M. Todd Henderson Makes the Case Against Fossil Fuel Divestment

Letter: Law School Professor Makes the Case Against Divestment

A petition is circulating among the faculty of the University of Chicago to “urge the University to divest from the fossil fuel industry.” As of now, it has over 109 signatures from professors across the University. This is a small part of a larger campaign spearheaded by Students for a Just and Sustainable Future (SJSF) to get universities out of the business of profiting from fossil fuels through divestment. The goal of these efforts is to put pressure on the stock price of fossil fuel companies and therefore force the firms to change their behavior.

No matter what your views are on the climate change debate, no rational person should support divestment. There is no evidence to demonstrate it will do anything to help the climate, and it will ultimately cost the University hundreds of millions of dollars—Swarthmore estimates it would cost their endowment $200 million over 10 years to divest. This is money that could be spent on research, scholarships, or perhaps best of all for the cause, reducing the University’s carbon footprint.

Here is why divestment won’t work: A central tenet of corporate finance is that demand curves for individual stocks are approximately horizontal. For most things we buy, demand curves slope downward. This means if we demand less, less will be supplied and at lower prices, but stocks are not like other products. The stock price is merely an estimate of the cash flows that ownership of the stock will produce in the future, and therefore is not determined by a “demand” for the stock. Unless the sale of stock conveys information to the market about the future cash flows, no individual sale can move the price.

Read more at The Chicago Maroon