· Recently universities and pension managers have been making headlines as they consider divesting their funds from certain investments, specifically fossil fuel stocks, bonds, and other investments. Illinois universities, in particular, has seen an increase in conversations about divestment. Unfortunately, there are drawbacks of divesting from strong investments.
· Like any good investment portfolio, cities, states, and universities should diversify their investments in order to receive the greatest return on investment. If endowments and pensions managers were to divest from fossil fuels, they would lose a secure investment that outpaces other options.
· In particular, divestment can shrink a portfolio’s return on investments and undermine an endowment or pension fund. University of Chicago Law Professor Daniel Fischel found in a 2015 study that portfolios divested of energy equities produced returns of 0.7 percentage points lower than ones that were invested in energy. In dollar amounts, that could equal a $3.2 billion annual loss of the $456 billion total university endowments.
· This can lead to a smaller budget available for universities to spend on academic needs as well as smaller payouts for future retirees.
· As a result, many universities and pension managers, including Harvard University, Stanford University and many state pension funds have rejected fossil fuel divestment.
· In fact, Stanford pointed out that divestment does nothing directly to help the social cause behind the action, and instead, believe that their continued investment will give them the opportunity to hold fossil fuel companies accountable to their actions. It will also allow fossil fuel companies to continue research into sustainable energy.
· Divestment is a form of social activism based upon a feel-good cause. However, in reality, divestment will not harm the intended industries, but will ultimately bring financial consequences upon retirees and students who rely upon endowments and pensions for their future.
Studies have found there are financial drawbacks of divesting a portfolio. Most notably, divesting from fossil fuels, including shrinking returns on investments and undermining endowments.
The Wall Street Journal: The Feel Good Folly of Fossil Fuel Divestment
- · Any rational investor should make a clear-eyed comparison between the potential benefits and costs of a divestment strategy. A 2015 study byUniversity of Chicago Law Professor Daniel Fischel found portfolios divested of energy equities produced returns 0.7 percentage points lower than ones that invested in energy on an absolute basis, representing a 23 percent loss over 50 years. A decrease in portfolio performance of 0.7 percentage points on the roughly $456 billion that comprises total university endowment assets would decrease annual growth by nearly $3.2 billion each year.http://www.wsj.com/articles/
daniel-r-fischel-the-feel- good-folly-of-fossil-fuel- divestment-1423527484
The Financial Times: Vanguard chief criticizes fossil fuel divestment campaigns
- · The head of one of the world’s largest asset managers, Bill McNabb chief executive of Vanguard, has criticized the fossil fuel divestment movement, saying its proponents are throwing away their chance to influence oil companies. Mr. McNabb, whose company manages $3.5tn in assets, expressed skepticism that divestment, would affect share prices enough to register inside the boardroom. Mr. McNabb says that even if divestment campaigners succeed in driving down oil company share prices, the only outcome would be to create a new generation of private oil barons.“There is no impact to the income or balance sheet of the company. You are not sending a message to the company. You are better remaining an owner and being able to engage with the company,” he said.