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August 27, 2018

Divestment’s Final Exam: 2018

If you wanted to get a sense of how the divestment movement has performed over the past year, look no further than June 2018.  In one day, University of Cambridge, one of the most prestigious colleges in the world, and Swarthmore College, the campus on which the divestment movement began back in 2011, both rejected a fossil free investment policy.  In fact, Swarthmore rejected divestment for the fourth time!

These high-profile rejections come amidst a year of  independent reports discrediting all of the major pro-divestment talking points and a concerted pushback from pensioners in some of our nation’s biggest and bluest cities.  Divestment campaigns on college campuses have gone so poorly that they have even started to shut down and rebrand.

So as a new school year begins  and summer comes to a close, here are the key takeaways from 2018.

The Major Rejections Continue

  • Cambridge

Just in time to mark the end of term, Cambridge University decided against divesting its £6.2 billion portfolio from all fossil fuels.  The three-year campaign on campus by Cambridge Zero Carbon Society had yielded an agreement to cease investments in coal and oil sands—a weak gesture considering the endowment did not have direct holdings in either to begin with.  That didn’t prevent students from getting creative with their protests.  Back in March, Zero Carbon Society dropped banners and lit flares on the Hammersmith Bridge during the annual Oxbridge Boat Races as the teams rowed underneath; last month, students staged a similar protest, dropping another banner from the River Cam and leading chants over a megaphone.  But, it was all for naught as the university council officially announced it was rejecting a fossil fuel divestment policy.

Most notably, in rejecting divestment, the Council points to the fiduciary duty of its fund being able to make significant returns in order to support and drive the University’s academic program:

“The financial sustainability of the University depends on strong returns from its investment strategies and the ability to benchmark these strategies against other investors. The CUEF has significantly outperformed its market benchmarks over the 10 years of its existence and so has significantly enhanced the University’s ability to pursue its mission. Those returns are a critical component of the financial resources that underpin research and education activities across the University, including the provision of some financial support for students and the enhancement of education and research facilities.”

“Divestment from any funds that have even small fossil fuel components, or that would require CUEF to step back from investments in alternative energy initiatives by global companies currently regarded as fossil fuel companies, would result in significant limitations on the CUEF’s ability to invest as successfully as in the past, with consequent reductions in the fundamental support provided by the endowment to the University’s core academic activities.”

  • Swarthmore

It’s somewhat ironic that Swarthmore has never agreed to divest, given that the campus is the birthplace of the college divestment movement.  Over the years, Swarthmore has rebuffed students’ protests and demands for divestment.  In June 2018, the school once again reiterated its anti-divestment stance and confirmed the school’s $2 billion would not bar fossil fuels.  A new student referendum prompted the administration to confirm the standing policy.

The following is the school’s official statement, as reported in Chief Investment Officer:

“Any policy change that shifts the focus from attaining the best long-term financial results would then require fundamental changes in both the asset allocation and the investment managers who serve the College, and would place that performance at risk,” said Salem Shuchman, chair of the Swarthmore’s board of managers, in a letter to students and faculty. “As with other policies of the board, it may be revisited from time to time, but there is no current plan to do so.”

Swarthmore has a longstanding investment policy that commits managers to ““yield the best long-term financial results, rather than to pursue other social objectives,” first adopted in 1991.

  • Grinnell

The administration at Grinnell College was forced to explore divestment options after students occupied the President’s office for several days in protest.  About ten percent of the student body participated in the demonstration, which prompted the formation of the Divestment Task Force.  After a year of analyzing the issue, the task forced released a comprehensive report that rejected divestment on the grounds that it “would introduce significant investment risk in the endowment while having little, if any, direct impact on climate change.”  While only 2.4 percent of Grinnell’s $2 billion endowment is invested in fossil fuels, full divestment would require selling off a quarter of all investments, or $500 million, due to these investments being wrapped up in comingled funds.

