Dear Columbia Students, Divestment From Israel Won’t Work

Even if the university surrenders, it will be making a statement, not doing anything financially meaningful

By James Mackintosh of The WSJ. Excerpts:

"the parallel frequently made to the boycott of apartheid South Africa isn’t a very good one. That boycott lasted decades, mainly involved consumers, not investors, and had serious financial effects on the country’s exports. Cutting academic ties with South Africa didn’t have such a clear impact as protesters today believe, research suggests."

"But the financial effects, or lack of them, bear examining. And there’s a very instructive parallel: misguided demands to quit investments in fossil fuel companies to slow climate change.

Environmentalists think that if universities and others sell coal and oil stocks, it will influence fossil fuel production. It hasn’t, and it won’t, for three reasons that also apply to Israel.

First, there’s just too much capital around. University endowments are big (Columbia has $14 billion) but are a drop in the ocean of capital swilling around big companies. Microsoft, one of the stocks protesters want sold, alone is valued at $3 trillion. 

The impact of even a lot of universities selling would be negligible. There are far more people with huge amounts of money who don’t care about links to Israel (or oil). Investors who sell to protest against Israel will find others willing to buy for purely financial reasons. And some deep-pocketed supporters of Israel may have money to spare that would once have been a university donation.

Look at the climate campaign. The most widespread divestment has involved coal companies, which many huge pension funds and endowments agreed to exclude, and which are almost universally banned by ESG (environmental, social and corporate-governance investing) funds.

But when the world decided it wanted more coal, after Russia’s invasion of Ukraine led to energy shortages, no amount of shunning by investors could stop the shares of coal companies soaring. Investors who want to stop the use of coal should stop using coal, or push governments to ban coal use earlier, not try to somehow affect production by steering clear of coal stocks.

Second, small changes in share prices have no effect on corporate investing decisions. It is hard to detect the effects of interest rates on corporate investment, let alone of share prices.

Even if there were some marginal effect on a company’s valuation from massive disinvestment—and the evidence is there wouldn’t be much if any—the feed through to investment decisions would be more marginal still. Israel is much more likely to have trouble attracting capital because it is at war, not because share prices of companies invested in Israel are slightly reduced by disinvestment.

Even if selling the stock made it cheaper, the effect would be counterproductive. The profits of the companies would be unaffected, since they are determined by their costs and revenues; a boycott of their goods might matter, but a boycott of their shares won’t.

Selling the shares cheaply to someone else just leaves the buyer owning the future profits instead, at a bargain price. The university would have less money to spend on students, while those who are pro-Israel, pro-oil or just pro-profit would have more.

Third, the companies most important to Israel’s military, and to fossil fuel production, belong to or are supported by governments. Even if divestment somehow worked on other companies, it still wouldn’t work here. Israel receives large U.S. military support, financed by the government. Weapons will continue to flow no matter what private investors do—only Congress or the White House can stop them.

Likewise, in the climate debate, five of the top 10 oil producers in the world are controlled by Saudi Arabia, China, Mexico and Brazil, and they pump far more than the big five private U.S. and U.K. producers. They just aren’t vulnerable to divestment threats."

"“Divestment will not directly reduce the capital available to publicly listed fossil fuel companies, and may in fact promote the transfer of fossil fuel extraction activity to national and state-owned companies that are more polluting, less transparent, less sensitive to societal pressures, and less committed to addressing the climate crisis,” the committee said. It wants to be able to engage companies to encourage a switch to clean fuels by 2050 and to stop them lobbying against climate science. For that, the university needs to be a shareholder." (Columbia's socially responsible investing committee)