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June 4, 2018

ICYMI: WSJ Opinion Explains Why Fossil Fuel Divestment Is Futile

Last week The Wall Street Journal ran an expertly-written opinion piece laying out the many reasons why fossil fuel divestment is a waste of time.  It’s author, Paul H. Tice, is an investment management professional and an adjunct professor of finance at New York University (NYU), a school that rejected fossil fuel divestment in 2016, 2017 and again in 2018.

Mr. Tice is quick to point out one of the most fundamental flaws of the divestment movement: university endowments and pension funds cannot divest from such a large portion of the overall economy without severely impacting returns.  In his words:

“Fund managers need return performance and portfolio flexibility.  That’s the main reason college endowment boards have generally ignored student climate protesters.  Energy is a significant component of the world’s financial markets—too large, diverse and volatile a sector for major institutional investors not to own.  Depending on the benchmark index, the industry comprises between 5% and 15% of the major U.S. debt and equity markets.”

This point echoes the findings of Professor Daniel Fischel of the University of Chicago, whose study found that a fossil fuel divestment policy would cost pensions trillions of dollars in combined losses over a 50-year timeframe because the funds would exclude such a significant part of the economy.  These losses would result in either slashed payments to pensioners or taxpayer bailouts.

What’s more, Mr. Tice points out that the ESG movement may be, paradoxically, making energy companies more—not less—attractive to investors. From the op-ed:

“In the long run, the effort to starve energy companies of capital will only make the oil and gas sector more attractive to investors… In the near term, any cash not put back into the ground through the drill bit would likely be returned to shareholders in the form of dividends and stock buybacks.”

That’s right, the divestment movement may actually benefit the investors who, in. Mr. Tice’s words, “resist peer pressure and maintain exposure to the sector.”  This isn’t, of course, the first time the fundamental premise of the divestment movement has been questioned in this way.  In fact, just last week the University of Massachusetts released a study, which similarly questioned whether divesting from fossil fuels will impact energy companies at all, or simply transfer ownership of those shares.  From the UMass study:

“It is a truism that profit-seeking investors will continue to purchase these divested fossil fuel assets as long as they can profit from them.  Their profit opportunities will not be diminished through the divestment led sales per se.”

These two points taken together paint a bleak picture of fossil fuel divestment, a policy that ensures endowments and/or pension funds hurt only their own returns while failing to impact targeted energy companies at all.  Mr. Tice adds to the long list of people already decrying the misguided movement.