  • NYU & Middlebury

Within the same week we saw both New York University (NYU) and Middlebury reiterate their anti-divestment stance. In NYU’s case it was for the third time, as the school first rejected in June 2016 and again in December 2017.  The administration told students in a letter that divestment would lead to NYU fund managers being barred from participating in “many funds that they believe are important for growing the endowment.”

Middlebury, where the leader of the divestment movement, Bill McKibben, teaches, first rejected the policy back in 2013.  Since then the school has continually avoided giving in to student demands—the latest example during an April forum where treasurer David Provost told students the aim of the endowment was solely to maximize long term financial returns.

Evidence against divestment continues to mount

  • UMass report

Two years ago, the University of Massachusetts was lauded with praise after announcing it was “the first major public university to divest its endowment from fossil fuels.” However, the school’s own Political Economy Research Institute (PERI) released a report that completely rained on their parade, shutting down all pro-divestment arguments and concluding what we knew all along: divestment is a pointless strategy. The report was authored by Robert Pollen, a distinguished professor of economics at UMass Amherst who has expressed his strong support of sharply reducing the carbon footprint of the U.S.

Key findings of the report conclude that the $6 trillion number usually put forward by activists as the total amount of dollars divested is nonsense, pointing out that most pledges “as of March 2018 amount to $36.1 billion” and are not binding and the fact that “it is critical to be clear on the distinction between the assets under management of an entity committed to divestment and the actual level of divestment by that entity.”  The report also finds that divestment does not lower carbon emissions:

“Our answer is also straightforward. We conclude that divestment campaigns, considered on their own, have not been especially effective as a means of significantly reducing CO2 emissions, and they are not likely to become more effective over time.”

Additionally, Pollen’s report finds that divestment does not impact the stock prices of targeted companies, it simply frees up those stocks for others to pick up.

  • Price Tag of Harvard’s Good Intentions? $1 Billion

Bloomberg  reported in March that Harvard’s investment managers lost a staggering $1 billion (yes, that’s billion with a ‘b’) by prioritizing sustainable investments over those that generate consistent returns.  This flies in the face of usual arguments from divestment proponents that traditional fossil fuel stocks are losing money and that investing in renewables and sustainable investments exclusively will boost returns.

Perhaps this strategy is the reason why Harvard’s 10-year average annual returns lag those of its peers at just 4.4 percent compared to 6.6% at Yale, 7.1% at Princeton, 7.3% at Columbia and 7.6% at MIT.  It begs the question, by forcing through a sustainable investments policy, are financial managers adhering to their fiduciary duty?

Divestment on the Pension Front

Since it’s clear that the divestment track record on college campuses is not a successful one, divestment proponents have turned their efforts to the next best thing: public pensions.  No matter that divestment has been proven to be a major money losing strategy by economists, politicians seem to be an easier sell on the policy than colleges and investment managers.

  • New York

A new study by Prof. Daniel Fischel of the University of Chicago Law School and co-authors Christopher Fiore and Todd Kendall of economic consulting firm Compass Lexicon  was released earlier this year and analyzed the pension funds of New York and Colorado to determine the financial implications of divesting from fossil fuels. For New York, the study found that, when broken down annually, the expected cost of divestment for the New York State pension fund ranged from $136 million to $198 million.

This follows a 2017 report authored by Fischel that found New York City’s five pensions would lose up to $1.5 trillion over 50 years if it were to fully divest.

Late last year, the Suffolk County Association of Municipal Employees also released its own divestment report, and found that such a policy would lose $2.8 billion for the state pension over 20 years.

Both Governor Andrew Cuomo and New York City Mayor Bill de Blasio have made their pro-divestment stances known, and have supported efforts to compel their respective funds to divest from fossil fuels. However, their proposals were met with pushback from five public sector unions while more than 12,000 people signed a petition designed to educate citizens about the risks of divestment and signal a lack of public support for Cuomo and de Blasio’s plans. While the feuding pair continue to push for something their constituents don’t want, they’ve run into an unexpected problem: pensioners who are actually impacted by this policy and depend upon pension payments spoke out forcefully against the move.

