Responsible investment: The financial case

23 Jul

One of the common arguments made against responsible, or ethical, investment is that it is not affordable, or that the priority for the university’s endowment should be creating the greatest possible financial return.

We believe the university’s endowment should be invested in line with the shared goals of the entire university: to promote the public good through encouraging innovation and increasing and widening knowledge. We also believe that this is compatible with the university making a good and consistent financial return.

In fact, we think the case is stronger than this – evidence suggests that ethical investments are also good financial investments in the long term. A UN review of 20 academic studies into the relationship between ESG factors (Environmental, Social and corporate Governance, non-financial indicators which can be used to assess company behaviour) and portfolio performance has shown a positive correlation – in other words, that on balance more ethical funds do better.

The Responsible Investment campaign is calling on the University of Edinburgh to do a number of things to invest more ethically, including to divest from arms and fossil fuels. The moral reasons why the university must divest from these are explained on this page – but there is also increasing evidence that continuing to invest in fossil fuels is a serious financial risk.

With strong scientific evidence that avoiding runaway climate change will involve leaving most proven fossil fuel reserves in the ground, this means that the stock market valuations of fossil fuel companies are overvalued, as their valuations are based upon the amount of reserves they hold. Action in the future, governmental or otherwise, to counter the threat of climate change will make these reserves unuseable, and unsaleable – with financial consequences for these companies, and for investors. Some are even suggesting that this $4 trillion plus ‘carbon bubble’ will cause another financial crisis.

By continuing to invest in fossil fuels, the University of Edinburgh not only helps fund their continued extraction and exploitation, with disastrous consequences for the climate, but is also in effect betting on insufficient action being taken to tackle climate change.

Moreover, with evidence that climate change will have economic consequences in addition to its social and environmental ones, unmitigated climate change is likely to harm other investments the university holds as well.

The University of Edinburgh, a 420-year old institution, should be taking a long term view – and not risking its finances, its ethics, and the environment by continuing to invest in fossil fuels.

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