June 29, 2016

Maryland Divestment Decision Another “Empty Gesture”

By now, no one should be surprised by “empty gesture” divestment pledges from college campuses and pension funds. The latest example? The University System of Maryland Foundation (USMF). The University, according to the student paper, “has no direct investments in coal, tar sands or any companies on the Carbon Underground 200 list,” yet announced today it was giving up its direct holdings in fossil fuels. Confused? You aren’t alone.

USMF is that latest university to utilize the “Syracuse model” — when an institution announces it will sell only direct investments from fossil fuels. The model is increasingly being used by endowments to gain the applause of the decision to divest without incurring the sizeable costs associated with such a decision. What’s even more interesting is how many of these programs don’t actually have any direct investments in the first place.

So how much does Maryland have invested in direct fossil fuel investments? Turns out, according to USMF president and CEO Leonard Raley in the student paper in May 2016, “currently, the USMF has no direct investments in coal, tar sands or any companies on the Carbon Underground 200 list.”  The paper notes that “the foundation has found that $1.1 million of indirect investments have been exposed to those forms of dirty energy. However, this will all taper off within the next five years, {Raley} said.”

Yet as noted in the Baltimore Sun, this week’s announcement “applies only to direct investments, not investments in indexes such as the S&P 500 that may include oil and coal stocks. About 7 percent, or $70 million, of the university system’s endowment is invested in the energy sector, which includes some fossil fuel and some clean energy sources.” In other words, the university system is giving up no direct fossil fuel holdings while still maintaining a number of fossil fuel investments in co-mingled funds – funds not impacted by this divestment announcement. Even supporters of divestment recognized this was a limited move, calling for more “focus on direct investments in clean energy companies and shift away from investments in indexes that may include fossil fuel stocks.”

A future effort to remove these indirect holdings may also be an uphill battle for the foundation. As stated in the Baltimore Sun, “It might take some time to divest from all coal, oil and natural gas companies, Raley said, because some investments come with a penalty for pulling out early.”  That penalty could be extremely high, as featured in recent report from Prof. Bessembinder of Arizona State University. According to his report, the research, transaction and management costs related to divestment – what he refers to as “frictional costs” – have the potential to rob endowment funds of as much as 12 percent of their total value over a 20-year timeframe.

The Sun does note that “officials said they will instruct fund managers to stop investing in the 200 coal, oil and gas-related companies on a list compiled by Fossil Free Indexes, which ranks the companies by the potential carbon emissions content of their reported reserves.” Given the importance of fossil fuels to many of these funds, and the highly co-mingled nature of these investments, it remains to be seen how many of these investments Maryland can really give up.

It is clear the “Syracuse model” of empty gestures is back at work, and that for Maryland to really divest it still has a long road ahead.