such as Caterpillar and Raytheon, who contract with the Israeli military, prime targets for divestment. Opponents claim that Israel’s actions do not merit any form of condemnation, and have even gone so far as to label prominent members in the BDS campaign as anti-Semitic. The BDS movement is especially controversial on Cornell’s campus, where a website called SJP Uncovered recently began a PR campaign aimed at Cornell’s BDS movement. The rather shady organization advertised directly to Cornell students on Facebook, accusing the organization Students for Justice in Palestine of working against the Israeli-Palestinian peace process, including for its advocacy of BDS.

Concerning divestment issues, Cornell remains well behind the times. The university’s equity holdings and business deals have sparked three organized divestment movements, targeting fossil fuels, Israel, and private prisons respectively. Some proposals have catalyzed action, with Cornell recently announcing that it will honor Black Students United’s demands that security firm G4S’s contract with Cornell’s Herbert F. Johnson Museum of Art be terminated for its business in private prisons. But overwhelmingly, the university’s attitude towards divestment has been patronizing and unsympathetic. A resolution for BDS against Israel was not even given a vote by the Student Assembly, and when presented with resolutions by Cornell’s student government organizations in January calling for divestment from major polluters, the Board of Trustees voted against divestment. The Board instead issued guidelines that the university would divest only from firms partaking in “morally reprehensible” actions, such as apartheid, genocide, and child labor law violations.

The core of Cornell’s distaste for divestment was stated by board member Donald Opatrny when he extolled that the endowment’s main purpose is to “provide income for the advancement of the university’s educational objectives.” Admittedly, if ever there were a university that needs to worry about its finances, it is Cornell: last year its endowment’s 3.4% return on investment was the worst in the Ivy League, and at least 2.4 percentage points behind any other Ivy. But Cornell’s administration used the same rationale in the 1980s when it declined to join the divestment campaign against South African apartheid. Cornell’s actions are striking: today its administration has the gall to advocate divestment from apartheid, when it was one of few large universities never to do so, while deploying the same financial myopia it used in the 1970s and 1980s to avoid new divestment campaigns. Even those who reject that propagating climate change is a “morally reprehensible” action must find it hard to stomach such a carelessly two-faced and opportunistic institution.

Central to the rejection of such financial activism is the misguided belief that divestment does not work. A single university, opponents pointedly argue, holds far too little of a company’s stock or debt to affect its equity or borrowing prices in a noticeable way, even in mass divestment movements like that for fossil fuel. Even the anti-apartheid movement’s economic results can be attributed to congressional action. However, the awareness that the campaign raised certainly paved the path for more efficacious changes down the road. And that is the necessary lens for divestment: it is not a painful sanction but a powerful protest. Like any meaningful protest it incurs financial cost, although concerns about cost are wildly blown out of proportion. While energy stocks represent an important source of diversification, targeted fossil fuel stocks compose less than 0.5% of Cornell’s endowment. And that’s the kicker: so long as they are reasonable, divestment initiatives will never impact the endowment enough to noticeably change its composition or its return.

Clearly we should not rule out divestment completely. While most issues at the butt end of divestment campaigns are highly contentious, there are some obvious investments that no conscionable human being would be able to make. An example would be German bonds in the 1930s: perfectly legal to hold, and very profitable before war broke out, but representing an investment in actions unforgivable. Even if secondary stock purchases do not directly flush a company with cash, by holding shares one literally owns a piece of that company. As a stockholder, one not only acknowledges that company’s right to existence, but seeks to profit from its success. Not even practitioners of the dismal science can be that indifferent.

Exxon-Mobile is not the Third Reich, but we first have to acknowledge that what divides us is not whether one can rightly divest from an ethically bankrupt institution, but where to draw the line separating the acceptable from the unforgivable. Divesting from every company that has even the smallest ethical infraction on its record is functionally impossible. However the ultimate arbiter of Cornell’s investments’ moral merit should not be Cornell administrators themselves. They have proven themselves to be opportunistic, inconsistent, and borderline incompetent, establishing a litmus test to serve the university’s “interests” without bothering to listen to what its own students want. If ever there were a responsibility to devolve to Cornell’s dilapidated student assemblies, it would be this.

Divestment campaigns will continue to be a powerful tool for any student activist, and rightly so. They do, however, in many ways represent a morally conscious university’s greatest fear: having to put its money where its mouth is. A university’s divestment sends a powerful signal even if it has a negligible financial effect, one that has the potential to grow into something more. Cornell should welcome such moral convictions. And for the tuition Cornellians pay, their university might at least respect them.