If at first you don’t succeed, try again. That appears to be the thought behind a “new” report by the Institute for Energy Economics and Financial Analysis (IEEFA) that once again uses misleading claims to support fossil fuel divestment. The group (that just happens to be heavily funded by the pro-divestment Rockefeller Brothers Fund), has done nothing more than slap a new headline on recycled talking points that have already been debunked by Divestment Facts again and again.
The report desperately tries to assert that the divestment is smart fiscal policy due to the underperformance of the energy sector over the last decade. Yet this argument falls short and is not consistent with actual facts. While there’s no need to go line by line refuting their arguments (you can read that HERE), below are five things to keep in mind when considering IEEFA’s report:
For example, California Public Employees’ Retirement System (CalPERS), the nation’s largest pension fund, last year found that previous divestment decisions cost the fund $8.5 billion in losses.
Harvard University’s endowment lost $1 billion by prioritizing “feel good” investments over ones that consistently generate solid returns.
Economic consultants for San Francisco Employees Retirements System’s (SFERS) released a report stating that:
“If SFERS had divested of $450 million in equity investments in fossil fuel companies by July 1, 2017, between that date and December 31, 2017, it would have cost SFERS approximately $78 million in gain and about $27 million in excess returns over the MSCI ACWI.”
These pensions and institutions have unfortunately learned the hard way that divestment is a costly option.
New York State Comptroller Tom DiNapoli, who opposes divestment, said that diversification is key to the long-term value of a fund:
“My fiduciary duty requires me to focus on the long-term value of the Fund. To achieve that objective the Fund works to maximize returns and minimize risks. Key to accomplishing this objective is diversifying the Funds’ investments across sectors and assets classes including the energy sector.”
A report from Prof. Hendrik Bessembinder at the University of Arizona found the transaction costs and on-going management fees 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. For a typical large endowment, this would translate into a loss in value of as much as $7.4 billion.
Increased management costs were a major reason why the Vermont Pension Investment Committee (VPIC) rejected divestment:
“The largest measurable explicit costs of divestment to VPIC would be ongoing increased management fees. Management fees would increase under each of these three divestment scenarios because VPIC commingled funds, where the bulk of VPIC’s fossil fuel were held, would have to be restructured into materially higher-cost SMA funds.”
The Massachusetts Institute of Technology: “In our judgment, a symbolic public move to divest is not the most effective way for MIT to drive progress on climate, and pursuing it would interfere with two promising strategies: active engagement and bold convening.”
University of Massachusetts, Political Economy Research Institute: ““The basic question we ask here is simple: how effective are campaigns to force various entities to sell their fossil fuel stock holdings likely to be in driving down CO2 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”
William Coaker, CIO of the San Francisco Employees Retirements System: “Divestment alone does not harm or punish companies that produce fossil fuels, and the only parties that could be negatively impacted by divestment are those that are not invested in them.”
Peter Meringolo, Chairman of the New York Public Employee Conference: “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 towards addressing climate change.”
Despite IEEFA’s attempt to breathe life into the faltering divestment movement, the facts show that divestment is all cost and no reward. Their attempts to justify the economics of divestment didn’t hold up last year, and don’t hold up now. Thankfully numerous cities, states, and universities continue to reject divestment and recognize it as bad fiscal policy.