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Decision making. No, it will not get simpler.

Summarising very briefly:

Before you start reading this, quickly record your views on climate change: is it happening? Is it bad? Who should act on it? Keep these records for the end of the reading piece.

Now that even Leonardo DiCaprio brought up climate change at his Oscars acceptance speech, few can really ignore it.  News about climate change is getting worse and worse.  2015 was the hottest year on record, and now it turns out January 2016 was the hottest month.  For decades now, scientists have been warning us that the industrialisation and automation of the world has caused our climate to change and the temperatures to rise.  About a decade ago, this warning was met with a strong opposition, arguing that the climate change, if occurring, is not due to man-made actions.

It’s not easy make up one’s mind about the whole issue of climate change.  Evidence, even if they are clear to scientists, is not always clear to the lay person.  Have a look at the temperature charts.  Does it seem like global warming is here?  Now look at the chart that describes the various components that contribute to climate change.  What is the main contributor to climate change?

So the scientific community generally agrees on the trend of global climate change, and its causes (human greenhouse gas emissions).  Scientists are the backbone of the academic world, so you would expect that at least universities, which are where science has freedom, power, and respect, would do what they can to address climate change. 

What could universities do?  They are already tracking temperature records, working hard on developing technological solutions for clean energy, and teaching degrees which advance environmental goals.  What else can they do?

Universities, like other big organisations, also run their own investments.  Many of those investments are managed by external funds, and they often include at least some fossil fuel based investments.  It would make perfect sense for universities to divest from such companies.  There are two main kinds of reason for such divestment: financial and ethical. From a financial point of view, companies reliant on fossil fuel seem to be at a great risk.  Currently, such companies rely on the rate of consumption of fossil fuels remaining the same as it is today; they do not seem to take into account restrictions which are likely to be imposed by the international community.  These restrictions are likely because of a recent international agreement of the international community, like the Paris Agreement recently formulated, and like many nations committing to drastically reduce their carbon emissions.  If the international community takes steps to limit global warming to two degrees, most of the fossil fuel reserves these companies hold cannot be used.  They will become ‘stranded assets’, and most of the fossil fuel reserves held by fossil fuel companies will not accessible to use.  Basically, fossil fuel companies rely on the assumption that the international community will fail to take significant steps to limit climate change.  If this assumption turns out to be mistaken, investors in fossil fuel companies will lose a lot of money. This ‘climate risk’ gives investors strong financial reasons to divest now.

The second set of reasons is ethical.  If universities invest in these companies, then these universities effectively endorse their business model, and ‘bet’ on the success of fossil fuel companies.  These companies will be successful only if enough fossil fuels are burnt to result in global warming well over two degrees, so universities investing in them effectively support global warming well over two degrees.  This is profoundly wrong, given the serious and potentially catastrophic consequences of such warming.

In addition, the fossil fuel industry is actively seeking to block action on climate change.  For example, it funds many sources of misinformation about climate change, misinformation that has played a major role in preventing strong action on climate change.  So if universities invest in these companies, they basically get involved in such unethical and wrong practices.

These ethical reasons apply to all investors but are particularly strong in the case of universities: forward-looking institutions focused on educating people and producing research in order to create a better future.  It is deeply incoherent to pursue these ends while also investing in fossil fuel companies whose business model is premised on the use of resources that would undermine those ends.

Now scientists are not the only ones at a university, and they are usually not the ones making investment (or divestment) decisions.  Recently, a movement called started a campaign among Australian universities, requesting their divestment from fossil fuel companies.  They organise university members to ask for their universities to do the following:

(1)   disclose its current holdings in the fossil fuels industry to its staff and student members, and (2)

(2)   divest from fossil fuel companies.

Australian universities have been slow on divesting.  ANU led the way in 2014, and the University of Sydney followed a year laterOther universities have these campaigns running too.   If your university isn’t one of them, maybe you can be the leader of this cause!

Now, clear your mind, take a few deep breaths, and think: If you had to answer the questions presented at the beginning all over again – is climate change happening? Is it bad?  Should Australia act on it? – What would your intuitive answer be now?


Consider the following questions for discussion…

  1. This will be easy to answer, but you will be surprised how often this issue is overlooked in managerial discussion: is the climate change question structured, or unstructured problem?
  2. Why would bounded rationality play a part in how people normally consider the climate change issue?
  3. Most climate change issues are discussed in group forum – at least among policy makers.  It makes sense to solve a global problem within a global forum.  What kind of problems, biases, and benefits does this group setting bring to this problem?
  4. If you were the manager of a university’s investments, and approached you and asked you to divest from fossil fuel companies, how would you approach that decision?  What considerations would guide you, and how would they relate to the decision making process in Figure 3.1?
  5. What kind of biases listed in Figure 3.2 do you think affect university investment managers?  How would they affect you if you were one of the managers?
  6. It may be tempting to follow the rational decision-making approach to every problem you encounter as a manager, but keep in mind realistic conditions, that are similar to those in managerial workplaces: time pressure, tasks overload, and multiple stakeholders.  How would you address this problem?