February 11, 2019

IEEFA Recycles Debunked Arguments in Latest Divestment Report

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:

1. IEFFA says not to look at past performance, unless it suits their argument. The biggest contradiction in the report can be found in the title, “Fossil Fuel Investments: Looking Backwards May Prove Costly to Investors in Today’s Market.” As the title suggests, the report claims that investment managers shouldn’t look at past performance as the basis for continued investment in fossil fuels. But then in the same report they claim that divestment is the right choice based on the underperformance of the energy sector over the past decade. Seems like IEFFA wants to have their cake and eat it too. It’s not permissible to analyze divestment based on a 50-year timeframe, which encompasses a multitude of market highs and lows and geopolitical changes, but it is permissible to base divestment upon more recent market underperformance? Yeah, we’re confused too…

2. It’s not theoretical, pension funds and institutions have actually lost money due to divestment. IEEFA claims that money managers should be “leading their investment pitches with fossil-free funds” because of the “underwhelming performance of oil and gas stocks.” Yet this theory does not hold up with reality.  Pensions and endowments have lost billions of dollars due to divestment.

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.

3. It’s not about individual stock performance, but about lost diversification. IEEFA’s whole argument is based on the notion that if oil and gas stocks have underperformed in recent years, then it won’t be costly to divest of them. However, studies have found that the majority of costs associated with divestment are from reduced diversification and increased risk. Of the 10 major industry sectors in the U.S. equity markets, energy has the lowest correlation with all others—which means it has the largest potential diversification benefit. By giving up the diversification benefits of the energy sector, investors either can sacrifice returns or incur more risk. Financial losses due to divestment are tied to risk, not whether energy stocks go up or down.

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.”

4. There are additional costs and fees associated with divestment. It’s not just lower returns that one must consider when looking at divestment, but also associated costs and fees that make the cumulative impact even greater. For example, there will be transaction costs from selling fossil fuel holdings and replacing them with other securities.  There will also be ongoing compliance costs to maintain the fund’s adherence to a new fossil-free investment policy.

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.”

5. Divestment is a symbolic gesture and ineffective at achieving environmental benefits. Despite what IEEFA and other pro-divestment groups would like to believe, divestment will not help them achieve their environmental goals. Here’s a sampling of what some of the experts say:

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.