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September 10, 2018

Arabella’s Latest #FakeDivestment Numbers: What You Need To Know

The new Arabella Advisors divestment report is out, and unsurprisingly they claim yet another trillion dollars has been divested since their last report was released in 2016.  We already previewed the announcement here.  But now that the new number is official, here is what you need to know about this divestment stunt.

Claim: “Today, nearly 1,000 institutional investors with $6.24 trillion in assets have committed to divest from fossil fuels, up from $52 billion four years ago—an increase of 11,900 percent.”

Fact: The real number worth noting here is the fact this report finds such a little change since 2016.  As Divestment Facts has pointed out time and again, the metrics Arabella uses to tabulate the total funds divested is inherently flawed.  As outlets like Mother Jones and MSNBC have pointed out, the firm counts the total amount of assets a fund has as “divested” assets, even if the number of shares sold amounts to less than a percentage point of that total.

But even by their absurdly lax standards, Arabella’s own numbers show the trend for the divestment movement is slowing.  For comparison, between 2015 and 2016, Arabella claimed that divested assets doubled—jumping from $2.6 trillion to $5.2 trillion. This report shows a gain of $1 trillion over a timespan that was twice as long.

A much more realistic estimate can be found in a recent report from the Political Economy Research Institute (PERI) at UMass Amherst which found that divestment pledges “as of March 2018 amount to $36.1 billion.”  That’s $20 billion below the initial figure the campaign rolled out in their first report. Not a great start for Arabella’s math.

Claim: “In 2018, New York City became the largest city in the world to date to commit to divest.”

Fact: A January announcement from Mayor Bill de Blasio along with Comptroller Scott Stringer that the city was “divesting” $5 billion from fossil fuels was nothing more than a promise to begin the process of examining divestment among New York’s five pensions.  POLITICO later reported, the plan has yet to make real headway in the city, with only one of the five pensions even voted to “begin studying” the fiscal implications of divesting:

“Mayor Bill de Blasio’s much-touted plan to divest the city’s pension funds from fossil fuel reserves did not receive the glowing reception from city pension boards Thursday that it has from environmental advocates. Four of the five boards representing the city’s roughly $191 billion pension fund system met to vote on a resolution to begin studying the fiscal implications of divesting from companies that own fossil fuels. Only one board — the NYC Employees Retirement System — voted to pass the resolution.”

New York City’s five pension funds all have to independently vote to start the process of examining divestment, so it is disingenuous to claim New York City divested.  We also don’t know what their final decisions will be, if they decide to move forward with the policy, so the final number will most likely be far lower than the $5 billion being reported.

The city also started up an RFI process to gather insight into how the city could go about divesting, which IPAA responded to at length. New York City may be considering divestment, but counting it in this tally is far from honest.

Claim: “The insurance sector continues to divest more than any other sector, having committed to divest over $3 trillion in assets.”

Fact: Scroll down one more page, and Arabella states “In addition, several major insurers have decided to stop underwriting fossil fuel projects. While not divestment per se, these actions impact the industry by increasing the costs of capital and compliance.”

So, is an insurance company saying they won’t underwrite a new coal project the same as divesting? The answer is no. And while the merits of such decisions should be discussed at length, the bottom line here is that Arabella is picking and choosing numbers that bolster its case.

Claim: “Norway’s sovereign wealth fund—the world’s largest, with approximately $1 trillion in assets and roughly $35 billion invested in oil companies—divested from coal companies in 2015. It has recently indicated interest in divesting its holdings of international oil companies, as well.”

Fact: Perhaps Arabella’s report was already sent to the printer, but just last month a government-appointed commission offered a stern rebuff to the idea of divesting, stating:

“The commission has taken a number of considerations into account, and based on an overall assessment, recommends that the GFPG should still be invested in energy stocks… A sale of energy stocks would challenge the current investment strategy of the Fund, with broad diversification of the investments and a high threshold for exclusion. This investment strategy is simple, well founded and has served the Fund well. If energy stocks are excluded from the Fund, the composition of the investments will differ from market weights, and the Fund will be expected to either achieve lower return or higher risk.” (emphasis added)

Claim: “Ireland, which has an €8.9 billion ($10.4 billion) sovereign development fund, became the world’s first country to commit to divest its wealth fund from fossil fuels this year.”

