I think I might not really understand Paul’s argument completely, but I really value his opinion generally, so I think more people should look into this more (but he also said he meant to write a new version soon).
Having said that, I still think divestment is not worth it for EAs and I still believe mission hedging is a better strategy, for four reasons:
I don’t think divestment changes the stock price substantially as I argue in my Impact Investing report with John Halstead. Peter Gerdes makes very similar points in the comments of Paul’s blog.
Even if share prices did not return to equilibrium, the impact on the level of production is likely to be low. Public equity is generally traded in secondary markets, meaning that changes in stock price affect shareholders, rather than the usable capital the company has at hand. From the impact investing report: “Movements in the share price do not always affect the capital available to companies. In industries that generate a lot of cash and so do not need to raise capital, changes in share prices will not have much impact. In addition, public equity is generally traded in secondary markets, meaning that changes in stock price affect shareholders, rather than the usable capital the company has at hand.[38].” Also see Modigliani–Miller theorem.
The post is too focused on marginal cost-effectiveness/benefit cost ratios but we should look at the cost-effectiveness at scale and also the total benefit minus cost.Paul highlights that the first unit of divestment is free and I agree with this. Thus, the first unit of divestment has theoretically an infinite marginal cost-effectiveness (infinite benefit cost ratio). But after the first dollar of divestment the costs increase. And then beyond the individual investor, the cost increases further. He also acknowledges that “It’s hard to implement” and “Deciding how to divest is quite challenging.” and “These funds would only be appealing to an unusual audience” Thus, even if Paul is right, and even if the marginal cost-effectiveness is high, the overall benefit will likely be small as this doesn’t seem to scale and have substantial associated set-up costs.
Even if one could scale at a benefit cost ratio—I don’t think it would be particularly effective. Consider, that Paul argues that one can ““sacrifice <$1 to reduce EvilCo’s output by >$5”. I have an intuition that this is unrealistically high on the face of it, because it would allow all kinds of uncompetitive practices like shorting competitors to dominate the market, but, for simplicity, let’s go with it and say it’s 10:1. Global fossil fuel industry revenue is ~$10trn. To reduce output to zero with divestment, you’d need to spend ~$1trn. Fossil fuel industry emits ~35gT/y. To reduce their output by 1 ton, their revenue needs to be reduced by ~$285 ($10trn / 35bn). So it’s $285/tCO2e averted. Even with 10:1 leverage, this would be quite expensive (but am not 100% confident in this calculation). As you say Jonas: “Any thoughts on whether divestment is generally worth the opportunity cost if the returns had been donated to the most effective charities? (E.g., reductions in carbon emissions from divestment vs. donations to clean energy R&D.)” I think there are more effective ways to solve climate change with $1 trillion (e.g. through clean energy R&D). I don’t think trying to reduce corporations’ costs of capital is an effective way to reduce their externalities. Generally, multi-objective optimization is harder than single-objective optimization. Divestment tries to optimize for both social impact and financial impact. However, I think it’s easier to optimize for financial impact (which is relatively straightforward), and then use the profits to optimize for social impact through donations (which we also have a relatively good grasp on). With mission hedging you still have the option to donate and it can also be combined with using leverage (for instance, this 3x leveraged AI FAANG+ ETF for people wanting to hedge against long-term risks from AI- this is of course not financial advice).
Regarding #1 and #2, so far I found Paul’s line of argument more convincing, but I have only followed the discussion superficially. But points #3 and #4 seem pretty strong and convincing to me, so I’m inclined to conclude that mission hedging is indeed the stronger consideration here.
For AI risk, #3 might not apply because there’s no divestment movement for AI risk and tech giants are large compared to our philanthropic investments. For #4, using the same 10:1 ratio, we’d be faced with the choice between sacrificing around $10 billion to reduce the largest tech giants’ output by 1%, or do something else with the money. We can probably do better than reducing output by 1%, especially because it’s pretty unclear whether that would be net positive or negative.
Even with 10:1 leverage, this would be quite expensive
My understanding is that 10x leverage would also mean ~10x cost (from forgone diversification).
