December 12, 2016

New $5 Trillion Figure another Over-exaggerated Claim from Divestment Movement

Divest-Invest released a new report from Arabella Advisors at a webinar this morning, claiming $5.2 trillion in divestment pledges have been made across the globe. If that number sounds over-exaggerated, that’s because it is.

The report concludes that “fossil fuel divestment movement has doubled over the past 15 months,” with 55 percent of divesting institutions based outside of the United States. The types of institutions divesting have also grown, with “no one sector representing more than a quarter of commitments.”

But what exactly is behind this $5 trillion figure?  More importantly, how does the divestment movement help promote impact investing, Arabella’s ultimate goal? Here are the top 10 things you need to know about the 2016 Divest-Invest report.

1) Today’s report is more of the same. In its 2015 report, Arabella Advisors claimed that entities representing $2.6 trillion in combined assets pledged to divest—a marked increase from its 2014 study, which pegged that figure at $50 billion.  Today’s report estimates $5.2 trillion, a number that again no way represents the amount of assets divested from fossil fuels, but rather is an aggregation of the total value of combined assets of institutions that it claims have “pledged to divest.”

Mother Jones remarked upon the ridiculousness of Arabella’s previous claims stating, “that big number — $2.6 trillion—has nothing to do with the amount of money that is actually being pulled out of fossil fuel stocks” and further called out Arabella for having “no idea how much money the institutions surveyed have invested in fossil fuels, and thus how much they pledged to divest.”

2) No one knows how many fossil fuel shares have actually been divested. Even The Guardian – divestment’s biggest fan in the media — stated in its write up on the report, “it is often difficult to calculate the precise proportion of fossil fuel investments in complex funds, but about $400bn of the $5.2tn total is likely to be in coal, oil and gas” – a huge (and likely still exaggerated) difference in actual impacts.  The article continued:

“Fossil fuel divestment has been criticised as gesture politics, as the investments are sold on, or unrealistic due to world’s current dependence on fossil fuels. Bill Gates called fossil fuel divestment a ‘false solution’ in 2015, although the $40bn Bill and Melinda Gates Foundation has now sold off 85% of its fossil fuel investments. Saudi Arabia’s oil minister, Ali Al-Naimi, also criticised divestment as ‘misguided’ but said it could not be ignored, while Bill McNabb, chief executive of the investment giant Vanguard, said divestment had no impact on company balance sheets and threw away the opportunity to influence the company as a share owner.” (emphasis added)

3) Divestment still has no impact on the environment. Arabella’s report states the growing “Keep it in the Ground” efforts and fossil free campaigns are gaining momentum. The report notes, “Together, these campaigns comprise a multi-faceted, increasingly global movement, with divestment providing an important on-ramp for a new generation of young climate leaders.” What they don’t mention, is the fact that divesting has absolutely no impact on the environment.

4) In fact, divestment actually contradicts supporting new technology developments. In addition to producing natural gas to provide back-up power for renewable resources, many fossil fuel companies are also investing in alternative energy and technology resources. The Financial Times, for instance, reports that Shell has launched a “New Energies division to invest in renewables, and has hit the headlines for its possible bid for a share of an upcoming offshore wind tender in the Netherlands.” Exxon’s investment in advanced biofuels is implementing new research into algae-based fuels to create a next generation biofuel with fewer impacts than ethanol. Bloomberg explains more:

“Exxon Mobil Corp. is partnering with a company to capture carbon-dioxide emissions from power plants. Total SA, the French oil supermajor, announced a $1.1 billion deal Monday to buy the battery maker Saft Groupe SA, complementing its 2011 purchase of a majority stake in the solar-panel maker SunPower Corp. And the Canadian pipeline company Enbridge Inc. announced Tuesday it will pay $218 million for stakes in offshore wind farms as it attempts to double its low-carbon generating capacity.”

Robert Stavins, Director of the Harvard Environmental Economics Program, has also discussed how divestment runs in opposition to developing new technologies for the future. As he states:

 “Even if divestment were to reduce the financial resources of coal, oil, and gas companies (which it would not do), this would only serve to reduce research and development at those same companies of carbon capture and storage (CCS) technologies, as well as other potential technological breakthroughs; and could reduce the development of some renewable sources of energy (which the fossil fuel companies are carrying out as part of their financially rational diversification strategies).”

