June 16, 2016

ICYMI: New Report Finds Transactional Costs of Divestment Could Cost Schools Billions

A new report by Prof. Hendrik Bessembinder of Arizona State University highlighting the true cost of divestment is receiving nationwide attention. The study found that transactional costs and management fees alone could cost endowments billions of dollars to rid themselves of fossil fuel investments – over and above any costs that would be incurred through weaker portfolio performance.

The findings are as relevant as ever in light of recent announcements from the University of Massachusetts and the Washington, D.C. pension fund that each institution is only selling its “direct” holdings in fossil fuel companies. This empty gesture is the latest trend in the pro-divestment movement, and ultimately amounts to a negligible percentage of an overall portfolio.  Institutions are opting to sell their insignificant direct holdings instead of fully divesting in part, as Prof. Bessembinder’s study shows, because full and genuine divestment is incredibly complicated and expensive.

Arizona State University Professor: “These are largely unavoidable costs, every institution that divests will incur them, and as my research shows, they significantly add up as time goes on”

San Diego Union Tribune: “A 2015 study … claimed that eliminating fossil fuel companies from a portfolio led to half-a-percentage-point losses per year. ‘That’s a substantial chunk of money,’ said Todd Kendall, who helped write the report. Another report, released last month, said the transaction costs of selling off a share of a large portfolio and the costs of adhering to a fossil fuel divestment policy acts as a drag on returns. ‘There’s really no agreement on what it means to be a fossil fuel company,’ Kendall said. ‘Is it the company that owns the fuels that are in the ground? Is it the ones extracting the fuels? Is it the ones burning it? What about an automaker? What if Bank of America makes a loan to Exxon? Should Bank of America be divested?’” (June 14, 2016)

Chicago Sun Times:  “Professor Bessembinder said endowments could lose between 2 percent to 12 percent of their value due to the costs of trading securities, management fees, and ongoing monitoring of this specific directive. So, due to lower returns on their investments and excessive Wall Street management and trading fees, these endowment funds are at risk of significantly lower returns. That could mean less programming, fewer facility upgrades, and diminished capacity to provide scholarships and financial aid to students.” – Ald. Howard Brookins represents the 21st Ward of Chicago and chairs the City Council’s Education Committee (June 14, 2016)

VPR: “Of all the economic literature that’s looked into this question, basically all come to the conclusion that these divestment efforts don’t have any actual benefit that anyone can really articulate, it doesn’t change what the companies do,” Todd Kendall said. Kendall continued: “It’s basically a bumper sticker decision. It might feel good to slap your opinion on the back of your car, but it doesn’t change anyone’s opinion or move the debate forward, and in this case it’s a really costly bumper sticker.” (June 15, 2016)

Boston Globe: “Opponents of divestment believe such decisions could prove expensive. A recent study by Bessembinder estimated that full divestment could cost an endowment between 2 and 12 percent of its value over 20 years … Todd D. Kendall, an economist who worked on the study, said UMass could be making a mistake by “excluding a major sector of the economy from the portfolio.” He said divestment has “no real benefits in terms of affecting what oil companies do.” (May 25, 2016)

New York Times: “But the simple act of divesting may carry its own costs. A new report cited potentially large losses in the so-called frictional costs of divestment — the transactions required to get the schools out of the mutual funds that make up the bulk of most schools’ endowments and move to fossil-free funds or handpicked portfolios. Those costs … would “range between approximately 2 and 12 percent of the endowment’s value, which, for a typical large university endowment, would translate to a decline in value of between $1.4 billion and $7.4 billion” over a 20-year period.” (May 25, 2016)

The Hill: “Pensioners are right to be wary of the impact of divestment on their returns. According to a new report by a researcher at Arizona State University, divestment carries substantial “frictional costs” by way of transaction and management costs. According to his research, these costs have the potential to rob university endowment funds of as much as 12 percent of their total value over a 20-year timeframe. These same costs would apply to a pension fund that, much like universities, are invested in mutual funds, commingled funds, and private equity funds. In turn, to truly give up fossil fuel holdings requires the sale of a large portion of the overall fund, not just the energy stocks included within it – a significant cost to undertake.” – Jeff Eshelman, Senior Vice President of the Independent Petroleum Association of America (June 15, 2016)