This piece provides an IMO pretty strong defense of divestment: https://sideways-view.com/2019/05/25/analyzing-divestment/
Do you agree, and if to some extent, how does it change the conclusions of this article?
I think I might not really understand Paul’s argument completely, but I really value his opinion generally, so I think more people should look into this more (but he also said he meant to write a new version soon).
Having said that, I still think divestment is not worth it for EAs and I still believe mission hedging is a better strategy, for four reasons:
I don’t think divestment changes the stock price substantially as I argue in my Impact Investing report with John Halstead. Peter Gerdes makes very similar points in the comments of Paul’s blog.
Even if share prices did not return to equilibrium, the impact on the level of production is likely to be low. Public equity is generally traded in secondary markets, meaning that changes in stock price affect shareholders, rather than the usable capital the company has at hand. From the impact investing report: “Movements in the share price do not always affect the capital available to companies. In industries that generate a lot of cash and so do not need to raise capital, changes in share prices will not have much impact. In addition, public equity is generally traded in secondary markets, meaning that changes in stock price affect shareholders, rather than the usable capital the company has at hand.[38].” Also see Modigliani–Miller theorem.
The post is too focused on marginal cost-effectiveness/benefit cost ratios but we should look at the cost-effectiveness at scale and also the total benefit minus cost. Paul highlights that the first unit of divestment is free and I agree with this. Thus, the first unit of divestment has theoretically an infinite marginal cost-effectiveness (infinite benefit cost ratio). But after the first dollar of divestment the costs increase. And then beyond the individual investor, the cost increases further. He also acknowledges that “It’s hard to implement” and “Deciding how to divest is quite challenging.” and “These funds would only be appealing to an unusual audience” Thus, even if Paul is right, and even if the marginal cost-effectiveness is high, the overall benefit will likely be small as this doesn’t seem to scale and have substantial associated set-up costs.
Even if one could scale at a benefit cost ratio—I don’t think it would be particularly effective. Consider, that Paul argues that one can ““sacrifice <$1 to reduce EvilCo’s output by >$5”. I have an intuition that this is unrealistically high on the face of it, because it would allow all kinds of uncompetitive practices like shorting competitors to dominate the market, but, for simplicity, let’s go with it and say it’s 10:1. Global fossil fuel industry revenue is ~$10trn. To reduce output to zero with divestment, you’d need to spend ~$1trn. Fossil fuel industry emits ~35gT/y. To reduce their output by 1 ton, their revenue needs to be reduced by ~$285 ($10trn / 35bn). So it’s $285/tCO2e averted. Even with 10:1 leverage, this would be quite expensive (but am not 100% confident in this calculation). As you say Jonas: “Any thoughts on whether divestment is generally worth the opportunity cost if the returns had been donated to the most effective charities? (E.g., reductions in carbon emissions from divestment vs. donations to clean energy R&D.)” I think there are more effective ways to solve climate change with $1 trillion (e.g. through clean energy R&D). I don’t think trying to reduce corporations’ costs of capital is an effective way to reduce their externalities. Generally, multi-objective optimization is harder than single-objective optimization. Divestment tries to optimize for both social impact and financial impact. However, I think it’s easier to optimize for financial impact (which is relatively straightforward), and then use the profits to optimize for social impact through donations (which we also have a relatively good grasp on). With mission hedging you still have the option to donate and it can also be combined with using leverage (for instance, this 3x leveraged AI FAANG+ ETF for people wanting to hedge against long-term risks from AI- this is of course not financial advice).
Cool, thanks for the reply! Strong-upvoted.
Regarding #1 and #2, so far I found Paul’s line of argument more convincing, but I have only followed the discussion superficially. But points #3 and #4 seem pretty strong and convincing to me, so I’m inclined to conclude that mission hedging is indeed the stronger consideration here.
For AI risk, #3 might not apply because there’s no divestment movement for AI risk and tech giants are large compared to our philanthropic investments. For #4, using the same 10:1 ratio, we’d be faced with the choice between sacrificing around $10 billion to reduce the largest tech giants’ output by 1%, or do something else with the money. We can probably do better than reducing output by 1%, especially because it’s pretty unclear whether that would be net positive or negative.
My understanding is that 10x leverage would also mean ~10x cost (from forgone diversification).