UC Fossil Fuel Divestment and a New Energy Portfolio

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UC Fossil Fuel Divestment and a New Energy Portfolio

Despite widespread support among student groups, faculty, and alumni, the Regents of the University of California rejected the call on September 17th to divest its holdings of fossil fuel related companies. Of the $91 billion UC endowment, a substantial $10 billion are attributed to investment in fossil fuels. [1] Some action was taken on the front of climate change as the assembly approved to invest $1 billion in renewable energy, energy efficiency, and agriculture solutions. [2] Despite some progress, the Regent’s financial preference for traditional carbon-intensive energy lacks the urgency needed when addressing one of humanities greatest challenges.

This failure to take bold action comes in glaring contrast to Stanford’s announcement in May that it would no longer invest in coal companies. [3] The UC system needs to follow suit, recognizing not only the school’s worldwide influence, but also understand the growing impetus and importance of commitment to alternative energy. Investment portfolios are a just a collection holdings with varying rates of return and riskiness. It is understandable that as the investment officers have found a suitable mix for their preferred level of risk and return, they would be reluctant to make abrupt changes. But change is coming, and under the wave of transformational social, technological, and economic movements only those who are proactive will survive.

As the parts per million of greenhouse gases in our atmosphere continues to rise and the effects of global climate change become more intensely felt, we need to use our creativity for all its worth in devising solutions. This does not include the safe adherent to old traditions (i.e. coal investment). We cannot afford any longer to focus solely on financial objectives. Rather, we need to aggressively support technologies that make sense from multiple perspectives, including environmental and economic considerations. And although the UC Regents may not be the biggest fans of fossil fuels, what better way to show support than with $10 billion.

Reflecting on the UC Regents concerns it becomes clear that divestment and transition towards a renewable energy portfolio is actually a matter of investment risk manifest in the market uncertainty for the technology! However, there are numerous examples of renewable and clean technology that have as of late become cost competitive with traditional energy sources. One concrete example is in the solar photovoltaic industry.

A recent report by consulting firm McKinsey & Company predicts an inflection point for the solar industry around 2016. [4] The inflection point occurs when solar photovoltaic becomes so cost competitive that capacity and adoption of the technology will grow at unprecedented levels. This prediction is driven by the rapid decrease in cost, the development of innovative manufacturing techniques, and changing public perception towards traditional energy. This sounds like an incredible investment opportunity, like a stock tip about Apple in 2001. This McKinsey & Company report is not a unique observation. Banking institutions such as Citi and Silicon Valley Bank have published recent reports deriving the same conclusions about the solar photovoltaic industry! [5,6]

Portfolio divestment and transition to renewables might still be held back by drawbacks in the technology. Such arguments might include solar’s intermittency problem or noise-related concerns for wind power. However we can look to Germany to quell any arguments about the technologies ineffectiveness. During summer months in 2013, energy from solar and wind accounted for over 30% of Germany’s production! [6] In just over five years Germany has completely transformed its energy industry. Doing so, they have provided the world with a case example of how the climate crisis can be addressed through courageous investment combined with technological innovation.

Looking to a more robust example, in 2013 nearly 100% of Iceland’s electricity demand was supplied by renewable resources. [7] Iceland has capitalized on its abundant potential for geothermal and hydro power, with the remaining source of fossil fuel usage coming from the transportation industry. Granted, the US does have much higher energy demands and given our natural resources and the inertia of public opinion it will be challenging to match such admirable performance. The US will need to diversify its energy sources, using a blend of solar, wind, biofuels, geothermal, and efficiency products backed by ambitious and forward-thinking investors.

We might now completely flip the conversation. Could it be possible that by remaining invested in fossil fuels, the UC Regents have exposed themselves to considerably more portfolio risk? A recent report by the Edison Electric Institute cites the considerable risk traditional utilities (e.g. coal or natural gas power plants) face by the disruptive threat of renewable energy. Given trends occurring in the energy industry, the UC Regents can do much better in addressing global climate change. It seems more than feasible that with some creativity, the UC system can make a commitment to divest from fossil fuels and invest in proven renewable technology. Let’s show the world that we mean business when it comes to saving the planet!

 

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