Kevin Milligan

The group UBCC350 has initiated a ‘Divest UBC’ campaign to promote the idea that the UBC endowment should divest from investments in fossil fuels. UBC Professors will be voting on this matter between January 26th and February 6th.

I have read their proposal. I don’t find it convincing.

I will vote ‘no’ in the referendum. Here are my reasons.

1. Divestment is ineffective. 

Assets are priced, more or less, on the value of their future income stream. If a large number of investors sells some asset for reasons unrelated to the value of the asset’s future income stream, the sellers may push the asset price down temporarily. But so long as there is one well-financed investor who wishes to take advantage of this mis-pricing, the asset price will soon be restored to its original level. This leaves no change in the financial position of the company, but leaves the original investors who have now divested in a worse position because of lost portfolio diversification possibilities. What’s more, this action has also provided a deep-pocketed financier (who by construction does not share the moral stance of the divestors) a profitable arbitrage opportunity.

Sometimes I take moral or political stances on things. I prefer to spend my time on moral or political measures that are effective to those that are not. Divestment is not effective.

2. Morality is diverse and reconciling that diversity views brings costs without benefits.

The UBCC350 proposal repeatedly stresses the opinion that burning fossil fuels is not moral. I don’t wish to change their mind. But I do hope they will acknowledge that other people have different moral positions which are in their minds equally logical, heart-felt, and honest as the moral position advanced by UBCC350. For example, someone deeply concerned about global warming may sincerely believe that running cars that burn fossil fuel is less moral than providing the fossil fuel that runs those cars. Another similarly-concerned person may believe that building and buying houses in lightly-densified suburbs is immoral. How sure is UBCC350 that fossil fuel companies alone are worthy of moral censure?

Because of differing moral sentiments, collective decisions about the management of portfolios become difficult. Why just oil or cars, some may ask, what about cigarettes? What about garage door companies that provide services to cigarette factories? I don’t mean to make light of the serious moral views that some may hold–only to emphasize that reconciling differing views is a non-trivial task.

Trying to reconcile differing moral views brings two consequences. First, faculty time and energy will be spent in never-ending debates about which set of moral values should prevail. Second, portfolio managers will have their time diverted from optimizing the risk-return balance of the portfolio to satisfying the moral constraints imposed on their investment choices. Neither of these consequences will lead to higher returns or lower portfolio risk, but both are costly in effort and time. Therefore, we lose by trying.

In my view, we can avoid the argument by setting aside moral concerns for the selection of assets in the endowment portfolio. So long as a company is obeying the law of the land, I believe it should be considered for investment.

If one wishes to exercise a moral view on one’s own investment account, that is one’s prerogative. In fact, a savvy investor could hold a short position in oil companies on his or her own account to perfectly offset the positions held in the collectively-managed account.

In light of these arguments, I believe portfolio managers for the UBC endowment should be tasked with the proper balance of risk and return, and nothing more.

Kevin Milligan, Associate Professor