April 22, 2015, Earth Day Gil Kemp and Members of the Board of Managers of Swarthmore College: We write to you as a small group of tenured faculty representing a range of responses to the recent Mountain Justice Sit-In. Some of us have signed the divestment letter from faculty1, others of us have not. We are both aware and respectful of the fact that the Board is charged with maintaining the fiduciary health and well-being of the College. We remain grateful for the ways in which we have been treated as partners in everything from the choice of a new president to the shaping of curriculum. And, in this particular moment, we reach out to you to partner in finding a resolution to what appears to be a stalemate between the Board and Swarthmore Mountain Justice. We sense that you each may be closer to common ground than is believed, and we offer ourselves as a conduit for communication and resolution. This springs sit-in has concluded, but the students remain poised for fresh action in the fall semester. We would like to help resolve this impasse before the arrival of our new president. Clearly, climate change is a multifaceted crisis, engaging many disciplines in overlapping ways. Thats one of the things that has brought us together; we represent racial, disciplinary, gender, and age diversity. We have a collective investment of more than 130 years at the College, and our love of and respect for Swarthmore is deep and enduring. We recognize that there are scientific, economic, and moral issues at stake, and that both our students and our Board are engaged with these issues. Indeed, it is hardly surprising that members of one of the most thoughtful and extraordinary liberal arts colleges in the country would be part of a broader self-reflection and an increasingly international social movement. Our point in this letter is not to settle the issue of how we reduce emissions or sequester carbon, because it is clear to us that there is the will to do both at Swarthmore. In response to the rising and irrefutable costs of climate change, Swarthmore has been steadily and impressively reducing our own carbon footprint. Your support of hiring a Sustainability Director, erecting buildings that are LEED-certified and better, and your sponsorship of the Sustainability Charrette that you and our interim president attendedall of these choices show that you care about the issues that climate change raises, as does the community as a whole. Divestment has been a more fraught issue. The stalemate is often framed this way: on the one side are those who are committed to defending the endowments role in financial support of the College and maintaining its independence from political activism; on the other side are those who believe investment is not politically or morally neutral and who want to use the endowment to make a political, symbolic statement. Moral arguments can be and have been invoked in defense of both sides. But we see a common ground shared by these two positions: in particular, both sides are concerned with reducing intergenerational inequity, either by maintaining financial resources to support future students or by influencing larger movements working to reduce the intergenerational inequalities associated with climate change.

1 http://swatmj.org/faculty/

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In light of this common ground, we offer a compromise proposal. We ask you to make a visible gesture of support for a rapid transition away from fossil fuels: the declaration of the separately-held assets of the endowment to be free of fossil fuel stocks. This would not require upsetting the arrangements we have with managers of our commingled funds and would constitute an appropriate exercise of the greater control we maintain over our separately-managed accounts. The limited divestment proposed here would affect roughly 0.3 percent of the endowment; according to Greg Brown, there are currently holdings of only three equity stocks in our separately-held assets listed in Carbon Trackers 200 fossil fuel companies. This very modest compromise proposal works to support both sides, by preserving the independence of the vast majority of the endowment while offering a small yet potent symbolic gesture of support to a broader social movement working, in response to an unprecedented global challenge, to encourage economic and political policies to reduce striking intergenerational inequities. Some Managers might still object that acting on this proposal would create a slippery slope precedent, inviting a wide range of political divestment campaigns. While some of us would be pleased to see the Board engage ethical investment concerns more broadly, we all agree that this proposal stands apart from broader discussions of investment on two grounds, both of which call for the College to act in self-defense. First, the ongoing production of climate deniala deliberate campaign of misinformation and anti-rational discourseby fossil fuel companies such as Southern Co. and the Koch brothers holdings strikes at the heart of the Colleges educational mission. Second, climate change is all-pervasive: unlike apartheid, a practice localized in a foreign state, climate change will affect the functioning of the College and the lives of all our future students. Even if the College becomes carbon-neutral by 2025 (an aspirational goal we wholeheartedly support), as a carbon-neutral island in a rapidly warming world, we will still suffer extreme weather events, strained governmental resources, and loss of some environmental services. Only by supporting global action toward reduced emissions can we protect the College from some of these negative future impacts. With your help, we are increasing sustainability efforts on campus, but it is equally important to promote the Colleges long-term physical and institutional survivalfiduciary and otherwise by reducing the influence of fossil fuel companies that delay positive climate action. We believe that our commitment to intergenerational equity demands decisive action to participate in the movement of organizations and institutions that will protect the education of future Swarthmore students. Thank you for your willingness to consider this alternative. We append here a longer document that we presented to the faculty that outlines the issues as we see them. Betsy Bolton, Chair, Program in Environmental Studies; Professor, English Literature Joy Charlton, Executive Director, The Lang Center for Civic and Social Responsibility;

Professor, Sociology Carr Everbach, Chair, Department of Engineering; Professor, Engineering Carol Nackenoff, Chair, Department of Political Science; Professor, Political Science Lee Smithey, Chair, Program in Peace and Conflict Studies; Associate Professor, Sociology Mark Wallace, Chair, Interpretation Theory; Professor, Religion Sarah Willie-LeBreton, Chair, Department of Sociology and Anthropology; Professor, Sociology

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Question for Discussion at Faculty Meeting 17 April 2015 Should the Faculty request that the Board of Managers change its approach to the investment of that portion of the endowment that consists of separately managed funds, removing investments in fossil fuel industries and reinvesting in energy efficiency and renewables? Separately managed funds, compared to commingled funds, constitute approximately $250 million of the endowments approximately $1.9 billion total; an estimate of the amount that would be moved and reinvested is $5 million. We offer this proposal as a compromise suggestion that steers a middle course between the request by the student movement for divestment that the College completely divest from all of its fossil fuels holdings, on the one hand, and the Board of Managers decision not to do so, on the other. We envision this third-way proposal as a reasonable step to explore the impact of fossil fuel divestment financially while acknowledging the direct, existential threat of the fossil fuel industry to the well-being of Earth in general and the College in particular. [Note: During its April 17 meeting, the faculty adopted the following resolution by majority vote: Resolved, the Faculty requests the Board of Managers announce divestment from fossil fuels on the Carbon Tracker2 200 within separately managed funds, with reinvestment in energy efficiency and renewables.] Executive Summary World leaders and climate scientists agree that we are facing the end of the world as we know it unless we limit greenhouse gas emissions. To ensure climate stability, the working consensus is that current global temperatures cannot rise more than 3.6F (2C). To stay within this threshold, the International Energy Agency estimates that global use of coal must peak this year; global use of oil must peak in 2020; use of gas can continue to rise briefly before leveling off in 2025.3 Unfortunately, according to Michael Greenstone 91, the Milton Friedman professor at the University of Chicago, the world economy is on a disastrous glide path to raising global temperatures by an astonishing 16.2F (9C) in the near term if we continue to use all of the known reserves of fossil fuels in the ground.4 We do not have decades to transform our global economy: that transformation needs to happen in the next five to ten years. If we are to preserve the best likelihood for human flourishing in the future, we must begin dramatically reducing global carbon emissions now. Not in a decade or so. Now. Transformation of the global energy system requires investments of trillions of dollars: at least $8 trillion in energy efficiency, and $7 trillion in renewables (and probably much more). The markets alone have no mechanism for generating that level of investment, and government policies are lagging well behind the urgency of the issue, in part for reasons discussed below. What can we do to help encourage large-scale investment in the systems we need now? 2 http://fossilfreeindexes.com/research/the-carbon-underground/ 3 Original citation: https://www.environmental-finance.com/content/news/$300bn-of-fossil-fuel-assets-risk-being-stranded-by-2035-says-iea.html 4 Michael Greenstone, If We Dig Out All of Our Fossil Fuels, Heres How Hot We Can Expect It to Get, New York Times (8 April 2015). http://t.co/3SCvseeIuF

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We are very grateful that the Board has exercised the foresight to bring the BEP project up to the highest level of sustainable building and that the Board is considering other sustainability-related initiatives. Yet remaining below 3.6F (2C) requires a reduction in emissions on a much larger scale than the College can accomplish on its own. Those Swarthmore students coalescing in the social movement for divestment push us to consider divestment as a channel through which to bring about necessary change. Reasonable people can have different views on the efficacy and desirability of divestment as a strategy for achieving large-scale emissions reductions; we discuss many of the arguments pro and con below. One central question is the cost of divestment. Discussions of divestment often look back to a 2013 summary of the cost of divesting from commingled funds ($856 million @ 1.7% opportunity cost from loss of higher returns x 10 years = $264.4 million). Many students, faculty, and board members look at that price tag and decide it is too high. But is that a reasonable figure? Our proposal specifies divestment within separately managed accounts -- those accounts containing Swarthmore-only assets (in contrast to commingled accounts which pool assets from multiple investors) -- currently about $250 million. What percentage of those funds are actually invested in fossil fuels? According to John Fullerton, most US funds have roughly 2% exposure, an assessment that aligns with a 2013 report on divestment campaigns by the Smith School of Enterprise and the Environment at the University of Oxford.5 One might then estimate the funds to be divested as roughly $5 million. $5 million @ 1.7% opportunity cost from loss of higher returns x 10 years = $850,000 if one accepts the premise that in the present and future fossil fuels will continue to be safe investments. Given our rapidly shifting carbon environment, some of us support divestment for financial reasons, others for politically strategic reasons, and/or because its the most visible social movement working to limit carbon emissions. Others, such as Academics Stand Against Poverty (ASAP), a global group of roughly 2000 researchers working on poverty and development, make a specifically moral argument:

