Thursday, February 12, 2015

On Global Divestment Day: A Chicago Theory of Risk Management

Mother Nature Says "Divest!"
(So do Black and Scholes.)
Tomorrow is Global Divestment Day.

There will be activities in Chicago.

To mark the day, I dredged up my memory of financial principals to respond to an article in The Wall Street Journal with these words:

The reason university (and other) investment offices should divest from fossil fuel stocks is: they provide overly-large exposure to risk. Raising awareness of this is the real point of Global Divestment Day. 

 (See "The Feel-Good Folly of Fossil-Fuel Valuation" on the Scarry Thoughts blog.)

Chicago is the home of sophisticated financial analysis. It's time for us to lead the conversation about the true shape of the coming economy.

Related posts

What was striking to me was that, despite the U of C's reputation as a center of economic research and thinking and teaching, all four of the panelists appeared singularly uninterested in the central economic problem of the climate crisis: how will the supply and demand of goods and services change as a result of society's understanding of the climate crisis? and how will the market react to signals about such changes?

(See EXTRA! Climate Economics Confound U of C Profs! )

Oil companies are valued by the market based on their reserves. The problem with this approach is that the total reserves claimed by the oil companies is FIVE TIMES what can possibly be burned without driving up the temperature of the atmosphere up by a catastrophic amount and, as McKibben puts it, "breaking the planet." How can the value of oil companies be a function of reserves that can never be used?

(See The REALLY Big Short: The Jig is Up with Oil Companies)

The planning that is under way for 2015 clearly envisions the connections between multiple issues -- nuclear disarmament, clean (non-nuclear) energy, and climate -- and a need to involve everyone who cares about these issues.

(See #NoNukesTuesday: Disarmament? Clean Power? Climate? All three?