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May 9, 2017

Global Divestment Mobilization Ignores Facts and Figures of Divest Effort

This week marks the start of the Global Divestment Mobilization, an effort led by 350.org to promote divestment with events around the globe over the next week. While the effort has received little attention to date, let’s take a look back at where the divestment campaign stands, and why universities across the country have said no to this costly, ineffective effort.

1) Over 50 U.S. colleges have rejected divestment.

In April 2017, four U.S. colleges — Mount Holyoke, Washington University, University of Wisconsin-Madison, and Kenyon College – rejected fossil fuel divestment, adding to a long list of over 50 U.S. colleges that have said “no” to this costly and ineffective campaign.

According to Kenyon, “Divestment is not going to change things —it’s just not. The reality is our mission first and foremost is making our education accessible to as many talented people as possible. It doesn’t mean I don’t care about climate change.”

Mount Holyoke came to a similar conclusion in its rejection saying, “Ultimately, we came back to our responsibilities as Trustees: to preserve and protect our endowment, which represents the cumulative generosity of many donors to support our academic mission in the many ways they have identified as being of shared importance. Funding 26 percent of our annual operating budget, our endowment is the cornerstone that enables us to provide an intellectually rigorous education for students of all backgrounds while strengthening our legacy of leadership.”

These universities are just a few of the many that have said “no” to divestment in recent years. Denver University rejected the effort in January 2017, and in 2016 the divestment campaign saw rejections from schools like CornellUPennNotre DameRice UniversityNortheastern, and University of Utah.  Six of the eight Ivy League colleges in the United States are also now on record rejecting divestment, with the only two yet to take a formal stance on the issue — Dartmouth and Princeton — both suggesting they will not move forward with an empty, costly pledge.

2) Divestment imposes direct costs on students and faculty.

A new report from Prof. Hendrik Bessembinder, professor of finance at the Arizona State University’s Carey School of Business, looked at the financial impacts of divestment – including transaction, management, and diversification costs – to understand the direct impact of divestment on endowment spending and, in turn, the services such funds support. Focused on analyzing the finances of the nation’s public and private universities, Prof. Bessembinder found that divestment would lead to a 15.2 percent average reduction in endowment spending.

As the report explains, since private institutions typically rely more heavily upon endowments for expenses, these colleges pay an even higher price for the same amount of divestment than do public universities. Prof. Bessembinder calculates that to fund fossil fuel divestment, private universities would be forced to raise annual tuition by approximately $1,043 to $3,265, depending on how reliant each school is upon its endowment.  A private university could also make up for lost endowment value by cutting spending on faculty by 11.5 percent, leading to fewer classes and increased class sizes. Though smaller in dollar value, most public universities would also face difficult financial decisions from divestment, such that keeping spending at current levels would necessitate tuition increases by approximately $123 to $385 on average or reductions in spending on faculty costs of 3.5 percent, or a combination of these.  Universities could also forego future expected spending increases and spend down their endowments, but that would simply delay the costs of divestment at the expense of future students, alumni, and faculty.

These are real costs with real consequences for the individuals endowments are meant to support.

3) These costs are exactly why many schools have said no to divestment.

These costs are no stranger for the numerous universities that have said no to divestment. For example:

  • Tufts University: “Even the most conservative model showed that the endowment would experience a significant loss of return—$75 million in market value over the next five years—in large part because of our investments in commingled funds. I put the projected impact in perspective, $75 million would provide endowment income to fund scholarships for 100 undergraduates or annual stipends for 125 Ph.D. students, or fund the entire 2012 state appropriation for the Cummings School of Veterinary Medicine.” Tufts University, Statement from the President, February 2014
  • Brown University: “Divestiture would convey only a nebulous statement … without speaking to the technological and policy actions needed to reduce the harm … actions where Brown can make real and important contributions through teaching and research.” Brown University, Statement from the President, October 2013
  • Univ. of Tennessee: “Last year, 90 percent of the endowment’s payout went to supportive scholarships, instruction, and research. Eliminating a broad segment of the market from investment could hinder future funding of these endeavors.” – University of Tennessee, Letter from Board of Trustees, December 2013

4) Divestment is all symbolism and has no impact on targeted companies.

It’s not news that divestment is all symbolism and no real impact. As an editorial from the Harvard Crimson recently stated, “Any case for divestment therefore operates purely on the symbolic level. Given that Divest Harvard’s most recent protest merely argued for the formalization of the coal investment moratorium Harvard has already instituted, they have conceded as much.” Harvard’s President Faust has also commented saying, “I also find a troubling inconsistency in the notion that, as an investor, we should boycott a whole class of companies at the same time that, as individuals and as a community, we are extensively relying on those companies’ products and services for so much of what we do every day.”

In 2015, University of Chicago Professor Daniel R. Fischel weighed in on the argument that divestment simply does not make sense stating, “Every bit of economic and quantitative evidence available to us today shows that the only entities punished under a fossil-fuel divestment regime are the schools actually doing the divesting—with virtually no discernible impact on the targeted companies.”

A study from Dr. Bradford Cornell, senior consultant at Compass Lexecon, also found that divestment has no impact on the fossil fuel companies’ ability to operate. Economist Christopher Fiore agrees arguing, “Even people who are in favor of the divestment movement …also concede that there will probably be no price impact on the valuation of the companies…It’s purely a symbolic move.”

5) Most importantly, divestment has no impact on the environment – the exact issue about which 350.org pledges to care.

Divesting from fossil fuels is not just costly, but it also does not have any environmental implications. Harvard officials stated, “We agree that climate change is one of the world’s most urgent and serious issues, but we respectfully disagree with Divest Harvard on the means by which a university should confront it.” And according to Prof. Fischel, “even activists acknowledge that divestment is more about stigmatizing fossil-fuel companies” than it is about affecting real change. Simply put, if an institution divests from fossil fuel holdings, there will still be plenty of people still investing in and consuming the goods these companies produce, doing little to address activists’ true agenda.

Bottom line: Divestment is a lot of costs with no impact on the environment. Perhaps it’s time 350 focus on a new issue.