At this moment in history, it is paradoxical for universities to remain invested in fossil fuel companies. What does it mean for universities to seek to educate youth and produce leading research in order to better the future, while simultaneously investing in and profiting from the destruction of said future? This position is neither tenable nor ethical. [] As academics, we are in the privileged position to understand the risks posed by climate change and to make powerful statements in support of action.6

5 Stranded Assets and the Fossil Fuel Divestment Campaign: What Does Divestment Mean for the Valuation of Fossil Fuel Assets? 2013 http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets/SAP-divestment-report-final.pdf 6 http://www.theguardian.com/environment/2015/apr/07/top-academics-ask-worlds-universities-to-divest-from-fossil-fuels

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We see this compromise proposal as designed to counter in some small measure the drastic blow climate change delivers to the Colleges deeply held values of intergenerational equity and educational access. Climate change disrupts the lives of the poor more than it affects the lives of the rich: if we are to offer our resources to worthy students of all backgrounds, we should recognize that climate change will increasingly prevent worthy students from marginalized communities from acquiring the preparation they would need to arrive here, much less thrive here. This proposal includes a series of appendices to attempt to facilitate a well-grounded faculty discussion of these issues:

1. Diagnostic test: do we suffer from stealth denial? (includes mock climate quiz) 2. Climate change as a multiplier of inequality 3. Climate science crash course: the meaning of the numbers, the carbon budget, range of

projections, limits and costs of adaptation, climate changes effect on the college 4. Some arguments against and for divestment

Con: politics, inefficacy/distraction, costs and risk, impeding change Pro: responsible fiduciary action (wasted capital, stranded assets with/without governmental action, revenue risks), building a social movement, moral imperative

5. Political money, subsidies, climate denial 6. Beyond divestment: recognize social cost of carbon; invest in own energy efficiency,

direct investment in community, venture capital focused on renewables, other strategies.

Betsy Bolton, Chair, Program in Environmental Studies; Professor, English Literature Joy Charlton, Executive Director, The Lang Center for Civic and Social Responsibility;

Professor, Sociology Carr Everbach, Chair, Department of Engineering; Professor, Engineering Carol Nackenoff, Chair, Department of Political Science; Professor, Political Science Lee Smithey, Chair, Program in Peace and Conflict Studies; Associate Professor, Sociology Mark Wallace, Chair, Interpretation Theory; Professor, Religion Sarah Willie-LeBreton, Chair, Department of Sociology and Anthropology; Professor,

Sociology

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Appendix 1 Diagnostic: do we suffer from stealth denial or climate denial 2.0? We dont imagine any members of the College community actively deny the reality of anthropogenic climate change, but we probably all participate in some form of stealth denial: continuing to live in the manner to which we are accustomed, as our world continues on a path of catastrophic warming. Climate change: thats someone elses job. We dont bother to track the science or the finance: better-qualified people are working on these issues. Its in their hands. The only trouble with this approach is that climate change is such a massively unprecedented challenge, with such a troubled history, that we need all hands on deck. If youre not working on climate change in one form or another, in your personal or your professional life, youre engaging in some form of stealth denial. Climate science and finance: Heres a challenge quiz, just for fun. Try to answer the questions below, as one way to assess whether youre paying attention to the greatest issue of our time. If you can answer all these questions, you are climate literate

(and we hope you are taking action); if youre puzzled by 2-3 questions, youre sneaking into the stealth zone; if you find yourself struggling to answer 4-5 of them, consider yourself stealth intensive; if youre stuck on 6-7, you win the stealth supreme label. Answers can be found in the relevant appendices.

1. What is a global carbon budget? (Whats the concept and what is estimated to remain of the budget today?)

2. CCS: What is it? What are potential strengths and weaknesses? At what scale has it been implemented?

3. How consistent are the effects of climate change across different regions and latitudes? What does CO2e (or eCO2) stand for? Whats a Gt?

4. What dollar figure would you give as an estimate of current costs of climate change? Projected costs as of 2050? Projected costs by the end of the century in a 2C warmer world? A 4C warmer world?

5. What is the lowest degree of warming we can now attain, according to current estimates? 6. What is capex? What is a stranded asset? 7. How much did fossil fuel exploration and development receive in G20 government

subsidies in 2013?

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Appendix 2 Climate change: a multiplier of inequality In 2014 Secretary of Defense Chuck Hagel called climate change a threat multiplier.7 We would add that climate change is a powerful multiplier of inequality. The most recent report of the UN Intergovernmental Panel on Climate Change (IPCC) makes both claims clearly though blandly: Climate change will amplify existing risks and create new risks for natural and human systems. Risks are unevenly distributed and are generally greater for disadvantaged people and communities in countries at all levels of development. Anthropogenic global warminga result of greenhouse gas emissions produced through industrial energy processes developed in and a result of the Industrial Revolutionis inseparable from the history of colonialism and imperialism, so climate change is a postcolonial legacy. At the same time, as the World Bank notes, the geography of climate change collaborates with patterns of urban development to ensure that the distribution of impacts is likely to be inherently unequal and tilted against many of the worlds poorest regions, which have the least economic, institutional, scientific and technical capacity to cope and adapt.

The situation is complicated by the fact that carbon-intensive development is high in the BRIC nations (Brazil, Russia, India, China), all of whom have reasons to resent European and American imperialism, and to resist what feels like neo-colonialism, but the worst conditions will be endured by those in sub-Saharan Africa, South and Southeast Asia:

As the coastal cities of Africa and Asia expand, many of their poorest residents are being pushed to the edges of livable land and into the most dangerous zones for climate change. Their informal settlements cling to riverbanks and cluster in low-lying areas with poor drainage, few public services, and no protection from storm surges, sea-level rise, and flooding. [...] Climate change will increasingly threaten the food supplies of Sub-Saharan Africa and the farm fields and water resources of South Asia and South East Asia within the next three decades, while extreme weather puts their homes and lives at risk.8

All of this makes political negotiations over emissions reduction extremely complex. And, as the IPCC notes, the postcolonial is here, too, in our own region: when Venezuelas Hugo Chavez offered free heating oil to poor American households (including families in Philadelphia), he was making the point that marginalized populations in the United States are effectively citizens of the global South. How can we improve educational access for underrepresented and underserved populations if we accede in the dramatic worsening of their public health, economic opportunities, education, and life expectancy? As Academics Standing Against Poverty (ASAP) notes, climate change will wipe out crucial gains in development and poverty reduction in the global South, and will trigger food shortages,

7 http://www.acq.osd.mil/ie/download/CCARprint_wForeword_c.pdf 8 http://www.worldbank.org/en/news/feature/2013/06/19/what-climate-change-means-africa-asia-coastal-poor

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conflict, epidemic disease, and mass displacement. The current response by the international community is inadequate to prevent this from happening.9 Appendix 3: Climate science crash course In talking about climate change among ourselves, we have been struck by how shallow our shared understanding of climate change actually is. Because we believe climate change to be the overriding issue of this centurypredetermining the resources available for human survival and flourishingwe also believe we need to take the time for a communal recitation of the science, economics, politics, and values relevant to climate change and its risks. We expect anyone confident in his or her grasp of the scientific, political, and social issues will choose to skim or skip familiar material. Global scientific consensus on climate change is detailed by the Fifth Assessment Report of the United Nations International Panel on Climate Change (IPCC). The IPCC offers the most exhaustive survey of global science on climate change; the Fifth Assessment Report (AR5) was compiled by a group of 833 scientists around the world (see appendix 1). The report includes overwhelming evidence of anthropogenic (human-created) CO2 emissions drastically changing the carbon cycle of the planet. CO2 is not the only greenhouse gas affecting climate change, but it is the most prevalent (after water vapor) and the most persistent. Note that cement and flaring also constitute significant components of CO2 admissions, in addition to fossil fuels.

