September 21, 2018

IEEFA Opinion Piece Ignores Economics to Push Agenda

Despite a lengthy debunk of their false claims, the folks at the Institute for Energy Economics and Financial Analysis (IEEFA) are once again spreading misleading claims and misinterpreting economic research in an attempt to paint divestment as a viable choice for pension managers.

This time around a new piece posted by IEEFA’s Executive Director, Tom Sanzillo, completely misconstrues the findings of highly regarded economic consulting firm Compass Lexecon and lead author Prof. Daniel Fischel’s divestment research to push a false narrative about the nature of divestment in Colorado.

For background, Prof. Daniel Fischel, of the University of Chicago Law School, authored a recent report that analyzed the potential impact of divesting the Colorado Public Employees’ Retirement Association (PERA), and found that PERA would lose up to $50 million per year if it were to fully divest from fossil fuels, and up to $646 billion in foregone returns over 50 years. Prof. Fischel outlined these important findings in an opinion piece placed in Colorado Politics, stating in sum:

“Fossil fuel divestment is not an issue that should be taken lightly. It carries significant financial implications and will cost Colorado and PERA recipients tens of millions of dollars annually and hundreds of billions of dollars in the long-run. Given the precarious state of Colorado’s pension fund, divestment would only exacerbate the situation and cause further financial injury to the pensioners who depend on the fund for payments and to the taxpayers who help support it.”

Fast forward to this week: IEEFA Executive Director Tom Sanzililo posted a response opinion piece with multiple falsehoods and even intimates that Fischel’s piece “comes perilously close to misleading advice according to the Security and Exchange Commission rule on forward-looking statements.”

Most of Sanzillo’s points are based on a report IEEFA put out recently which had numerous shortcomings already debunked by Divestment Facts, available HERE. There’s no need to relitigate each point again, but it’s important to clarify what Fischel’s findings are and how Sanzillo has once again completely misinterpreted the report’s conclusions.

For starters, Sanzillo harps on the fact that Prof. Fischel and his team look at the past 50 years to construct their findings, stating “what were the conditions under which the past performance was achieved and will it be repeated?” and “oil and gas stocks aren’t going to regain their former glory. And while the energy sector remains a behemoth, its current and future performance will not resemble the past.”

Yet Fischel et. al never argue that past performance determines future returns.  In fact, the report specifically acknowledges that there is no way to predict what stock prices will do.  From Fischel’s 2015 report:

“… Regardless of recent events, there is no way to reliably predict future returns in advance, and therefore, the best guide to the potential effects of diversification – and the standard approach of financial scholars and analysts to such questions – is to examine longterm averages.”

The argument Fischel puts forward is that fossil fuels are the least correlated to the broader market, and therefore provide the most diversification benefits. Their findings of possible financial losses are tied to risk, not whether energy producing stocks go up or down.

By giving up the diversification benefits of the energy sector, investors either can sacrifice returns or incur more risk.  Fischel and his team simply calculated the risk-adjusted returns of a fossil free portfolio and found it would underperform a non-divested portfolio by 0.14.  Because pensions have millions, if not billions in assets, those losses expand overtime to very sizable numbers.

Interestingly enough, Fischel and his team actually took a conservative approach to their estimates, leaving out losses associated with active portfolio management and transaction costs. Sanzillo ignores this fact in this attempted debunk, but dozens of institutions that have rejected divestment cite these very costs as a primary reason for rejecting ineffective divestment. In fact, the transaction and management costs related to divestment have the potential to rob endowment funds of as much as 12 percent of their total value over a 20-year timeframe.

Let’s look at the evidence:

• University of Denver (DU) DU Board of Trustees: “Regarding divestment, the Board adopted the task force recommendation that 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.
• Vermont Pension Investment Committee: “Fossil fuel divestment may introduce meaningful diversification risk, increase costs – including cost to restructure the VPIC portfolio from commingled funds into to SMAs, higher management fees, and operational costs, reduce VPIC’s proxy voting and engagement opportunities across an entire sector of the economy, introduce a slippery slope potential for other restrictions, particularly for other aspects of today’s carbon economy. Fossil fuel divestment does not reduce the global economic dependence on, or demand for, fossil fuels, or impact the financing of the targeted companies.”
• Swarthmore College: “If Swarthmore decided to divest, we would have to find replacements for all the commingled funds because an institution has no power to impose a constraint on a commingled fund. Swarthmore’s commingled funds totaled $660 million at the end of the last fiscal year. Divestment would incur a very large cost.”
• Marc Wais, Senior Vice President for Student Affairs at NYU, on the schools divestment rejection: “{The Board’s} concern is that prohibiting such investments would exclude NYU from participating in many, many funds that they believe are important for growing the endowment, which in turn supports NYU’s academic mission and student financial aid.”

Still not convinced divestment is costly? Let’s take the California Public Employees’ Retirement System (CalPERS), the nation’s largest pension fund and one that voted unanimously to curtail its divestment policy last year.  The reason? CalPERS’s previous divestment initiatives cost the pension more than $8 billion in taxpayer and pensioner dollars since their inception.

Bottom line: Don’t be fooled by the latest claims put forward by a group that is funded heavily by the Rockefeller Brothers Fund—who is also bankrolling the broader divestment movement. The economics speak for themselves, which is why countless universities and pension funds have rejected the empty gesture that is divestment.