Last fall, Harvard University announced it would divest its endowment from the fossil fuel industry, becoming part of a wave. According to a list maintained by environmental groups, about 20 colleges announced divestment last year, including the California State University system, Dartmouth College, Amherst College, and the University of Michigan.

This year, that momentum seems to have slowed slightly—at least until an unexpected legislative breakthrough this month cleared the way for a federal climate bill. Experts say market changes may make colleges less willing to go "fossil fuel-free" in the short term, but the overall pressure to divest will not disappear and may even strengthen.

Stock market factors

One factor influencing the willingness to divest is the stock market. Christopher Marsicano, assistant professor of educational studies and public policy at Davidson College, said that when the market is high, colleges may find it easier to divest. This is not only because colleges can sell fossil fuel stocks at a better return when the market is high, but also because it is easier to gain support from stakeholders such as alumni.

In other words, the high stock market in 2021 may have contributed to the surge in divestment announcements.

"In financially prosperous years, it is very easy to announce major changes to the endowment," Marsicano said. "When the endowment is growing rapidly, you can divest, and even if some areas incur losses, market growth will offset them, making it easier to convince alumni or related parties."

CJ Ryan, associate professor of law at the University of Louisville, said that concerns about economic recession and rising fuel demand could, in turn, suppress institutional divestment, especially for those with above-average investments in fossil fuels.

"I predict that universities hesitant to divest may continue to wait and see, to ride out the current inflation curve and the (likely) recession," he wrote in an email.

Political pressure

Marsicano said some institutions may have chosen to divest but kept it quiet to avoid political confrontation. As sustainable investing grows, there has been a conservative backlash. For example, West Virginia and Texas have passed laws restricting state agencies from doing business with financial companies committed to divesting from fossil fuels. University donors may react negatively to divestment, especially in states with large energy industries.

Marsicano noted that financial managers are often reluctant to get involved in hot-button political issues. If they wanted to, they could divest quietly without drawing attention.

"It's a relatively easy thing to do over a long period without announcing it. We actually don't know how many schools have already divested," he said.

But the pressure on colleges to divest is unlikely to disappear. On one hand, student enthusiasm and activism seem unlikely to fade. On the other hand, the movement now has more data to prove that divestment is a safe and fiduciary-responsible choice.

Financial records

Amy Gray, senior climate finance strategist at Stand.earth, a nonprofit advocating divestment, said the divestment movement increasingly uses financial data and research findings because they have learned that fund managers and decision-makers respond positively to them.

"We hope they will act based on moral requirements, but often they value economic arguments more," she said. "Once you start talking about money, they listen and begin to change their practices."

A 2020 study co-authored by Ryan and Marsicano found that divestment did not negatively affect the value of college endowments. Last year, a report commissioned by the New York City Teachers' Pension System from financial firm BlackRock concluded that multiple strategies were "appropriate divestment approaches" for the fund.

"The energy industry is the only one facing serious questions about its long-term viability."

— Dan Cohn, global energy transition researcher at the Institute for Energy Economics and Financial Analysis

The growing number of financial companies and pension funds choosing to divest may also put pressure on colleges. Although higher education institutions may not view these entities as peers, the actions of well-known companies and funds could weaken colleges' ability to justify continued investment in fossil fuels on fiduciary grounds.

"We have passed the tipping point, and actions by some very serious investors show that divesting from fossil fuels is fully consistent with achieving divestment goals and fulfilling fiduciary duties," said Dan Cohn, global energy transition researcher at the Institute for Energy Economics and Financial Analysis. "The financial logic that underpinned divestment from the start has been recognized to some extent by those who are not motivated by climate moral concerns."

Environmental, social, and governance (ESG) investing, which focuses on stock risks unrelated to a company's balance sheet, is growing. As it expands, advocates point to the inherent financial risks of holding fossil fuel assets.

"The energy industry is the only one facing serious questions about its long-term viability," Cohn said. "Endowments should choose long-term winners, and the fossil fuel industry has a negative outlook."

Effectiveness

Finally, there is evidence that divestment makes it harder for energy companies to finance new fossil fuel projects. This suggests that, despite doubts about the impact of divestment in recent years, the movement may be achieving its stated goals.

Although institutions selling shares of fossil fuel producers does not immediately affect a company's ability to raise capital, commitments not to participate in new share issuances do. Energy companies have begun disclosing in financial filings the risks that divestment poses to their business.

"Private investors like endowments and foundations have structurally exited permanently, and this time it is truly different," said an anonymous energy industry executive in a survey by the Federal Reserve Bank of Dallas. "Despite high prices, pension plans are also hesitant to commit capital."

Announcements continue

Some institutions have still chosen to announce divestment decisions this year. Marsicano said religious institutions may find it easier than others to justify divestment because their unique missions can provide reasons for skeptics. In fact, this year Marquette University, a Jesuit institution, announced that its endowment would prohibit direct investment in fossil fuels.

"Our Catholic, Jesuit mission calls us, as an institution, to invest in our students' futures in ways that benefit the world," President Michael Lovell said in a March statement. "By prohibiting direct investment in fossil fuels and following best practices in responsible investing, Marquette is responding to Pope Francis's call: 'to reject the magical concept of the market, which suggests that problems can be solved simply by increasing corporate or individual profits.'"

The University of Maine System also announced this year that it would divest all its managed funds from fossil fuels. The system had previously reduced its fossil fuel investments to about 2%.

Trish Riley, chair of the system's board of trustees, said student activism and overall climate goals played a role in the decision. But the system's investment committee also conducted a long-term review to determine whether divestment aligned with fiduciary duty. The system conducted a comprehensive review of other institutions' divestment experiences.

"As a public institution, every penny matters, and every decision is public, so we wanted to be absolutely sure we weren't rushing into something that would harm our revenue-generating ability," she said. "We don't have the deep pockets that many private institutions do."

She added that students are grateful for this.

"This is the issue of our time," Riley said.