Why all the focus on carbon? What about other greenhouse gases (GHG)? Carbon dioxide is the longest-lasting and most prevalent of the greenhouse gases, thus it has the greatest overall impact on global warming. Each gas is assigned a Global Warming Potential (GWP) which reflects its persistence in the atmosphere and its absorption of energy. Carbon dioxide has a GWP of 1. Methane lasts only 12 years in the atmosphere (on average) before reacting with hydroxyl molecules to form CO2 and water (which of course leaves CO2 in the atmosphere): methanes

9 http://www.theguardian.com/environment/2015/apr/07/top-academics-ask-worlds-universities-to-divest-from-fossil-fuels

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GWP is 21. Leaks from shale gas production are of concern for this reason (amounts of leakage are disputed), but methane is also released from coal mining, cattle feedlots, and landfills.10 Nitrous oxide, produced by fossil fuel consumption and agriculture, has a GWP of 310. Fluorinated gases have variable GWPs ranging from 140 to a shocking 23,900. They are used to substitute for ozone-depleting substances (chiefly as refrigerants: make sure your air-conditioner is not leaking!), in the production of aluminum and magnesium and semiconductors, and in electrical transmission and distribution. The proportions of US greenhouse gas emissions in 2012 are shown below left; sources of CO2 below right:

What do all the carbon numbers mean? The carbon cycle includes both flux (CO2 emissions) and stocks (atmospheric carbon). Emissions are typically measured in billions of metric tons or gigatons (Gt); atmospheric carbon is measured in parts per million (ppm). 350.org took its name from the attempt to keep atmospheric carbon below 350 ppm; on April 1, 2015, atmospheric carbon was 400.88 ppm; to stay below a 2 degree Celsius average temperature increase, the global community now aims to limit atmospheric carbon to 450 ppm, though the IPCC frequently articulates its goals as a range (e.g., from 430 to 530 ppm).11 10 http://arstechnica.com/science/2014/02/methane-burned-vs-methane-leaked-frackings-impact-on-climate-change/2/ 11 Each year when the terrestrial vegetation of the Northern Hemisphere waxes and wanes in vigor along with the seasons, it removes considerable CO2 from the atmosphere in its productive growing phase, while it returns CO2 to the air when it dies and decomposes. This phenomenon creates a seasonal ripple in the atmosphere's CO2 concentration, as it drops a few ppm when land plants are growing vigorously and rises a similar amount when the majority of these plants are senescing. Over the past forty years that this seasonal oscillation of the air's CO2 content has been accurately measured, it has been noticed that the amplitude of the oscillation has been growing in size. In fact, as we note in our mini-review of the Amplitude of the Atmosphere's Seasonal CO2 Cycle, this once-a-year "breath of the biosphere" has risen in strength by approximately 20% over the last four decades. http://www.co2science.org/subject/s/summaries/seasonalco2.php

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As the chart on the left below indicates, however, actual temperature rise is not a single line but a band registering regional variation. Even the best-case scenario of a 1.5 degree Celsius average temperature rise will involve some regions experiencing more than a 2-degree rise. The globally agreed 2-degree Celsius limit will expose certain regions to temperature increases of 3 degrees and more, and unmitigated CO2 emissions will produce temperature increases of 6-7 degrees Celsius in some regions by the end of the century.

Carbon budget: The IPCC suggested in September 2013 that in order to have a two-thirds chance of limiting global warming to 2 degrees centigrade, we have to limit CO2 emissions to no more than a trillion tons since 1860. By 2011, we had already emitted 515 billion tons. That leaves 485 GtCO2 left to emitfor a two-thirds chance of staying below average warming of 2 degrees Celsius. This is known as the carbon budget. Scientific projections following the IPCC cite carbon budgets ranging from 485 GtCO2 down to 250 GtCO2. The range of projections varies according to policy assumptions: should we limit other greenhouse gasses? Should we engage in massive reforestation? And so on.12 We are currently using roughly 36 GtC02 per year, increasing at a rate of 2-3%. At current rates, depending on which carbon budget you select, we will burn through our allowance in the next twenty to twenty-five years.13 12 A useful overview is available at http://e360.yale.edu/feature/what_is_the_carbon_limit_that_depends_who_you_ask/2825/ 13 Carbon dioxide (CO2) emissions from fossil fuel burning and cement production increased by 2.3% in 2013, with a total of 9.90.5 GtC (billion tonnes of carbon) (36 GtCO2) emitted to the atmosphere, 61% above 1990 emissions

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What will happen if we do nothing? What will happen if we drastically reduce our emissions? The IPCC has explored four major scenarios, or projections of what will happen under four different approaches to mitigation (efforts to reduce CO2 emissions): RCP2.6 represents the most aggressive mitigation, RCP8.5 represents no mitigation efforts beyond present practices. If we limit emissions drastically, the near future will look like the left-hand images of the globe in the image below; if we fail to change emission patterns, the right-side images represent projected conditions in roughly 2100. In every case, we will experience more extreme weather events, more precipitation in some regions and more drought in others, increased food and water insecurity with resulting increase in conflict over basic needs. The World Bank estimates 20% decline in water availability with a 2C rise in average temperature; 50% decline with a 4C rise.14 These effects will hit the Swarthmore campus directly, as it will the hometowns of our students. Economic and social stresses are likely to increase, affecting every aspect of the College (including its finances).

(the Kyoto Protocol reference year). Emissions are projected to increase by a further 2.5% in 2014. In 2013, the ocean and land carbon sinks respectively removed 27% and 23% of total CO2 (fossil fuel and land use change), leaving 50% of emissions into the atmosphere. The ocean sink in 2013 was 2.90.5 GtC, slightly above the 2004-2013 average of 2.60.5, and the land sink was 2.50.9 GtC slightly below the 2004-2013 average of 2.90.8. Total cumulative emissions from 1870 to 2013 were 39020 GtC from fossil fuels and cement, and 145 50 from land use change. The total of 53555GtC was partitioned among the atmosphere (2255 GtC), ocean (15020 GtC), and the land (15560 GtC). GlobalCarbonProject.org. Posted September 21, 2014. 14 http://www.worldbank.org/en/topic/climatechange/publication/turn-down-the-heat

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What about a middle ground? Cant we just burn our carbon reserves more slowly? If we could completely stop emitting CO2 into the atmosphere (flux), the overall stock of atmospheric CO2 would remain high for a period of time ranging from 50 years to hundreds of thousands of years. Researchers estimate that roughly 50 percent of the net anthropogenic pulse (sustained but temporary increase in CO2 flow) would be absorbed in the first 50 years, and about 70 percent in the first 100 years. Zeke Hausather notes that Absorption by sinks slows dramatically after that, with an additional 10 percent or so being removed after 300 years and the remaining 20 percent lasting tens if not hundreds of thousands of years before being removed. As University of Washington scientist David Archer explains, this long tail of absorption means that the mean lifetime of the pulse attributable to anthropogenic emissions is around 30,000 to 35,000 years. Even 10 percent of the anthropogenic carbon pulse has the capacity to produce changes in sea chemistry and seawater rise.15 Cant we just adapt?

15 http://www.yaleclimateconnections.org/2010/12/common-climate-misconceptions-atmospheric-carbon-dioxide/

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Thats what human beings are good at: adapting and thriving in challenging situations, right? In fact, no matter how hard we work to mitigate climate change, we will also have to be adapting to its challenges and risks. The IPCC has been criticized for underestimating climate change risks, so the following assertions should be considered conservative predictions for the best possible, most mitigated climate future:16

Surface temperature is projected to rise over the 21st century under all assessed emission scenarios. [H]eat waves will occur more often and last longer, and [] extreme precipitation events will become more intense and frequent in many regions. The ocean will continue to warm and acidify, and global mean sea level to rise. {2.2}

Climate change will amplify existing risks and create new risks for natural and human systems. Risks are unevenly distributed and are generally greater for disadvantaged people and communities in countries at all levels of development. {2.3}

Many aspects of climate change and associated impacts will continue for centuries, even

if anthropogenic emissions of greenhouse gases are stopped. The risks of abrupt or irreversible changes increase as the magnitude of the warming increases. {2.4}

Substantial emissions reductions over the next few decades can reduce climate risks in

the 21st century and beyond, increase prospects for effective adaptation, reduce the costs and challenges of mitigation in the longer term and contribute to climate-resilient pathways for sustainable development. {3.2, 3.3, 3.4}

As Michael Oppenheimer, a Princeton University geosciences professor and contributing author to the [IPCC] report, put it, The window of opportunity for acting in a cost-effective way or in an effective way is closing fast. 17 The dramatically rising cost of adaptation and remediation may be seen in a recent report (April 2015) by Bloomberg and Paulsons Risky Business on the effects of climate change in California.18 Some of the risks applicable to the first half of the century were listed as follows: Changes in the timing, amount, and type of precipitation in California, which could lead to

increased drought and flooding and put the reliability of the states water supply at risk

Widespread losses of coastal property and infrastructure due to sea-level rise along the California coast (If we continue on our current path, between $8 billion and $10 billion of existing property in California will likely be underwater by 2050, with an additional $6 billion to $10 billion at

16 http://www.washingtonpost.com/blogs/wonkblog/wp/2014/10/30/climate-scientists-arent-too-alarmist-theyre-too-conservative/ 17 http://www.washingtonpost.com/national/health-science/effects-of-climate-change-irreversible-un-panel-warns-in-report/2014/11/01/2d49aeec-6142-11e4-8b9e-2ccdac31a031_story.html 18 http://riskybusiness.org/uploads/files/California-Report-WEB-3-30-15.pdf

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risk during high tide. Rising tides could also damage a wide range of infrastructure, including water supply and delivery, energy, and transportation systems.)

