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May 26, 2016

Another Empty Divestment Gesture: UMass Divests Less than 1% of Endowment

When the University of Massachusetts announced yesterday its plans to divest its endowment from “direct holdings” in fossil fuels, divestment activist cheered and claimed it as a major victory. Yet, as is often the case, the fine print tells a very different story. Once again, this divestment “victory” is simply another “empty gesture.”

Here are a few things to know about what this announcement really means.

1) UMass Decision Impacts Very Small Portion of Portfolio

According to the Boston Globe, “the UMass Foundation, which oversees the $770 million endowment of the five-campus system, affects direct investments made in fossil fuel companies. University officials have valued those holdings at about $5 million. The action does not include university-owned investment funds that have portfolios with stakes in fossil fuel.” In other words, UMass is divesting about .65 percent of its entire endowment — less than one percent of the entire endowment of the UMass system.

Furthermore, the university is only giving up its direct holdings in fossil fuels, leaving the number of comingled funds in its endowment that include fossil fuels untouched. In reality, part of why divesting is so difficult for universities to undergo is because portfolios invest in index funds, private equity, mutual funds, hedge funds, and more. In turn, truly eliminating all fossil fuel exposure would mean reinvesting a sizable portion of the entire portfolio.  Wellesley College, for example, calculated that if it fully divested from all fossil fuels, 58 percent of the endowment would be affected.  UMass saying it has divested ignores the reality that true divestment would require a much larger action on behalf of the endowment.

2) Empty Gesture Has Not Held Back Pro-Divestment Groups

Despite the minimal nature of the divestment decision, activists have taken to the worldwide web to tout the UMass decision as a “mammoth” win for the movement. But given that the endowment is giving up less than one percent of its direct investments in fossil fuels, this decision feels like more of an empty one than anything else.

mckibben umass

3) Decision Ignores Key Costs of Divestment

Small or not, divestment comes with a cost for universities. As reported in the Globe, “A recent study by Arizona State University business professor Hendrik Bessembinder estimated that full divestment could cost an endowment between 2 and 12 percent of its value over 20 years.” That study, recently commissioned by the Independent Petroleum Association of America, finds that the “frictional costs” of divestment have the potential to rob endowment funds of as much as 12 percent of their total value over a 20-year timeframe. For a typical medium endowment like UMass, the report finds the loss is equal to between $52 million and $298 million.  Todd D. Kendall, an economist with Compass Lexecon who worked on the study, was also featured in the Globe, stating UMass could be making a mistake by “excluding a major sector of the economy from the portfolio.”

4) Fellow New England Colleges Have Rejected Divestment

As UMass moves forward with its divestment decision – however limited it may be – it’s important to remember the number of neighboring schools that have rejected divestment. Harvard University, for instance, rejected divestment in October 2013, stating “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. I believe there are a number of more effective ways for Harvard both to address climate change and to enhance our commitment to sustainable investment.”

The Massachusetts Institute of Technology (MIT) announced in October 2015 that it wouldn’t divest, instead announcing a “plan for action on climate change” that places a greater emphasis on engagement and research initiatives. MIT President Reif also stated, “We believe that divestment — a dramatic public disengagement — is incompatible with the strategy of engagement with industry to solve problems that is at the heart of today’s plan. Combatting climate change will require intense collaboration across the research community, industry and government.”

Another top university in the region, Brown University, stated in October 2013, “As a university, Brown has a responsibility to grapple with the world’s problems in all their complexity. As I and others considered the matter, it became apparent that the symbolic statement of divestiture would not elucidate the complex scientific and policy issues surrounding coal and climate change and, for this reason, it would run counter to Brown’s mission of communicating knowledge.”

The UMass Board of Trustees will discuss the recent divestment decision at a June 15 meeting. Let’s hope that the real facts about the university’s decision are well understood by the board, and by the many people that rely on a healthy UMass endowment.