July 24, 2017

ICYMI: Economists Find Divesting Brings High Costs, No Rewards

A new OpEd in the San Francisco Examiner highlights the immense costs of divestment from fossil fuels. The OpEd, co-signed by economists Christopher Fiore and Todd Kendall of Compass Lexecon,  highlights that divestment is costly not matter how you slice it. As previous research conducted by Compass Lexecon, academics, think tanks, and others supports, divestment imposes lofty new fees and costs for funds that implement such a policy. For the beneficiaries of funds considering divestment in the weeks ahead, such as the San Francisco Employees’ Retirement System, this piece is a must read.

From the San Francisco Examiner:

The available evidence shows that divestment is not only a costly investment decision for funds to pursue, but also carries no tangible impact on targeted companies or the environment. In a report released earlier this year, Compass Lexecon specifically examined how divestment would impact SFERS (among other major pension funds). Our study found that divesting from oil, natural gas and coal securities would cost SFERS $11.5 million annually. Over 50 years, that equals a $149 billion loss. If divestment were expanded to include utilities, the losses would grow to $15.7 million annually and $201 billion over 50 years.

In our study, we measured losses caused by reduced portfolio diversification — a key principle of investing that all advisors recognize as critical to increasing returns and managing portfolio risk. Despite the rhetoric of divestment advocates, the reality is that the energy sector has the lowest correlation with all other majority industry sectors in the U.S. equity markets and, as a consequence, the largest potential diversification benefit. Removing this sector of the economy from a pension fund’s portfolio reduces this benefit, either limiting potential returns or increasing portfolio risk (or both).

The lost diversification costs alone mean a loss of $11.5 million annually for the 59,000 active and retired employees that rely on SFERS. We also performed the same analysis for CalPERS, the nation’s largest pension fund. For the 1.6 million California public employees, retirees and their families who rely on CalPERS, this loss translates to a shortfall of $210 million to $289 million annually, and up to $2.3 trillion to $3.1 trillion over the next 50 years. In fact, divestment also imposes additional costs, such as transaction fees, commissions and compliance costs, that are unavoidable when buying and selling securities.

Read the full OpEd in the San Francisco Examiner.