Shifting agricultural patterns and crop yields, with distinct threats to Californias varied crop mix of fruits, vegetables, nuts, and other highly valuable commodities (For example, the Inland South region will likely take an economic hit of up to $38 million per year due to cotton yield declines by the end of the century.)

Increasing electricity demand combined with reduced system capacity, leading to higher energy costs (The Inland South region will be the hardest hit, with total energy costs likely to increase by up to 8.4% in the short term and as much as 35% by end of century.)

Higher heat-related mortality, declining labor productivity, and worsened air quality (7,700 additional heat-related deaths per year by late century; with 30% of California workers in high risk industries that are vulnerable to high temperatures, labor productivity is likely to decline across the state; higher temperatures and more frequent wildfires increase particulate air pollution)

Many of these costs are hard to quantify,19 but they loom large, overshadowing the funds available to a state budget or federal budget. And this is the Golden State.20 What does climate change mean to the College? Even if the global community radically reduces emissions starting tomorrow, future generations of students will experience negative impacts of climate change. Some of our students had homes and communities shattered by Katrina or Sandymore will share such experiences as extreme weather events increase. As we engage more international students, the exposure of our student body to risks from climate change will increase. As we engage more first-generation college students, their exposure and that of their families will increase. In general, the college 19 The EPA estimates the social cost of carbon at $37 per ton in 2015. (This suggests that as we burn 36+ billion tons this year, we will be creating global social costs of $1.3 trillion.) A recent study out of Stanford proposes the cost should be much higher: $220 per ton. (This suggests a global social cost of 2015 CO2 emissions of around $8 trillion.) The Stanford study includes in its Integrated Assessment Model (IAM) recent empirical findings suggesting that climate change could substantially slow economic growth rates, particularly in poor countries. http://news.stanford.edu/news/2015/january/emissions-social-costs-011215.html 20 The IPCC Working Group 3 report notes a wide range of possible costs, figured in percentage of reduced consumption, depending on how quickly we move to mitigate climate change. The best case scenario would require holding CO2 to 450 ppm in 2100: in that case, the cost would be 1.7 % reduction of consumption in 2030, 3.4% in 2050, 4.8% in 2100; with an annualized reduction in consumption growth rate from 2010 to 2100 of 0.06%. Delaying mitigation to 2030 increases costs up to 37%. [www.ipcc.ch/pdf/assessment-report/ar5/wg3/ipcc_wg3_ar5_summary-for-policymakers.pdf] The White House in 2014 noted that damage estimates remain uncertain, especially for large temperature increases, [... and] the costs of climate change increase nonlinearly with the temperature change. Based on Nordhauss (2013) net damage estimates, a 3 Celsius temperature increase above preindustrial levels, instead of 2, results in additional damages of 0.9 percent of global output. To put this percentage in perspective, 0.9 percent of estimated 2014 U.S. GDP is approximately $150 billion. The next degree increase, from 3 to 4, would incur additional costs of 1.2 percent of global output. Moreover, these costs are not one-time, rather they recur year after year because of the permanent damage caused by increased climate change resulting from the delay. https://www.whitehouse.gov/sites/default/files/docs/the_cost_of_delaying_action_to_stem_climate_change.pdf, pp. 10-11

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community, like the population as a whole, will suffer (but suffer unevenly) various economic and health constraints resulting from climate change. Physically, the campus itself will suffer more frequent extreme precipitation events, affecting buildings and other infrastructure, as well as student safety. More frequent flooding will increase contamination risks even for filtered drinking water due to increases in temperature, salinity, sedimentation, concentrations of pollutants, etc. Rising temperatures will shift energy costs from heating to cooling, though winters may also be colder and/or longer due to the slowing and destabilization of the Gulf stream; managing heating and cooling will become more difficult and expensive. Food insecurity will increase with droughts and flooding. Disruption of energy supply through the grid becomes more likely with increase in extreme weather events. These projections represent local applications of high confidence projections included in the Synthetic Report of the IPCC AR5. If we are to counter these pervasive intergenerational inequities, projected even under the IPCCs most aggressive mitigation scenario, we must prioritize more desirable future scenarios over short-term profits. Furthermore, as we describe in more detail below, climate change is starting to have a significant impact on financial markets and investments, producing new risks that will affect the colleges investments and financial resources. And the necessary transition to a low-carbon economy is likely to produce political and social upheaval which may also have unforeseen effects beyond their immediate contexts. Given the changes now visible on the horizon, and knowing that climate change is bringing other, as yet unforeseen changes, we argue that protecting the future of the College and our goal of intergenerational equity requires us allthe Board of Managers, the administration, faculty and staff, interested students and alumnito pursue immediate and significant mitigation of climate change on all fronts. Appendix 4 Divestment: a symbolic and political gesture Supporters and opponents of divestment have generally agreed that divestment is a symbolic gesture rather than a direct attempt to reduce the profitability of fossil fuel companies. Since most of the worlds fossil fuel reserves are held not by publicly-traded companies but by national companies, even if the price of fossil fuel company stocks were to fall in response to the divestment campaign, that market shift would have no direct influence on the oil reserves held by OPEC, Russias Gazprom, Venezuela, and others. Opponents of divestment argue diversely that divestment is 1) inappropriately political; 2) an empty, ineffective strategy; 3) costly and risky; 4) a possible obstacle to development of mitigation strategies. Supporters of divestment argue that it is 1) a responsible fiduciary action, 2) supportive of a growing social movement, and 3) a moral imperative.

Arguments against divestment Politics: Some academics (such as the NYU working group on divestment) argue that political action or speech is not part of an academic mission and that divestment is inappropriate on that basis

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alone.21 Robert Knox, Chair of the Board of Trustees of Boston University, believes that divestment should be considered only when the social harm caused by the actions of the firms in the asset class is clearly unacceptable, which rather begs the question of what one considers clearly unacceptable.22 The Boston University Board of Trustees do acknowledge the following as one goal of the University: to create an environment in which an academic community can productively consider, discuss, and debate a variety of viewpoints on social and political issues and that encourages freedom of enquiry. We applaud this statement of engagement with the larger physical, political, and social environment. To us, as to other academics and fiduciaries, the critical challenges posed by climate change makes political speech or action toward a less drastically impaired future seem appropriate; indeed, excessively close alignment between fossil fuel companies and government leaders (discussed below) makes political engagement in our global future urgently necessary. Inefficacy: Many critics of divestment object not to the politics of the movement but rather to what they see as its inefficacy. Albert Stavins of the Harvard Kennedy School, writing in The Wall Street Journal on November 24, 2014, put this argument against divestment very concisely:

If divestment would at best be a symbolic action, without direct and effective financial impacts on the industryor, more important, on global CO2 emissionsthen a major problem arises. Symbolic actions often substitute for truly effective actions by allowing us to fool ourselves into thinking we are doing something meaningful about a problem when we are not.23

For some, more specifically, the focus on production rather than consumption is a dangerous distraction from the real work of limiting consumption. Like Stavins, we worry about the lack of direct action on global CO2 emissions, and we call on members of the College community to continue pursuing all possible paths to reducing emissions on campus, in the region, and more broadly, irrespective of any decision taken on divestment. Costs and risks: Managers may worry about potential costs and risks associated with divestment. Transaction costs are frequently mentioned: immediate full divestment of the endowment would require redeeming and reinvesting the bulk of the portfolio in order to accomplish divestment of a much smaller fraction of shares and funds. We would pay transaction fees for this wholesale redemption and reinvestment, taking on otherwise unnecessary costs, and the College could lose access to fund managers it strongly wishes to retain. One way to minimize the transaction costs associated with divestment and maximize the social benefits would be to divest only separately managed funds while asking managers of commingled funds to pursue productive engagement with fossil fuel companies. 21http://www.capitalnewyork.com/sites/default/files/Fossil%20Fuel%20Divestment%20Working%20Group%203%2026%202015.pdf 22 http://theenergycollective.com/cutler-cleveland/2203396/why-divest-substantial-harm-fossil-fuels. See the first footnote for full text of principles articulated by Board on divestment. 23 http://www.wsj.com/articles/should-endowments-divest-their-holdings-in-fossil-fuels-1416779351