5) Investing side of Divest-Invest still lagging. Not only is divesting retracting investments in the firms that are supporting new technology developments, according to the Arabella report “Institutions and individuals that have pledged to both divest and invest in clean energy and climate solutions collectively hold $1.3 trillion in assets.” So even if we pretend Arabella’s $5.2 trillion claim holds weight, only a fifth of all divestment pledges include “reinvestment” in clean energy sources.

That may have something to do with the immense costs of re-investing. As Executive Director of Hawaii’s Employee’s Retirement System, Thomas Williams, stated in his opposition to divestment:

“Transaction costs associated with divestment and reinvestment in alternative securities is estimated at $1.4 million dollars annually. Annual and quarterly reporting along with administrative costs is estimated between $80,000 and $200,000 annually. Opportunity costs are incalculable.”

We also know from Prof. Hendrik Bessembinder’s research that actively managing a portfolio and the act of selling and reinvesting stocks is very expensive for any fund.  In fact, he found that these “frictional costs” like management and transaction fees could cost a fund as much as 12 percent of its total value over 20 years.

Additionally, Dan Kern of Advisor Partners highlighted on a pro-divestment webinar that the most risk-averse reinvestment strategy for a divested portfolio is to invest in stocks that are closely tied with the energy industry — like utilities or countries whose value is closely tied to energy exports. So you can divest, but in order to get the benefits of diversification that come from investing in fossil fuels, you’ll need to invest in countries like Russia and Norway, whose economies are significantly dependent on oil and natural gas.  Might look like divestment on the surface, but in reality funds are not being taken out of fossil fuels.

6) Using Arabella’s own logic of endowment size, divestment is the clear loser in the United States. As stated in the New York Times, “Many institutions remain unconvinced.” From the article:

“Some universities, in rejecting calls for divestment, have cited their fiduciary responsibility to produce the greatest income from their endowments. Harvard’s president, Drew Gilpin Faust, has said that the university supported research and efforts to fight climate change, but that ‘The endowment is a resource, not an instrument to impel social or political change.’” (emphasis added)

In fact, in the past six months alone there have been a series of high-profile setbacks for the divestment campaign. In September, the University of Pennsylvania announced the unanimous decision to not divest from fossil fuels, following previous rejections from other Ivies including Harvard, Brown, Columbia, Yale, and Cornell. Notre Dame President Fr. John Jenkins also announced in September the implementation of a five-year sustainability plan while rejecting divestment.

The list continues, with the Chief Investment Officer at Rice University ($5.5bn) stating in November, “I do not consider blanket divestment to be the solution for sustainability in the future.” The University of Utah ($715 mn) rejected divestment in July, stating the school intends to instead focus their efforts on engagement.  Northeastern ($729mn) also quietly rejected divestment back in July, stating “We have deliberately chosen to invest, not divest. This approach is consistent with Northeastern’s character as an institution that actively engages with the world, not one that retreats from global challenges.”

7) Several of these “divested” institutions are limited at best. Bloomberg has labelled many divestment announcements “empty gestures” and the New York Times called Arabella’s previous $2.6 trillion figure “hardly a precise calculation.” If that is the case, this new figure is close to pure fiction.

Over the past six months, for instance, Boston University ($1.6bn), Univ. System of Maryland ($1.2bn), Univ. of Oregon ($873mn), and Salem State Univ. ($18mn) did take steps to partially divest but many are less than full commitments. For example Boston University stated it would make “efforts to avoid investments that extract” coal and oil sands, has noted that “total avoidance of coal and tar sands companies may not be possible, because the University’s portfolio includes vehicles such as mutual funds, whose managers choose stocks, and passive index investing.”  Salem State University also voted to divest from coal, despite the fact that the “University has no current investments in coal.” The University System of Maryland Foundation (USMF) also “has no direct investments in coal, tar sands or any companies on the Carbon Underground 200 list,” yet announced it was giving up only its direct holdings in fossil fuels.