New York State pensioners took a stand against divestment earlier in the year at the annual New York State Employee Conference.  As Peter Meringolo, Chairman of the New York State Public Employee Conference, noted:

“We understand that climate change is real but what is lost in this debate is that there have been no studies proving that fossil fuel divestment would make any significant progress toward addressing climate change… The bottom line is that the retirement accounts of working families should not be used as political bargaining chips in the debate over climate change.”

  • Colorado

Colorado’s PERA fund is currently facing what may be its second funding crisis in a decade. As the Denver Post reports, he fund only has only 58.1 percent of the money it owes in future retirement checks and the funding gap has ballooned to $32.2 billion by one accounting measure — and $50.8 billion by another. While some tone-deaf fossil free groups are calling for the pension fund to divest, a new study has shown that divesting from fossil fuels would already exacerbate a dire problem.

The study by Prof. Daniel Fischel of the University of Chicago Law School and co-authors Christopher Fiore and Todd Kendall of economic consulting firm Compass Lexicon was released earlier this year and analyzed the pension funds of New York and Colorado to determine the financial implications of divesting from fossil fuels. It found that—when adjusted for risk—Colorado’s annual cost of divestment could range from $36 million for a narrow divestment to $50 million for a broad divestment. The study also estimates that over the past 50 years, the Colorado PERA would have suffered a 7.36 percent loss with a narrow divestment, and a 10.12 percent loss with a broad one.

  • San Francisco

The San Francisco Employees Retirement System (SFERS) struck another blow to the divestment movement, opting out of full divestment during a board meeting in January.  Ultimately, after several delays, the board announced that it could not fully divest due to its fiduciary duty.

So what did the board vote to do instead? As E&E News summarizes, “San Francisco’s $24 billion public pension fund voted yesterday to shift a small portion of its holdings into an environmentally friendly portfolio, opting against a broader strategy of divesting from fossil fuels.”

SFERS’ financial consultants estimate that divesting from the full Carbon Underground 200 would impose a one-time transaction cost of $1.2 million and a performance shortfall “within a range of $5.765 million to $23.058 million per annum.”

Banks & Sovereign Wealth Funds on Divestment

  • Bank of the West

In August of this year, San Francisco-based Bank of the West received public pushback following their divestment announcement. After increasing pressure from social activist groups, Bank of the West announced that it was divesting from “coal, tar sands, shale oil, and artic drilling – and investing and financing the transition to more sustainable energy sources.”

Public reaction has been so negative in fact that Wyoming State Treasurer and Gubernatorial candidate Mark Gordon responded to the divestment decision by announcing that the state of Wyoming was now, in effect, closed for business and that he would deny any applications from the bank to place certain state funds into their institution. Also critical of the decision, U.S. Senator John Barrasso characterized the bank’s decision as “fashionable” and politically motivated – criticizing the San-Francisco-based institution for acting without consideration for the state of Wyoming and its’ economy.

  • Norway’s Government Pension Fund Global

Late last year, headlines were made about Norway’s sovereign wealth fund and the proposed idea to sell off its oil and natural gas holdings. However, the proposal was recently knocked down a peg with a stinging rejection from a government-appointed Commission.  The Commission recommended that Norway’s trillion-dollar sovereign wealth fund continue to invest in oil and gas companies, rejecting the prior advice of the central bank and eager activist groups.

The recommendation, handed down by Commission chair Øystein Thøgersen, minced no words in its rebuff of divestment, saying:

“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. A consistent adaption of the GPFG’s investments to other assets of the nation, may have major consequences for the investments – and represent a substantial change of the current investment strategy.”

A final decision on the matter will be made by the Finance Ministry, in the Fall.

Bottom Line

It seems that divestment advocates are continually getting blocked at every turn as large institutions opt for more common-sense approaches to investing.  In turn, institutions that choose to shirk their fiduciary duties and put politics about pensioners, students and clients find out that the consequences of divestment are far more serious than anticipated. At the end of the day, we know that divestment is all cost for no environmental gain, and universities and pensions have also acknowledged this reality.