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More generally, divestment works against the principle of diversification, with the result that a portion of the endowment takes on additional, idiosyncratic risk, in addition to the risks otherwise associated with equity markets.24 On the other hand, if (as some financial experts argue), fossil fuel companies are more exposed to risk than the market currently recognizes, divestment and reinvestment may also serve as a hedge against risks not yet fully priced by the market.25 While the College does not use index funds, it is at least instructive that there is presently little difference between a fully diversified index and a fossil-free index, as demonstrated by the Fossil Free Index US (FFIUS) of Tom Francis 87. Starting in 2013, FFIUS indexes the S&P 500 with the top 200 fossil fuel companies removed; there has been no statistical difference in daily returns between FFIUS and the S&P 500. This finding supports Mark Kuperbergs prediction, quoted in the New York Times in May 2014, that divestment would not cost much.26 Impeding change: According to Stavins, even if divestment were to reduce the industrys financial resources, this would only serve to reduce fossil-fuel companies efforts to develop emissions-cutting technologies such as carbon capture and storage.27 Carbon capture and storage (CCS) is a process whereby the carbon produced from fossil fuel power plants is captured (most easily from flue gasses after coal is burned), transported to a storage site, and deposited where it will not enter the atmosphere, most probably in an underground geological formation.

24 This issue is described by a May 2013 memo on the costs of divestment prepared by Sue Welsh and Chris Niemczewski: https://web.archive.org/web/20141020221453/http://www.swarthmore.edu/sites/default/files/assets/documents/finance-and-investment-office/cost_of_divestment.pdf 25 See Carbon Tracker Initiative, reports on Carbon Bubble, Stranded Assets. 26 http://www.nytimes.com/2014/05/17/business/a-clash-of-ideals-and-investments-at-swarthmore.html?_r=0 27 http://www.wsj.com/articles/should-endowments-divest-their-holdings-in-fossil-fuels-1416779351

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28 Stavins does not, however, mention that the most optimistic accounts of CCS tie it to bioenergy (BECCS) and biomass power plants as a means of enabling negative emissions of CO2.29 Stavins is correct that fossil fuel companiescoal companies in particularshould be investing in CCS because viable CCS would make it possible to burn more fossil fuels without increasing atmospheric carbon. But most CCS projects thus far have been state- rather than industry-funded, including the first commercial CCS coal plant: the Boundary Dam plant in Saskatchewan, Canada, which opened in October 2014.30

Arguments in favor of divestment 28 http://www.ornl.gov/info/ornlreview/v33_2_00/research.htm 29 Wikipedia offers this account of BECCS: Bio-energy is derived from biomass which is a renewable energy source and serves as a carbon sink during its growth. During industrial processes, the biomass combusted or processed re-releases the CO2 into the atmosphere. The process thus results in a net zero emission of CO2, though this may be positively or negatively altered depending on the carbon emissions associated with biomass growth, transport and processing, see below under environmental considerations.[15] Carbon capture and storage (CCS) technology serves to intercept the release of CO2 into the atmosphere and redirect it into geological storage locations.[16] 30 Sulphuric acid and carbon dioxide are extracted from the coal-burning process (liquefied) and then sold on the open market. Most of the CO2 from Boundary Dam goes to oil drillers who use it in enhanced oil recovery, a kind of fracking for oil, leading to environmentalists to complain that carbon pollution is merely being passed down the line. Boundary Dam is conducting research on underground and underwater storage of CO2 at their site. [http://english.cntv.cn/2015/03/19/VIDE1426732926512600.shtml] Some major fossil fuel companies are exploring CCS, such as Shells CCS Quest project, in relation to tar sands oil development. Yet CCS is estimated to increase energy costs by 25-40% and tar sands oils are already so expensive to develop that it is difficult to celebrate Shells Quest. Conversely, if IPCC projections that 90-99% of CO2 will remain underground for 1000 years or more are true, and if no ugly unintended consequences raise their heads, BECCS is a process and technology that could dramatically enhance our climate future.

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1. Responsible fiduciary action Conservative financial experts have argued that fossil fuel divestment is a responsible fiduciary response to the financial risks associated with climate change. In particular, in November 2013, Bevis Longstreth, former commissioner of the Securities and Exchange Commission (SEC) under President Reagan, published The Financial Case for Divestment of Fossil Fuel Companies by Endowment Fiduciaries, arguing that fossil fuel companies are struggling and will increasingly struggle as a result of four rapidly evolving developments:

(a) the stranding of carbon-bearing fossil fuel assets through governmental restrictions

(b) improvements in alternative sources of energy undercutting demand for fossil fuels,

(c) grass-roots public action,

(d) stigmatization of fossil fuel companies, with adverse effects on hiring, morale and motivation, and valuation.

Longstreth offers the following three-step argument as a basis for responsible fiduciary divestment:

1. Given that climate change is an existential threat to human civilization, a threat unique in human history, human beings have a compelling and urgent need to limit carbon emissions.

2. We believe that global leaders, driven by widespread and increasing social action, will achieve the necessary limits.

3. In a world of emissions limits, the largest 200 fossil fuel companies are vastly overvalued in their trading markets and continuing to hold investments in those companies exposes our endowment to material loss.31

The first step of this argument is generally accepted. The second step is less certain: the United Nations Framework Convention on Climate Change (UNFCCC) has repeatedly failed to produce binding agreements on reduced emissions. The third step in Longstreths argument relies heavily on the second: governments must act to limit emissions; until they act (or other circumstances intervene), carbon assets retain their value.32 More recently, our alumna Christiana Figueres, Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC), argued in her letter to the Board of Managers that the risk return analysis of fossil fuel investments has shifted in the past five

31 Longstreths actual phrasing was this: "Recognizing climate change as an existential threat to the planet, unique in human history, and both the compelling need to limit carbon emissions and the confidence we place in global leaders to achieve the necessary limits, the largest 200 fossil fuel companies are vastly overvalued in their trading markets and, therefore, continuing to hold investments in any of them exposes our endowment to material loss." The three-step outline fixes a grammatical confusion and points a little more clearly to Longstreths reliance on global leadership. 32 In defense of a belief in global leadership, Longstreth argues that Betting against the stranding risk materializing is arguably an irresponsible, hard-to-defend, position for a fiduciary, who will have to demonstrate a sound basis for doing so, something that seems hard to do. By the same token, betting that this risk will be realized is not hard to defend as the inevitable consequence of rational, self-surviving acts by people and their governments around the world.

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years, and is accelerating. In effect, the burden of proof has been reversedso that those who do not take these material factors into account face potential impairments to their asset values. Testing this fiduciary argument involves two key questions: 1) What is the amount of value at risk through the possibility of stranded assets? and 2) What are the odds of fossil fuel assets being stranded? (How likely is government action? Are there other mechanisms that might result in stranded assets?) Wasted capital: $674 billion-5.4 trillion capex (capital for exploration and development) Longstreths argument builds on a number of concepts proposed by Carbon Tracker Initiative (CTI), a London-based non-profit think tank focused on articulating the risks that fossil fuel investments pose to financial stability. Stranded assets are a key CTI concept, as is wasted capital associated with a carbon bubble. Wasted capital is perhaps the more widely accepted issue: Carbon Tracker Initiative reported that in 2013 the top 200 fossil fuel companies allocated $674 billion for exploration and development of new reserves; in 2014, they allocated $650 billion. In July 2014, Ambrose Evans-Pritchard pointed out in The Telegraph that

The cumulative blitz on exploration and production over the past six years has been $5.4 trillion, yet little has come of it. Output from conventional fields peaked in 2005. Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years. [] The damage has been masked so far as big oil companies draw down on their cheap legacy reserves.33

CTI has launched a new focus on capex to help investors identify the fossil fuel companies wasting the most on capex.34 As Longstreth notes, There is no good reason for this vast expenditure of stockholder wealth. It is wasted capital, an offense against stockholders in terms financial alone. It suffices as justification for a fiduciary to divest from any company so engaged. Stranded assets: Stranded assets are now receiving considerable attention in financial analyses, though there is not yet broad consensus about the mechanisms or the total values involved. The well-respected but conservative International Energy Agency (IEA) projects $300 billion in stranded fossil fuel assets in a world where we limit climate change to 2 degrees Celsius average temperature increase. The IEA explores two possible futures: one in which average temperature rises by 4 degrees Celsius (New Policies Scenario) and one in which average temperature rises 2 degrees Celsius (450 Scenario). Under the New Policies Scenario, fossil fuels share of the global energy mix will fall from 82% (at present) to 76%; under the 450 Scenario, they would fall to 65%. In either case, gas consumption would be higher than it is presently, but in the latter case, oil consumption would peak before 2020 and coal would peak in 2015 and then drop sharply.

