This week, Divestment Facts responded to the New York City Comptroller’s Request for Information (RFI), from which his office hopes to gather insight into how the city can divest $5 billion in fossil fuel assets during a five-year period in a manner “consistent with fiduciary duty.” Our response, which highlights the findings of numerous professors and economists, makes one thing abundantly clear: they can’t.
“These studies all conclude that fossil fuel divestment will lead to significant financial costs for public pensions and institutions, while providing no substantial environmental benefits…We strongly encourage you to examine the true costs associated with divestment, the impact it will have on pensioners and taxpayers, the effectiveness of such policies, and how you will define what is means to be a ‘company owning fossil fuel reserves,’” wrote Jeff Eshelman of Divestment Facts.
As outlined in the Divestment Facts letter to the Comptroller, the costs inherent in divestment necessarily clash with the funds’ legally mandated duty to maximize pensioners’ returns. The loss of fund diversification, as noted by Prof. Daniel Fischel of the University of Chicago Law School, will lead to significantly lower returns. In fact, he found that portfolios divested of energy equities produced returns 0.7 percentage points lower than those invested in energy on an absolute basis. One reason for the dramatic impact is because the energy sector has the lowest correlation with the other nine major industry sectors in the United States—and therefore—the greatest diversification benefit.
Lost diversification is only part of the problem with divesting. As pointed out by Prof. Hendrik Bessembinder, a Professor of Finance at the WP Carey School of Business at the University of Arizona, there are several other “frictional” costs associated with divesting. These costs, which include transaction costs and on-going management fees, have the potential to rob endowment funds of as much as 12 percent of their total value over a 20-year time frame.
In case these studies weren’t enough to deter Comptroller Stringer, we also urged him to consider a recent study conducted by Prof. Fischel that examined the direct impact divesting would have on the five NYC pension funds. He found that these funds would lose a combined $98-120 annually and between $1.2-1.5 trillion over 50 years. To compensate for these losses, more and more NYC taxpayer dollars would be needed to make up for pension funding shortfalls. This is almost unimaginable in light of the fact that the American Council for Capital Formation (ACCF) determined that by 2019 a staggering four-out-of-five taxpayer dollars collected from NYC’s personal income tax will go towards paying down the city’s pension liabilities even without divestment.
The staggering costs are part of the reason why Comptroller Stringer and NYC Mayor Bill de Blasio are getting are getting so much push back on their divestment plan. For example, Scott Evans, the Chief Investment Officer (CIO) for NYCERs recently noted that divesting from fossil fuels could cause “major tracking errors.” Moreover, the actual benefit of divesting is unclear, as noted by Vicki Fuller the CIO of the New York State Common Retirement Fund, “if we divest, we don’t have a seat at the table and we don’t change behavior.”
We hope—for the sake of pensioners and NYC taxpayers—that Comptroller Stringer will take the analyses of these fund managers, academics, and economists into consideration and abandon efforts to divest NYC’s pension funds.
Click here to read the comments sent to Comptroller Stringer in response to the RFI.