June 1, 2018

New University of Massachusetts Economic Report Tells It Like It Is, Calls Divestment Ineffective

This week, just two short years after the University of Massachusetts (UMass) held itself up as “the first major public university to divest its endowment of fossil fuels,” its own Political Economy Research Institute (PERI) released a report concluding that divestment is all but useless.  Written by a Robert Pollen, a distinguished professor of economics at UMass Amherst who is strongly in favor of sharply reducing the United States carbon footprint, the report lays out the many ways in which the activists behind the fossil fuel divestment movement have got it wrong.

Here are the highlights of the 44-page report.

Confirmed: That $6 Trillion “dollars divested” figure activists keep touting is nonsense.

At this point this probably isn’t news to too many people.  The $6 trillion figure is so far-fetched it has been debunked by even the most sympathetic outlets, like The Guardian and Mother Jones.  The problem is, of course, that activists are in the press announcing that $6 trillion has been divested, when in reality that number in no way represents the amount of assets divested from fossil fuels, it’s just an aggregation of the total value of combined assets of institutions that it claims have “pledged to divest.”

The PERI report noted this problem up front:

“As an initial matter, it is critical to be clear on the distinction between the assets under management of an entity committed to divestment and the actual level of divestment by that entity. “

The report then takes it one step further, noting that many of the pledges to divest, aren’t even binding:

“GFF states that all of the divestment commitments that it reports in its dataset are ‘binding.’ But we found that not all commitments are in fact binding. For example, city councils of some municipalities have voted to divest. But the final decision to sell off fossil fuel assets rests with the fund managers, not the council itself.

“We were also unable to consistently establish whether some entities have already divested, are in the process of divesting, or have yet to initiate the asset sale process.

“Additionally, for some entities, figures for commitment dates, commitment levels, and amount of assets under management are unavailable.”

Based on the information that PERI was able to obtain, the authors estimated the value of assets divested to be approximately $36.1 billion, which is about 0.6% of what activists are claiming—or, looked at in another way, 0.7 percent of the total market value of global fossil fuel companies as of August 2014.

The report also concludes the following about why this number is so small:

“Based on the data we have compiled and estimated on assets under management and divestment levels, the main patterns we observe are as follows:

1. Virtually all of the entities that have committed to divestment at any level are very small, as measured by assets under management;

2. Most of the entities are committed at full divestment levels. But here as well, virtually all of the entities committed to full divestment are small.

3. Fifteen large entities dominate the overall pool of divesting entities, as measured both directly by assets under management, and, through our estimations, by levels of divestment. Moreover, all but one of these 15 large entities have made only limited divestment commitments.”

Confirmed: Divestment is not an effective means of cutting carbon output, nor will it ever be.

This shouldn’t come as a surprise either, but the simple fact that the divestment campaign has not moved the needle in reducing CO2 emissions or reducing the consumption of fossil fuels globally is frequently lost on the environmental activists pushing for it.  From the report:

“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.

“We reach this conclusion on the basis of what we believe is the most careful examination to date of the evidence on global fossil fuel divestment activity. Our examination includes both an analysis of the available descriptive data on global divestment patterns as well as an econometric modeling exercise that evaluates the impact of divestment events on the stock market prices of fossil fuel companies.”

3) Confirmed: Divestment just frees up those stocks for other investors

The fact that divesting from fossil fuels wont impact the targeted company because another investor will just scoop up the stock undermines the entire movement. For years now,  responsible managers at universities and pension funds have pointed to this issue as their reason for not divesting.

This PERI report is essentially telling them that they were right.

The report used a standard “events study” methodology to conduct a “time-series econometric analysis to assess the impact of specific divestment events on the stock market share prices of oil/gas and coal companies respectively.” Essentially, the authors of the report seek to find out if divesting from fossil fuel companies has had any impact on these targeted companies. The overall conclusion is no, fossil fuel divestment doesn’t impact the operations of fossil fuel companies. From the report:

“…[divestment] will have no direct impact on the operations of the fossil fuel corporations as long as investors who are profit-seekers, as opposed to being motivated ethically, are willing to purchase the stocks and bonds that ethically-motivated divestors have been put up for sale. Indeed, the core divestment strategy of selling fossil fuel assets is, at best, incomplete until one also evaluates who will be purchasing these for-sale divested assets and under what circumstances.

“It is a truism that profit-seeking investors will continue to purchase these divested fossil fuel assets as long as they can profit from them. Their profit opportunities will not be diminished through the divestment-led sales per se. This is because divestment per se does not affect either the cost structure of the corporations’ productive operations or the goods markets in which consumers buy energy.” (emphasis added)”

4) Confirmed: Divestment has not impacted the share price of the targeted companies.

Once you accept that the shares will only shift ownership if a given university or pension fund opts to divest, it logically follows that divesting has no impact on the targeted companies share price.

Using economic modeling, the report concludes the following:

“Overall then, the results from regressions R1-12 consistently show that the divestment events had no negative impact on the share prices for oil/gas firms. Neither the share prices as measured by the oil/gas price index nor the individual share prices for Shell or Exxon have been negatively affected by either any single divestment event or by the combined impact of all the divestment events included in our model.”

Bottom line: UMass’s economic report concludes what we’ve already known for years. The divestment movement has been woefully exaggerated while having no impact on the environment. Talk about all cost and no gain.