33 http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10957292/Fossil-industry-is-the-subprime-danger-of-this-cycle.html 34 http://www.carbontracker.org/report/capex-tracker-a-lead-indicator-of-global-warming/

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In the 450 scenario, the IEA projects that roughly $300 billion of investment in fossil fuel assets could be "stranded," and the agency notes that this figure could rise with changes in the regulatory or physical environment.35

Chris Nelder argues in a different context that although its an understandable and uncontroversial baseline for analysis, its also of dubious value to use the IEAs scenarios as reference, because the agency has a long track record of poor forecasting and overly optimistic scenario construction.36 Indeed, Mark Lewis of Kepler-Cheuvreux, previously an analyst for Deutsche Bank, offers a drastically higher assessment of stranded asset risk, as quoted in Evans-Pritchards Telegraph piece:

Under a global climate deal consistent with a two degrees centigrade world, we estimate that the fossil fuel industry would stand to lose $28 trillion of gross revenues over the next two decades, compared with business as usual," said Mr Lewis. The oil industry alone would face stranded assets of $19 trillion, concentrated on deepwater fields, tar sands and shale.37

Carbon Tracker Initiative offers an estimate slightly lower than that of Lewis, who serves as an external research advisor to the think-tank: CTIs 2013 report on stranded assets noted that only 20-40% of the 762GtC02 listed as reserves on the top 200 publicly traded fossil fuel companies could actually be burned. In 2013, these companies had

35 Chart taken from http://www.carbonbrief.org/blog/2014/06/the-iea-weighs-in-on-stranded-assets-not-just-a-green-conspiracy/ Original citation: https://www.environmental-finance.com/content/news/$300bn-of-fossil-fuel-assets-risk-being-stranded-by-2035-says-iea.html 36 http://www.jeremyleggett.net/2014/06/fossil-fuels-are-on-their-way-out-chris-nelder-on-the-history-of-stranded-assets/ A range of scientists and activists have criticized the agency for an institutional bias in favor of fossil fuels, political commitments (in favor of US policy), and underestimation of renewables. One example: the anti-corruption NGO Global Witness argued that "the Agency's over-confidence, despite credible data, external analysis and underlying fundamentals all strongly suggesting a more precautionary approach, has had a disastrous global impact." "Heads in the Sand: Governments Ignore the Oil Supply Crunch and Threaten the Climate" (PDF). Global Witness. October 2009. pp. 4547. See also 37 http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10957292/Fossil-industry-is-the-subprime-danger-of-this-cycle.html

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a market value of $4trn and debt of $1.5trn. [] Analysis from HSBC suggests that equity valuations could be reduced by 40 - 60% in a low emissions scenario. In parallel, the bonds of fossil fuel companies could also be vulnerable to ratings downgrades, as recently illustrated by Standard & Poors. Such downgrades would result in companies paying higher rates to borrow capital, or if the rating drops below investment grade they could struggle to refinance their debt.38

Market exposure of 5.5 trillion, reduced by 40%, suggests possible market losses of $2.2 trillion or more. So, in answer to our first question, we have at least three possible answers: $300 billion (from IEA, with a pro-industry bias), $2.2 trillion at present (CTI), or $28 trillion over the next two decades (Lewis). Stranded assets despite a lack of coordinated governmental action At a brownbag lunch discussion at Swarthmore on April 3rd 2015, Tom Francis 87 offered a series of examples for ways in which carbon assets could be stranded even without governmental action: 1) In Groningen (northern Netherlands), the largest gas field in Europe, production-related

earthquakes (196 since 2013) have led the Dutch government to cut back severely on gas production.39 No lives have been lost but the cost of damage repairs, structural improvements to buildings, and compensation for home value decreases has been estimated at 6.5 billion euros. Dutch gas exports in 2012 totaled [] around 12 percent of Europe's gas demand, about 75 percent of it from the Groningen field.40 A significant portion of the Groningen gas may become stranded if the government rules it too risky to continue producing. Oklahoma is also suffering from earthquakes allegedly caused by hydrofracturing, but is there serious risk of those assets being stranded?

2) US sanctions against Russia in 2014 (in response to Russian annexation of Crimea and

destabilization of Ukraine) banned American companies from doing business with Russian gas and oil companies. This has led to politically stranded assets for Exxon: As reported in Forbes, Exxon-Mobil announced in a 10-k filing with the SEC on 25 Feb 2015, that In compliance with the sanctions and all general and specific licenses, prohibited activities involving offshore Russia in the Black Sea, Arctic regions, and onshore western Siberia have been wound down. Exxon said its maximum exposure to loss from these joint ventures was $1 billion.41

3) Saudi Arabias surprise decision to maintain production despite falling prices may have been

explicitly designed to hamper competitive oil and gas ventures in North America. In any case, the low price of oil (as low as $40/barrel at the trough) has made more expensive extraction ventures commercially unviable, leading to stranded assets in Canadian tar sands and a consolidation of smaller US gas companies: a loss to the sector as a whole. To balance their budget, OPEC needs the price of oil to return to $80-100 per barrel, and the market,

38 http://www.carbontracker.org/wp-content/uploads/2014/09/Unburnable-Carbon-2-Web-Version.pdf 39 http://royaldutchshellplc.com/2015/03/11/quakes-force-dutch-lawmakers-to-cut-gas-production/ http://royaldutchshellplc.com/2015/04/01/dutch-court-hears-challenge-over-groningen-gas-production/ 40 http://www.reuters.com/article/2015/02/18/us-netherlands-gas-groningen-iduskbn0lm0lg20150218 41 http://www.forbes.com/sites/kenrapoza/2015/02/27/heres-what-exxons-lost-from-russia-sanctions/

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currently in contango, seems to anticipate a return to those higher prices.42 But this is a case in which unexpectedly fierce competition among fossil fuel companies has led to the stranding of assets for part of the industry.

Energy analyst Chris Nelder offers two other examples of non-regulatory stranding of assets, bringing our total to five (block quotations below are drawn from Nelder): 4. Exxon Mobils Kearl project in the Canadian tar sands is working below 50 percent of

expectations and ultimate capacity has been downgraded by 31 percent.43

Importantly, the Kearl projects troubles have nothing to do with the KXL pipeline, nor with carbon policy. Theyre simply a function of the difficulty of production and rising costs. And they raise some important questions: How are ExxonMobil/Imperial booking the reserves related to Kearl? Have the claimed reserves changed at all since the 2012 projection? What production output level will the project actually achieve, and when? Will it turn out that cost expansion and delays are actually stranding some of those assets in the complete absence of any effective carbon policy?

Nelders analysis suggests the importance of considering the industry as a whole rather than concentrating only on the possible effect of government regulation:

A comprehensive assessment of stranded asset risk would be based on such real-world experiences as the Kearl project, and might point more to a revenue risk than stranded assets risk, but it could be at least as potent a warning to investors, and a powerful counter-argument to the sunny outlooks on production offered by the oil majors. Current metrics on free cash flow, capital intensity, the crude to natural gas liquid ratios, return on investment, and so on could be even more damning than the unknown risk that as-yet-unformed climate policy might pose at some unknown point in the future.

5. The grid power sector may be the first place significant asset stranding shows up: coal assets

stranded by competition from cleaner fuels, solar, moderating growth. Nelder summarizes relevant reports:

Barclays just downgraded high-grade corporate bonds across the entire U.S. utility sector, citing the emerging threat of solar power and storage. The latest Carbon Tracker report, The Great Coal Cap Chinas energy policies and the financial implications for thermal coal (PDF summary), released June 5, finally takes aim at stranded asset risk in the grid power sector. Up to 127 gigawatts (GW) of existing coal-fired capacity and 310 GW of expected future capacity, equivalent to 40 percent of the total installed coal-fired capacity by

42 According to Investopedia.com, a market is in contango when the delivery price of a particular futures contract has to converge downward to meet the futures price. If prices did not converge, it would set up an opportunity for investors to profit from arbitrage. Contango situations can be costly to investors holding net long positions since futures prices are falling. For example, assume an investor goes long a futures contract today at $100. The contract is due in one year. If the expected future spot price is $70, the market is in contango, and the futures price will have to fall (unless the future spot price changes) to converge with the expected future spot price. 43 From 2008 to 2014, after spending nearly $13 billion and running more than a year over schedule, the Kearl operation achieved a first-quarter production level of 52,000 b/d [barrels per day] when 160,000 b/d was expected, is only achieving 70,000 b/d now, and its ultimate capacity has been downgraded from 500,000 b/d to 345,000 b/d.

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the end of this decade, could be stranded in the Asian nation as demand falls due to moderating economic growth, increased competition from cleaner fuels, and carbon policy. But these are not merely future risks; theyre in the present.

