As schools continue to reject calls to divest their endowments of fossil fuels, one common question is often left unanswered: How much does divestment actually cost?
In an effort to answer this critical question, a new report released today, commissioned by the Independent Petroleum Association of America (IPAA) and authored by a researcher from Caltech, quantifies for the first time the actual, real-world costs that individual, select schools could expect by divesting. Looking at the real-world cost of divestment for five leading U.S. universities with significant endowments — Harvard, Yale, MIT, Columbia, and NY– the report finds that these five schools collectively could lose more than $195 million by divesting from fossil-fuel related equities – $195 million for each and every year the portfolios are active in the market.
Led by Dr. Bradford Cornell, a visiting professor of financial economics at Caltech and a senior consultant at Compass Lexecon, the report draws on publicly available data to model thousands of different proxy portfolios for each school studied. Dr. Cornell and his team were then able to approximate the composition of each school’s investment fund, and then analyze those portfolios’ performance under both divested and diversified scenarios. Among the schools evaluated, Cornell and his team found that Harvard would experience the most significant loss if it decided to divest – roughly $107 million per year. Yale’s losses are projected to exceed $51 million year per year. MIT would lose $17.75 million; Columbia would lose $14.43; and NYU would see a reduction of $4.16 million.
As Dr. Cornell highlighted upon release of the report, “The fact that divestment has the potential to generate lower returns for schools and other institutions isn’t particularly earthshattering news. But the fact that the projected shortfalls associated with divestment are this significant, and this universal – that is the real critical finding here, and one that schools would be smart to evaluate as part of any discussion on divestment moving forward.”
IPAA senior vice president for operations and public affairs Jeff Eshelman also noted that, “This report adds to the growing body of research and real-world evidence out there showing that divestment is a bad policy based on a bad premise, with the potential to produce really bad outcomes for the schools and institutions that adopt it.” In fact, the Cornell report builds off previous research by University of Chicago Law School professor Daniel Fischel that analyzed the performance of two investment portfolios over a 50-year period: one that included energy-related stocks, and another that did not. The Fischel report found that fully diversified portfolios generated average, absolute returns 0.7 percentage points greater than portfolios that excluded energy stocks — meaning the “divested” portfolio lost roughly 70 basis points relative to the optimal scenario for each and every year over the 50-year period in which the portfolios were active.
As experts and prominent universities alike have already stated, divestment comes with serious costs and little tangible benefits. We suggest you read this report in full, but here are a few key findings you don’t want to miss: