The Ethics of Responsible Investing in the Age of Climate Change

Dr. Byron Williston, Department of Philosophy


16 February, 2017

There are compelling reasons for Laurier to begin the process of divesting from fossil fuels on purely self-interested, economic grounds. If, as looks increasingly likely, we are moving rapidly towards a future in which governments are going to constrain the carbon supply with the aim of reducing the flow of greenhouse gases to the atmosphere, then assets will likely be stranded. This is a fact prudent investors cannot lose sight of. You will, I am confident, receive submissions from others making this case in some detail, so I want to expand instead on the ethics of the issue.
Let’s begin by clarifying the meaning of ‘responsible’ investing. Note that ‘responsibility’ here cannot refer simply to what is prudent. Obviously, it is possible to act in ways that are both prudent and blatantly immoral. Think of a slaveholder ‘prudently’ investing in more slaves in order to expand his plantation. Nor can we restrict the meaning of the term to actions that are, as some have put it, ‘thoughtful and intentional.’ The problem with this suggestion is that these terms are too vague to act as substantive constraints on our behavior. And again, it is easy to think of thoughtful and intentional action that is obviously immoral (our slaveholder fits the bill). These concerns have led many to insist on the expanded label, ‘social responsibility’ when talking about such things as investment decisions. And there is widespread agreement that the core of socially responsible decision-making is a concern with ethics.
So what does ethically sound decision-making look like from an institutional standpoint in the age of climate change? Consider an analogy. Suppose a university were invested in a company that manufactured and sold land mines. Call the company Bury-A-Bomb (BB). Under pressure from anti-land mine activists BB decides that its acronym now stands for Beyond Bombs, though it still makes and sells these weapons (a tiny portion of the company’s profits is now to devoted to the heavily marketed care of land mine victims). I think most of us would agree that investing in BB, even after the makeover, is contrary to the intended spirit of socially responsible investing.
But is investment in fossil fuel companies morally different? I don’t think so, and here’s why. There are three key features of the commodity manufactured and sold by BB. First, it is (let’s suppose) a source of great financial returns for the company and its investors because the market for it is very robust. Second, when put into use the product causes terrible harm to innocent people. Third, much of this harm happens in the (possibly quite distant) future, when people accidentally step on the buried bombs.
All three points apply to a commodity in which Laurier currently invests, fossil fuels. First, demand for these products is still robust and therefore returns on these investments are still very good (though we should pay attention to the stranded assets arguments here). Second, the IPCC’s fifth report argues that climate change—produced by anthropogenic forcings such as the burning of fossil fuels—is now an unequivocal fact. Moreover, as former Chairman of the IPCC Rajendra Pachauri put it, the harms caused by climate change may “threaten the very social stability of human ystems.” Third, many of these harms will be visited on entirely innocent members of future generations.
So in the interests of rational consistency, if we are inclined to respond to the case of the hypothetical university by insisting that it divest from BB as quickly as possible, we should react the same way with respect to Laurier’s investments in fossil fuels. To resist this suggestion, we would either have to admit that we are simply not interested in rational consistency (a difficult position to defend) or that the two cases are, in fact, importantly dissimilar. If we take the latter option, then what are these allegedly important differences? That fossil fuels are deeply embedded in our economies in a way that land mines are not? True, but then alter the hypothetical case to stipulate that land mines are an integral commodity in the global marketplace. This revision does not—or should not—alter our moral reaction to the production and sale of this commodity. It may be possible to come up with some other important differences between the two cases (and I invite responses along these lines) but my hunch is that they will all fail.
Now, it might be suggested that the real problem here is one of scale. We can imagine that BB’s contribution to the problem of land mines is miniscule. Many other companies—some much larger than BB—engage in this business. Attacking BB’s bottom line through divestment will not halt, or even substantially diminish, the production and sale of land mines. By analogy, one often hears Canadian politicians and oil lobbyists saying that even with the oil sands running at full tilt, the Canadian contribution to global greenhouse gas emissions (GHGs) is a measly 2%. So, since nothing we do can fix the problem, why bother trying at all? Moreover, because other countries might not bother cutting their emissions, Canada could become a global ‘sucker’, losing the economic benefits of high emissions without substantially altering the larger problem for the better.
Laurier—a relatively small institution—could make a similar point about its investments in fossil fuels, as could every individual person on the planet. This, of course, is a classic collective action problem. Because nobody wants a dangerously warmed world, what looks to be rational from the standpoint of the individual person, institution, or country is profoundly irrational from the standpoint of the larger collective. This is a mental trap, and there are two points to make about it.
First, we should think of GHGs from the standpoint of stocks rather than flows. The scale argument just rehearsed thinks only of the flow of GHGs to the atmosphere. This is very convenient because climate change comes from billions of point sources. From any one of these, the problem is easy to dismiss because it is, by definition, a tiny fragment of the total. But if we think of the stock of GHGs things look different. This is because thinking of a stock of some substance leads naturally to thinking of the container in which that substance is stored. And from there we might wonder about the capacity of the container, particularly whether it might not be filling up. Assuming that bad things will happen if we overfill the container, we will want to ration the amount of the substance we are putting in the container. And now, every flow source must come under scrutiny in a way it did not when we were thinking about the flow alone.
The connection to GHGs in the atmosphere should be obvious. It has been suggested that to meet its Paris commitments, at least 75% of Canadian oil reserves must remain in the ground. From the standpoint of this task, our 2% contribution to the global flow of GHGs is an irrelevant statistic. What really matters is that the container, the atmosphere, is becoming dangerously full and that we must therefore set about rationing the carbon we are putting into it. In other words, we must begin the hard job of rapid decarbonization and all of humanity must come together to this end (even though the burdens will not be equally shared across the human population). We cannot afford free riders, those focused only on their paltry flows. And we have very little time to lose.
This brings me to the second point. People find themselves mired in collective action problems all the time. It’s a basic fact of social life. But we sometimes find ways out of them as well. Think, in this connection, of the infamous bystander effect. A group of people stands around watching something bad take place—an assault, for example — because each individual is afraid to take the initiative (or assumes that someone else will do so). The harm-causing behavior is stopped only when someone displays the courage required to confront the aggressor. The amazing thing is that once one or two people step up, more usually follow. Climate change is like that. Solving this problem requires us to step forward and act meaningfully even if nobody else is doing so. In particular, what the world desperately needs now is some institutional leadership on this issue. Many of us have deep-seated intergenerational and ecological concerns that are not currently reflected in the decisions and prerogatives of most of our institutions.
Laurier appears to be genuinely interested in sustainability issues. There is no reason to think that this concern is insincere. Yet the biggest environmental threat faced by our species at the moment is climate change and our collective addiction to fossil fuels is abetting this threat significantly. So how can Laurier genuinely claim that it is concerned about environmental sustainability while continuing to invest in these commodities? The contradiction is stark. Laurier is a relatively small institution and no decision it makes is going to change the world all by itself. But we have the opportunity to send a loud and clear message of hope and moral courage to the rest of the world by refusing to license the damage being done to the biosphere by the fossil fuel industry. Who knows what that decision could inspire?