Assets stranded by high or rising oil prices Where Francis and Nelder point out that a wide variety of unforeseen circumstances may end up producing stranded fossil fuel assets, Lewis and Nelder argue respectively that continued high prices or even continually rising prices might also strand fossil fuel assets by triggering policy incentives or passing consumers pain threshold. Lewis notes that if oil prices rise faster in the future than currently assumed by the IEA in its base-case projections, we think this could lead to an acceleration of the policy incentives for, and deployment of, renewable-energy technologies and energy-efficiency measures.44 Nelder argues that prices could rise beyond the pain threshold of consumers, and oil demand could fall off through the mechanism of simple demand destruction and economic contraction precisely as it did (to some indeterminate extent) in the aftermath of the 2008 crash.45 Counter-argument: Efficient Market Hypothesis The primary argument against these views on stranded assets is the notion that these risks are already included in stock prices because the markets are informationally efficient. Eugene Fama was awarded the Nobel Prize for his work on the Efficient Market Hypothesis (EMH) in 2013. But behavioral economist Robert Shiller shared that Nobel Prize and he has called EMH the most remarkable error in the history of economic thought. Burton Malkiel, defending the general validity of EMH in Forbes, acknowledges that for many critics, asset bubbles such as the dot-com bubble of 2000 and the subprime crisis of 2008 stretch the credibility of the EMH beyond the breaking point. 46 Supporters of EMH might say that the information available on oil and gas companies is ambivalent: the market price reflects both the confidence of the fossil fuel companies and the uncertainties about global leadership on emissions reductions, as well as the knowledge of wasted capital and stranded asset risk. Behavioral economists might argue that stock prices variability can only be explained by behavioral considerations and crowd psychology. The financial analysts quoted hereincluding representatives of the Bank of England and Deutsche Bank quoted belowside not with EMH but rather with the carbon bubble hypothesis, stating explicitly that fossil fuel companies are dramatically overvalued in todays markets. Summary of the fiduciary argument: Wasted capital plus the likelihood of assets stranded by government regulation, political conflicts, rising costs and production challenges, competition with renewables or other fossil fuels, rising prices, and/or other, as yet unforeseen complications: the inherent riskiness of fossil fuels in the present and future underscores the financial, fiduciary argument for divestment. The signatories to this letter find this argument and its supporting evidence persuasive. 44 http://www.keplercheuvreux.com/pdf/research/EG_EG_253208.pdf 45 http://www.jeremyleggett.net/2014/06/fossil-fuels-are-on-their-way-out-chris-nelder-on-the-history-of-stranded-assets/ 46 http://www.forbes.com/sites/quora/2014/06/13/what-does-the-efficient-market-hypothesis-have-to-say-about-asset-bubbles/2/

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How can we better invest for a sustainable future? Carbon Tracker Initiative, a major power behind shifting financial views of fossil fuel companies, calls for a blended approach of divestment and engagement:

The volume of engagement activity by investors is larger than divestment, but much of it takes place below the radar. However true engagement needs the pressure created by divestment. Engagement without divestment is like a criminal legal system without a police force. 47

By divesting separately held funds while asking managers of commingled funds to assess risks of stranded assets and avoid wasted capital, Swarthmore Colleges endowment has the capacity to begin moving our gas and oil behemoths in the direction of greater sustainability. We need our major energy companies to help us make a massive and urgent transition to low-carbon. We are not looking for a major, destabilizing market meltdown; rather, we want these companies and their resources deeply engaged in energy development that will lead to greater human flourishing. When should we move to this blend of divestment and engagement? The fiduciary answer is this: when it costs us the least and gains us the most. We think that time is now. Perhaps because the real costs of climate change are becoming more evident, financial markets and institutions are becoming more skeptical about the value of fossil fuels. In January 2015, the Bank of England announced that it would assess the investment risks associated with stranded fossil fuel assets. In his speech, Paul Fisher, Executive Director of the Banks Supervisory Risk and Regulatory Operations, asserted the validity of stranded asset risks quite strongly:

One live risk right now is of insurers investing in assets that could be left stranded by policy changes which limit the use of fossil fuels. As the world increasingly limits carbon emissions, and moves to alternative energy sources, investments in fossil fuels and related technologies a growing financial market in recent decades may take a huge hit. There are already a few specific examples of this having happened.48

On January 19, 2015, in the journal Konzept published by the Deutsche Bank, Rineesh Bansal and Stuart Kirk argued that the emissions reduction agreement reached by the United States and China in late 2014 gives reason to believe that the UN Climate Conference in Paris in 2015 will produce a significant agreement. For Bonsal and Kirk, such a conclusion would change everything to do with the oil industry, so that peak carbon rather than peak oil becomes the primary driver of oil prices.49

47 http://www.carbontracker.org/divestment_engagement/ 48 http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech804.pdf 49 https://www.dbresearch.com/PROD/DBR_INTERNET_ENPROD/PROD0000000000349119/Konzept+Issue+02.pdf

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When central banks of the United Kingdom and Germany begin assessing risks associated with stranded assets, those risks become more visible to the market as a whole, and stock prices become more likely to reflect those risks. Coal prices have already plummeted, to the extent that Stanfords decision to divest from coal can be seen as financial foresight as much as a political or moral choice. In July 2014, Zacks Industry Rank put the coal industry 236 out of 260 industries, four places lower than the previous year.50 And on March 12, 2015, Moodys announced that the North American coal industry had moved into a negative risk climate. 51 Zacks Industry Rank also described the outlook for gas and oil overall as negative.52 We believe we are at or very closely approaching a tipping point at which divestment offers greater gain than loss, greater security than risk; at the same time, we are persuaded by Carbon Tracker Initiatives argument that divestment and engagement can work together to produce major improvements in fossil fuel company policies, including greater investment in renewables and CCS. Linking that targeted divestment announcement to strategies of investor engagement can help protect the larger endowment from the risks associated with wasted capital and stranded assets. 2. Building a social movement Social movements are politics by other means. Mass movements can shape entire structures of governance in dramatic revolutions, but more often, in western democracies, social movements impact politics by reshaping the social and cultural terrain on which politics are conducted. In the absence of significant fossil fuel industry investment in low carbon technologies and the absence of meaningful government action, the grassroots movement of the divestment campaign appears to many to be a necessary and productive political path toward a sustainable or even survivable future. Michael Greenstone 91, the Milton Friedman professor of economics at the University of Chicago warned in a recent article in the New York Times, that because of the vast supplies of inexpensive fossil fuels, protecting the world from climate change requires the even more difficult task of disrupting todays energy markets. Divestment supports political efforts that intervene in energy markets. A 2013 report on divestment campaigns from the Smith School of Enterprise and Environment at the University of Oxford53 asserts that direct impacts on fossil fuel companies bottom lines are unlikely, but a process of stigmatization can influence market norms. More importantly, however, if political uncertainty is generated, the enterprise value of fossil fuel companies may 50 http://www.zacks.com/commentary/33549/coal-industry-languishes-but-all-is-not-lost 51 Persistently weak demand for metallurgical (met) coal will lead to lower earnings over the next 12-18 months, and along with near-term challenges in the thermal coal sector will exacerbate the industry's long-term, secular decline. "We expect industry earnings to drop 6%-8% over the next year or so," says Vice President -- Senior Analyst, Anna Zubets-Anderson in "Changing Outlook to Negative as Earnings Come Under Added Pressure." https://www.moodys.com/research/Moodys-Weak-Demand-Leads-to-Negative-Outlook-for-North-American--PR_320617 52 http://www.zacks.com/commentary/36452/how-long-will-oil-gas-weakness-persist 53 Stranded Assets and the Fossil Fuel Divestment Campaign: What Does Divestment Mean for the Valuation of Fossil Fuel Assets? 2013 http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets/SAP-divestment-report-final.pdf

