February 10, 2017

Gonzaga, Washington, and Divestment: What You Need to Know

Next week, Gonzaga University is slated to release a report on the fossil fuel holdings present in its endowment investments.  To be clear, this report itself is not a decision on divestment, but rather a response to pressure on the university to provide more transparency on its fossil fuel holdings.

Yet given increased pressure on campus and within the state of Washington to divest, let’s take a quick look at what Gonzaga has said on the past about this costly gesture, what it would cost the university, and how divestment has fared in Washington to date.

For starters, previous comments from Gonzaga leadership already suggest the school understands the cost of divestment. The Fossil-Free Gonzaga campaign is calling for an end to new investments in the Carbon 200 and the removal of fossil fuel investments within the next five years from direct or co-mingled funds.  Yet to date, leadership from the University has highlighted the costs and impact such a decision could impose on the endowment. According to Associate Vice President for Finance Joe Smith in the Gonzaga Bulletin in November 2016:

“Associate Vice President for Finance Joe Smith said that divesting from fossil fuels, from a fiscal standpoint, is not a similar comparison to apartheid divestment because ‘it’s just so prolific…Consumption of carbon — in some way, shape or form — touches all industries, regardless of how little it would appear on the surface that that company is involved in it,’ he said. ‘I’m not going to assume that the moral comparison is the same — it could even be more profound, if you will, on one end or the other on either of these topics — but I think that the tactical strategy of implementation, [which] is sort of what I’m pointing to, is very different.’”

Smith continues, stating divestment would carry “definitively” higher administrative fees.  That’s because the majority of Gonzaga’s investments are in co-mingled funds – making any decision to divest highly costly.  According to the Gonzaga Bulletin:

“If the board moves investments to a fossil-free mutual fund, Smith said, ‘definitively,’ higher administrative fees will follow. Fossil-free mutual funds have higher administrative costs, in part, because of additional layers associated with locating carbon-free stocks. ‘You as an investment manager are a minority, meaning most of the universe of investors, don’t do fossil free,’ Smith said. ‘So you aren’t necessarily as big and perhaps aren’t as skilled as some of these other investment managers who, in essence, don’t have parameters.’”

Academic reports also find heavy costs for endowments. Gonzaga has a small endowment size of $200.8 million (as of 2015) that “consists of assets invested over the long-term to provide permanent support for the University.”  The endowment, while smaller than many of its peer colleges, has been praised for its growth in recent years and, according to Joe Smith, is key to the school’s “ability to provide an exemplary educational experience at tuition rates below many of our regional peers, now and into the future.”

So just what would divestment put at risk? Based on a report from Prof. Hendrik Bessembinder from Arizona State University’s Carey School of Business, for a typical small endowment divestment would translate into a loss in value of as much as $17 million to $89 million over 20 years.

This high cost is due to the transaction and management fees related to divestment, costs that 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.” Regardless of the total fossil fuel holdings presented in this week’s report, these are real and unavoidable costs in any divestment decision.

Gonzaga faces pressure from the national group behind the divestment campaign, 350.org. Despite the heavy costs and ineffectiveness of this effort, the divestment issue is gaining increased attention in Washington and has been amplified by 350.org’s presence in the state. Just this December, 350.org Board Chair K.C. Golden presented on divestment to the school’s fossil free group.

In his comments on campus, Golden went so far to say the “financial health of the fossil fuel industry is the death of the rest of the planet” and that “Divestment’s going to work out great financially, because fossil fuel companies are gonna continue to go bankrupt and continue to lose their share value.” Golden also repeated claims from debunked Arabella reports that “we’re up to about $5 trillion dollars totally committed to divestment.”

Still, even Golden admits that divestment isn’t really about selling off shares in a company, but rather  a way to stigmatize the industry. As he states, “It has been an overwhelmingly powerful way, not just to move money and investment out of the fossil fuel industry, which at the end of the day isn’t really the point, but to have a much better conversation about what is our relationships to the problem.”

These comments not only ignore the role of the oil and natural gas industry in supporting the economy  (and the environment), but actively notes that the impacts of divestment aren’t really 350.org’s problem – they just want to drive a conversation, a tough message for the pensioners and students who carry the financial burden of these decisions.

Colleges across the west continue to say to no to divestment. To date, many colleges in the west have rejected divestment.  Most recently, Denver University issued a strong rebuke of the campaign, stating “divestment in fossil fuel companies, or any other industry, would not be an effective means of mitigating global warming nor would it be consistent with the endowment’s long-term purpose to provide enduring benefit to present and future students, faculty, staff and other stakeholders.”

The DU Board of Trustees continued, noting “stigmatizing fossil fuel companies inherently involves stigmatization of their employees as well. As a general matter, the panel believes that stigmatizing individuals based upon a career choice to work for an employer engaged in a lawful enterprise is inappropriate.”

In fact, over 2016 alone the divestment campaign saw rejections from schools like Cornell, UPenn, Notre Dame, Rice University, Northeastern, and the University of Utah. 

Still, other divestment decisions in Washington have had costly consequences. The University of Washington divested from only coal in May 2015 – a small, partial divestment gesture that is still is carrying a heavy price. As the Seattle Times reported:

“About $2.3 million of the university’s $2.6 billion endowment is invested in coal, less than 1 percent of all investments. By selling those shares, the UW expects to lose about $13 million over the next 20 years. Divesting in all fossil fuels would be much costlier over the long run. The university would lose about $250 million over the next 20 years if it sold all its shares in fossil-fuel companies, university spokesman Norm Arkans said.”

The Seattle City Council also recently voted to divest from Wells Fargo “because of their funding of the Dakota Access Pipeline and other controversial business practices.” Similar pressure is underway in California to push two of the nation’s largest pension funds to divest. Yet as the nation’s largest pension fund, the California Public Employees’ Retirement System (CalPERS), stated in response to the effort, such a decision would limit its ability “to maximize risk-adjusted returns, and minimize risk through diversification, potentially imposing additional costs on California’s public employers and agencies, civil servants, and impairing CalPERS’ ability to pay promised benefits.”

Seattle University also rejected divestment back in 2014, stating “divestment from fossil fuels will neither impact the finances nor change the behavior of affected companies. We believe there are more effective ways to address climate change. For these reasons, we are not prepared to move forward on a feasibility study of divestment from fossil fuel companies.”  While efforts to change the school’s decision do continue, notably in a 2015 faculty letter to divest, the costs and negligible impacts of divestment are likely to win out.

Bottom Line: Gonzaga University’s endowment continues to grow and support its mission of providing affordable education to students. This week’s report on the endowment’s fossil fuel holdings may provide some useful background for future investment decisions, but any plan to divest will come at a hefty price. Let’s hope outside groups like 350.org pressuring the university to divest will consider this cost.