January 30, 2018

Activists Push Empty Gesture Divestment to Help the Environment

In response to this year’s State of the Union address, activists will be meeting again to push what they view as the solution to the administration’s energy policies: divesting from fossil fuels.

By their logic, a robust divestment movement will “restrict the social license” of energy companies to operate and “end the use of fossil fuels and usher in the fast and just transition to 100% renewable energy.”  Unfortunately for activists, universities and pension investment committees are closely scrutinizing these claims and by and large rejecting the ill-considered policy or claiming to divest publicly while actually retaining their shares in energy companies (a strategy that has also been used by some universities).  Why? Because divestment carries high costs while having no impact on the environment.

Take the recent divestment decisions by New York City and San Francisco as examples.  New York City’s Mayor, Bill de Blasio, and its Comptroller, Scott Stringer, made a big show of the city’s intention to divest its five pensions from fossil fuels, but in actuality the pensions boards have yet to move divestment forward.  San Francisco also just outright rejected the policy because, according to its investment consultant NEPC, divesting would hurt fund diversity and overall returns.

Put aside these rejections and the cost of divestment, activists like Bill McKibben and his supporters continue to ignore the fact that divestment does not help the environment, not even a little bit.

This point cannot be made enough.  Divesting from the companies that produce fossil fuels (as well as conduct a great deal of research on new sources of energy) does not stop people from using fossil fuels.  It also does not impact the companies’ bottom line as once you sell the stock another buyer just snaps it up.  Or, in the words of the Harvard Crimson’s Editorial Board after their university rejected fossil fuel divestment:

“Simply put, it is the supply of and the demand for fossil fuels that creates the market valuations of energy companies, not the reverse.  Divestment has no ability to alter these basic economic realities.”

Essentially, unless demand for fossil fuels is curtailed because there is another, cheaper, way to fuel cars and heat homes (among many other uses) oil and gas are here to stay.

Many of the energy companies divestment activists target are also spending billions to further support the energy challenges of tomorrow and continue to protect environment.

The very companies that divestment activists are jetting around the world to demonize (in fossil fuel powered planes, no less) are on the forefront of clean tech research and development.   And the strides they are making toward emission reductions technologies and alternative fuels are not small, in fact these companies have invested billions to this end.

According to Bloomberg New Energy Finance:

“The world’s biggest oil companies are closing more clean energy deals … Oil majors more than doubled the number of acquisitions, project investments and venture capital stakes, to 44 in 2016 from 21 the year before.  In the last 15 years, they’ve completed 428 transactions and spent $6.2 billion building stakes in clean energy companies.”

Not to mention the fact that the American energy industry is providing an affordable supply of clean-burning natural gas, which is credited by the International Energy Agency as the primary reason for the United States’ decreasing carbon emissions.

Divestment merely transfers funds from one owner to another, creating no benefit for the environment but real costs for students, pensioners, and taxpayers.

The cost of divestment is one of the most oft-cited reasons for rejecting it.  In the case of universities, a study conducted by Dr. Bradford Cornell out of CalTech that we commissioned found that divestment at five top U.S. colleges would lead to an average combined annual shortfall of $195 million.  Endowment portfolios are usually linked to overall university spending, and a major shortfall in performance could mean cost-cutting in areas like research, student aid, and faculty size.

Such exorbitant costs are why many universities decide against divestment, including, among others, the University of California, Berkeley Board of Regents, which noted that the supposed benefits divestment “would not outweigh the total costs”;  Middlebury college, which concluded “the board cannot look past … the difficulty and material cost of withdrawing from a complex portfolio of investments, and the uncertainties and risks that divestment would create”; and Wellesley College, whose President stated “the cost to Wellesley would be high and the economic impact on fossil fuels companies inconsequential.”

The same is true for pensions.  A recent study conducted by the Suffolk Country Association of Municipal Employees (AME) determined a divestment policy would cost the State of New York $2.8 billion over 20 years.  Cities and states have underfunded pensions tend to make up for these shortfalls by allocating more and more taxpayer dollars to fill the gap.  For example, in New York City a staggering four out of five taxpayer dollars collected from NYC’s personal income tax are already going towards paying down these liabilities — ratio that will only increase if the city follows through on its stated intention to divest.

Bottom Line: Pro-divestment events, like the one to be held in DC this week and the associated “watch parties” everywhere from New York City to Los Angeles, leave out these realities, but no amount of advocacy changes the fact that divestment is a counterproductive and expensive proposition.