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be undermined and impose significant constraints. The level of political intervention required to keep fossil fuels in the ground is admittedly unprecedented, but so is the danger of anthropogenic climate change and the need for us to take action on unprecedented scales. Rather than bankrupting fossil fuel companies literally, the divestment campaign aims to bankrupt them politically, (to quote the Harvard HeatWeek video54) or in the words of Tim Burke in the Daily Gazette, to deprive them of the political infrastructure they require to appear more economically viable than they actually are. Given the immense capacity of the fossil fuel industry to capture institutional politics, counter narratives must be produced that challenge the presumed legitimacy generated by the industrys lobbying efforts. Until fossil fuels are sufficiently stigmatized to the point where political leaders can feel confident that their own legitimacy will not be undermined by challenging the industry, it is unlikely that sufficient regulation will be undertaken. Indeed, when the head of the UNFCCC (Christiana Figueres) and the head of World Bank both support divestment, it is a sign that intergovernmental agencies need grassroots support and pressure. Thankfully, social movement organizations and institutions in civil society can impact public opinion by reshaping discourses. Since the 1980s, the anti-nuclear movement has been able to stigmatize the nuclear power industry (though, interestingly, nuclear powers fortunes may change as new needs for alternative energy emerge). The anti-war movement played an important role in puncturing the U.S. governments rationales for continuing the war in Vietnam. The LGBT rights movement has made important strides in challenging discrimination against LGBT Americans, with marked shifts in attitudes and policies. Nonviolent direct action campaigns, such as the divestment campaigns that are a subject of this paper, play a familiar role in the emergence or reinvigoration of social movements. Social movement scholars speak of coalescence in which dissent becomes collective and coordinated. The civil rights activist, Bill Moyers, (2001) eight-stage MAP model for organizing social movements defines stage four as the typological moment in which nonviolent actions follow a trigger event (perhaps the emerging perceivable effects of climate change) and serve to alert the public, to awaken more activists, and to signal the possibility of strength through solidarity and collective action.55 56 A nationwide social movement can be born in stage four of Moyers model. In addition to amplifying new discourses about climate change, the current wave of sit-ins and protests are serving as a kind of capacity-building exercise. Indeed, many organizational and communication skills have been developed on college campuses over the course of the past few years through trainings and trial and error. Nonviolent actions in this stage are unlikely to win immediately the ultimate goals of the movement, such as a cessation of fossil-fuel extraction, but they lay important groundwork, politicize participants, and begin to transform the discourses through which public opinion is formed and political efforts expand. 54 http://bit.ly/1IECjVN 55 Moyer, Bill. 2001. Doing Democracy: The MAP Model for Organizing Social Movements. New Society Publishers. See also Meyer, David S. 2003 How Social Movements Matter. Contexts. 2:4 pp. 30-35. Retrieved April 11, 2015. http://www.jstor.org/stable/pdf/41800812.pdf 56 Scholars of social movements describe cycles of emergence, subsidence, revival, and decline depending on a range of factors including opportunity structures, available repertoires of action, repression, and movement strategizing.

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Thus, one of our greatest contributions to mitigating climate change may well be sitting on the floor outside Greg Browns office at this very momentor sitting somewhere else, listening and thinking about the divestment debates. The students protesting are among those most motivated to challenge our reluctance to move beyond business as usual, the most motivated to lead their generation toward a future that allows for broader distribution of human prosperity. Finding a way to support and steer these studentsour own precious human capitalmay be our best contribution to a flourishing human future. We appreciate the work the administration and the Board have done already to engage our students as they have focused our attention on climate science and the fossil-fuel industry. We celebrate the strengths and successes of the divestment social movement while also wanting to continue to build a broad-based political movement. To that end, we would like to partner with both students and the Board in working to understand better the kinds of policies that will ease rather than increase the burden of climate change on underserved communities on campus and in the surrounding region and then reaching out more directly to policy makers. Ethical action in keeping with the Colleges Quaker heritage: We all believe that climate change poses an ethical challenge, calling us to a careful and creative rethinking of social relations: work that the College, with its Quaker heritage and its commitment to teaching ethical intelligence, is ideally positioned to perform. We call upon ourselves and our colleagues to include in our research and teaching critical tools that will help our society and our students create more just, creative and sustainable futures. Yet the ethical argument specifically in favor of divestment, at least as it has been advanced thus far, has been quite polarizing: some members of the College community (students, faculty, staff, alumni, and presumably board members) find it deeply compelling; others find it off-putting. The ethical argument for divestment has been most concisely stated in these terms: If its wrong to wreck the planet and threaten millions of lives, then its wrong to profit from that destruction.57 This argument has an intuitive force, and it also (at least superficially) connects the divestment argument to the much larger issue of local and global inequitiesan issue that climate change will only deepen. Yet, in the words of Tim Burke, As an act of public persuasion, making a show of ones own moral purity rarely attracts a wide base of admirers and supporters.58 Economists might add that if others divest from fossil fuel for moral reasons the Board is willing to ignore, and if there are no financial reasons to divest, the Board could actually reap a premium (additional profit) in exchange for its willingness to hold dirty energy shares and funds. In this regard, an ethical argument works against a financial argument for divestment. Such are the paradoxes of investment. It may be for this reason that Neil Berkett CEO of Guardian Media Group presented the groups recent decision to divest its $1.2 billion holdings from fossil fuels in pragmatic as well as moral terms, with pragmatism and finance leading the way: 57 https://www.youtube.com/watch?t=52&v=n0wCRruXYIU 58 http://daily.swarthmore.edu/2015/02/11/against-divestment/

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Neil Berkett: To say there is a single argument for ultimate divestment in a way undervalues the debate and the discussion and the ultimate solution. I think the economic argument is as strong as the values-based argument, and if you were funding an asset that believes strongly in the value-based (i.e. The Guardian and we were a public company) and you took the view that economically, this is the right thing to do, I think you could end up at the same position. I dont think this is [] a sop to the position that exists in terms of ownership by the Scots Trust (Scots Trust values, Guardian values, etc. etc.). Despite the fact that that exists, if this was a public company, it might have been in truth a more lengthy process, but I think we would probably end up in the same space. (our emphasis) Alan Rusbridger: So what youre saying is, the decision youre taking todaywhich is in the short term engage, in the medium term divestis a hard-nosed business decision. Neil Berkett: Absolutely. A hard-nosed business decision, but it is influenced by the values of our organization. [] The truth is, its a holistic decision thats taken into account all those things.59

In general, the ethical argument for divestment offers its adherents the energy to sustain a passionate commitment to the cause of divestment and climate justice. But some who might otherwise be allies find these ethical claims divisive and alienating, and others worry that ethical claims will obscure more strategic and financial arguments in favor of divestment. Despite the range of tactics we may support or propose, we see in our community a shared belief that climate change, by exacerbating the already striking inequalities of our society, points to the urgency of co-creating, with communities that have been marginalized and disenfranchised, a more just and diversely productive world. Overall, we propose targeted divestment, engaged investing, and limited direct investment in renewables and energy efficiency (discussed below) as the best means by which the endowment can serve its purpose of supporting the Colleges long-term well-being and providing for intergenerational equity.

59 http://www.theguardian.com/environment/video/2015/apr/01/guardian-media-group-divestment-video

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Appendix 5: Political money, subsidies, climate denial Part of the conversation around divestment has to do with the flow of money between fossil fuel companies and national governments. As you are no doubt aware, fossil fuel companies contribute millions of dollars to political campaigns, though as an industry they were only the ninth-highest overall contributors to political campaigns in 2013-2014, trailing health, lawyers, single issue contributors, and others. Open Secrets, a well-respected non-profit online publisher, listed the top oil and gas contributors to the 2013-2014 Congress as follows: Koch Industries $9,513,335 Ken Davis Finance $2,927,295 Chevron $2,099,893 Exxon Mobil $2,057,953 Marathon Petroleum $1,291,139 Western Refining $1,291,139 Occidental Petroleum $1,135,740 As reported in the New York Times on February 25, 2015, Southern Co, another big contributor to political campaigns ($948,257 in 2013-4), also provided at least $409,000 of funding over the past decade for prominent climate skeptic Wei-Hock Soon.60 But lobbying costs far exceed campaign contributions. Open Secrets lists total oil and gas lobbying and contributions to Congressional campaigns for the 113th Congress (including 2013 and 2014) as follows: Contributions to Congressional campaigns: $40,833,823 Oil and Gas lobbying total 2013: $140,389,740 Oil and Gas lobbying total 2014 : $144,941,531 TOTAL spent on 113th Congress: $326,165,094 In what some see as a weighted exchange, the federal government provides subsidies for fossil fuel exploration, production, and consumption. These are variously estimated at figures ranging from $2.4 billion to $52 billion. The enormous range points to major problems with definition and transparency. Robert Rapier uses Oil Change International (OCI) to demonstrate common misunderstandings about fossil fuel subsidies. (Rapier acknowledges that OCIs data is drawn from inter-governmental agenciesthe Organization for Economic Cooperation and Development [OECD] and the International Energy Agency [IEA], but his criticism is limited to OCI, which indicates some partisan energy to his analysis. For its part, OCI has shown a lack of professional restraint in attacks on Exxon.) Despite the appearance of bias, Rapiers analysis is finely pointed:

The summary of oil-related subsidies in the U.S. for 2010 totals $4.5 billion. That is a number often put forward; $4 billion a year or so in support for those greedy oil companies. But look at the breakdown. The single largest expenditure is just over $1 billion for the

60 http://www.nytimes.com/2015/02/22/us/ties-to-corporate-cash-for-climate-change-researcher-Wei-Hock-Soon.html?_r=0

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Strategic Petroleum Reserve, which is designed to protect the U.S. from oil shortages. The second largest category is just under $1 bil