Arabella, however, doesn’t discriminate between divestment pledges, stating it includes a “proliferation of approaches beyond divesting from the top 200 companies.” Clearly that includes divesting from nothing at all.

8) Divestment rejections in the U.K. continue to be riddle with empty gestures.   People & Planet in the U.K. suggests that nearly 42 U.K. schools have divested, yet provide little supportive data to back it up.  For instance, an October announcement that 26 UK schools had already divested had only five universities on the record as committed to full divestment. The remaining were partial acts–most merely giving up coal and oil sands holdings or having no holdings to begin with.

For instance, many UK schools are considered “divested” because an investment manager called CCLA that handles many endowments has said it “does not invest in any company that is primarily focused on coal or tar sands production.” This includes Birmingham City University, Cranfield University, De Montfort University, Heriot-Watt University, University of Hertfordshire, and the University of Portsmouth – all schools that have funds managed through CCLA.

Two of the UK’s most prestigious and well-known schools, Oxford and Cambridge University, have also fallen into empty divestment gestures, as Bloomberg highlights.

9) Losing on campuses, divestment also struggles to take hold at Faith-based institutions. Since the divestment movement has faced increased resistance among universities, especially in the United States, Divest-Invest pivoted to claim faith groups and foundations as a bright spot in their latest report.  Imam Saffet Abid Catovic, Board member of Islamic Society of North America Green Masjid Task Force, announced that 160 religious institutions with assets of $36 billion had committed to divestment. He also specifically touted the Islamic Society of North America’s announcement of a commitment to divestment.

But upon further examination, these “commitments” don’t seem to hold water.  Take Imam Catovic’s own organization: The ISNA announcement offered no details regarding which fund(s) will be divested, the percentage of holdings currently in fossil fuels, or if the announcement encompasses all fossil fuel holdings or just direct holdings.  This is the norm for most faith-based organization announcements, which usually feature broad divestment announcements scant on details and whose financial information is not readily available online.  In this case, we just need to take Arabella’s word for it, but based on their track record, they don’t seem to be a great source.

Of course, Divest-Invest also failed to mention high profile rejections among faith organizations, like that of the United Methodist Church.  Earlier this year, the UMC voted against adding a fossil fuels investment screen to the Church’s Board of Pension and Health Benefits, opting instead for an engagement strategy.  In a separate announcement preceding the vote, the Board stated, “experience demonstrates that the agency has significantly greater influence when it remains engaged with companies and active in drawing attention to these important issues—rather than selling shares and losing a voice for The United Methodist Church.”

10) Mark Ruffalo claims, “If you have your money in the fossil fuel industry, you’re going to lose it.” Unfortunately for The Hulk actor, multiple reports find that is not the case.

The Arabella report touts the “vulnerability in fossil fuel business models that divestment can potentially exacerbate.” Though the Divest-Invest crowd wouldn’t like to admit it, fossil fuels continue to be a vital energy source for the entire world and will remain so for the foreseeable future.  Mark Ruffalo’s outlook for fossil fuels seems to be a bit of an exaggeration, considering that the Energy Information Administration (EIA) has stated multiple times that oil and gas will constitute 80 percent of the world’s energy use by 2040.  Meanwhile, overall energy consumption worldwide will continue to grow by 56 percent during that period.

In reality, any commodity or technology will experience price fluctuations over its lifetime. Given the political climate in the United States, the continued reliance of fossil fuels around the globe, and the rebounding oil price, it’s hard to make a real financial case for Divest-Invest’s platform. The reality of it all is that oil prices are cyclical, but the energy sector remains a vital part of hedging risk in a portfolio, as Prof. Fischel discovered in his 2015 study.

Even 350.org activist Naomi Klein stated recently that, “Fossil fuel stocks aren’t performing very well right now. So opponents have just lost their best argument. They won’t lose it for long.  So that’s another reason to pound away at it.”  In fact, rather than divest from funds, a savvy investor will frequently take advantage of low prices to maximize gains over a longer timeframe.

Bottom line: Arabella’s numbers sound great, but they are just wrong. Not only does this report leave a lot of questions left to be answered about the real facts and figures behind the divestment movement, it again highlights the fact that divestment has no tangible impact on the environment – and very real costs for students, retirees, and pensioners.