Fact: As Arabella itself admits, the effort by Ireland to divest has yet to become law. Even if does, divesting will not actually occur for five years. In other words, the roughly $10.4 billion that Arabella counts as divesting has not yet, in effect, been divested.  Read more about that HERE.

Claim: “The United Kingdom has emerged as the leader among university divestments, with 12 new commitments so far in 2018 and 68 in total.”

Fact: Divestment announcements from the United Kingdom have long been on shaky ground, with  many having little to no public sourcing. In 2017, for instance, the Times Higher Education reports, Canterbury Christ Church University, University of Chester, University for the Creative Arts, University of Cumbria, Newman University, Wrexham Glyndwr University, York St John University, Writtle University College and the University of Winchester have all signed a pledge to not invest in fossil fuels — despite none of these universities having endowments to begin with.

Perhaps the most important announcement to come out of the UK university system was that of world-renowned Cambridge University, which rejected divestment despite fevered students protests and multiple proposals submitted by proponents.

Claim: New analyses show there is a strong financial case for fossil fuel divestment, and that investors can divest from any sector without jeopardizing their risk/return profiles.

 Fact: One can only assume this is referring to a study put out by the Grantham Foundation that is touted by 350.org and As You Sow in a new report released just a few days ago. That report ignored a number of claims previously debunked on the blog, but let’s highlight a few core items here:

  • Investing is a long game. Picking winners and losers based on a downward moment in a commodity cycle merely means missing out on later upswings in the market and, in turn, returns.
  • Divestment is proven to reduce returns. Daniel Fischel, Professor of Law and Business Emeritus at the University of Chicago Law School, found that 11 of the nation’s top pension funds would lose up to a collective $4.9 trillion over 50 years if they were to fully divest from the energy sector. 
  • Diversification losses from divestment should not be ignored. According to Prof. Fischel, of the 10 major industry sectors in the U.S. equity markets, energy has the lowest correlation with all others—which means it has the largest potential diversification benefit. By divesting from fossil fuel, one loses this particularly potent diversification benefit and is therefore exposed to increased risk above and beyond what may happen if a fund divested from other sectors of the economy. 
  • Divestment significant transaction costs. The Grantham Foundation only looks at returns and avoids the additional fees and costs that are caused by divestment. A reportfrom Hendrik Bessembinder, Professor of Finance at the W.P. Carey School of Business at the University of Arizona, found the transaction and management costs related to divestment – what he refers to as “frictional costs” – have the potential to rob endowment funds of as much as 12 percent of their total value over a 20-year timeframe. This includes the onetime immediate transactions costs an endowment must endure, as well as ongoing annual management fees to stay in line with the changing definition of “fossil free.”  Since many public pensions and endowments hold assets in mutual funds, commingled funds, and private equity funds, divestment generally requires the sale of an entire fund – not just its fossil fuel holdings. This imposes substantially larger transaction costs for endowments.

Claim: “In reaction to the risk posed by divestment and related campaigns, the fossil fuel industry is pushing back by funding PR and disinformation. These campaigns include front groups such as DivestmentFacts.com…”

Fact: Arabella’s report continues to put forward shaky numbers to gain new headlines–figures that have been called “hardly a precise calculation” by the New York Times and debunked by Mother Jones, MSNBC, and others.  The public, students and pensioners that stand to lose as a result of symbolic divestment efforts deserve the facts.


Read More:

New $5 Trillion Figure another Over-exaggerated Claim from Divestment Movement

While Gates Pledges Investment, 350.org Peddles Faulty Divestment Figures