Pensions & Investments: “Potential trading, ongoing monitoring and management costs of divestment of fossil-fuel companies from portfolio holdings ‘would substantially reduce the value’ of college and university endowment funds over 20 years, ranging on average from a cumulative $17 million for small endowments to $7.4 billion for large ones, concludes a research paper by an academic at Arizona State University. The costs — which amount to an average 2% to 12% reduction of an endowment fund’s cumulative value over 20 years — ‘are in addition to reduction in investment returns that divestment may impose due to forgone diversification benefits,’ wrote Bessembinder.” (June 10, 2016)

Bloomberg: “The top ten largest, actively managed funds with an ESG-focus cost, on average, 10 basis points more than active, non-social funds, and 73 basis points higher than passively-managed funds, according to the study. Some universities, including Williams College and American University have rejected broad-based fossil fuel divestment because of concerns over the added expense, the report cited. ‘The fact that costs exist should be part of the discussion,’ Bessembinder said in an interview.” (June 9, 2016)

East Bay Times: “Multiple studies confirm Ailman’s assertion. Caltech Professor Bradford Cornell released a report finding divestment could cost the nation’s leading universities millions while having no tangible impact on targeted companies or carbon reductions. Similarly, a new report from Hendrik Bessembinder of Arizona State University calculates the “frictional costs” by way of transaction and management costs. According to his research, these costs may rob endowment funds of as much as 12 percent of their total value over 20 years.” – Jeff Eshelman, Senior Vice President of the Independent Petroleum Association of America (June 15, 2016)

Washington Examiner: “Divesting from fossil fuel companies could cost major universities with large endowments as much as $7.4 billion over 20 years, according to a new study. “Divestment activists appear to rely on the reasoning that divestment will spur such a shift away from reliance on fossil fuels,” Bessembinder wrote. “However, there is little economic support for the claim that divestment of fossil fuel assets will have a material impact on the targeted companies in a way that would produce such a shift.” (June 1, 2016)

POLITICO: “Divesting from fossil fuel sources can reduce overall returns, but it can also require expensive active management, further harming returns, according to a study out today … dropping fossil fuel companies from a portfolio requires active management, particularly as the definition of “fossil fuel investment” shifts. The net result could be a loss of between 2 percent and 12 percent of a fund’s value over 20 years.” (June 1, 2016)

Cornell Daily Sun: “Bessembinder’s study aimed to shed light on the lesser-known frictional costs of divestment — the cost that “college and university endowments incur in implementing fossil fuel divestment” — which he said is often excluded from discussions about the merits of such a policy…These findings come roughly three months after the Board of Trustees’ vote against University divestment in February, which generated pushback from students and professors.” (June 3, 2016)

102.5 FM The Bone: “’These fees really add up overtime. Over a 20 year period, these can eat away up to 12 percent of a university’s endowment portfolio,’ said Kendall. ‘For a lot of colleges and endowments with endowments of millions and billions of dollars, these fees and expense can be millions and billions of dollars. And that money that’s lost could have gone to student scholarships, research, technology.” (LINK)

WAMV 420: “A lot of people have looked at [divestment], and ultimately when they do look at it they find what we found, that ultimately there really are no benefits in terms of making the world any greener from fossil fuel divestment, but it does have real and substantial costs because the fees can really add up,” said Kendall.’” (LINK)

WCBC 1270: “Buying and selling stocks has costs, real expenses and fees, and the same is true for a university endowment. If they decide they want to sell of their holdings in certain companies, those expenses and fees really add up…Georgetown announced that they were divesting from fossil fuels, but when you look at the fine print they were only divesting from direct investments. Even divestment activists realized that wasn’t a real victory for them.” (LINK)