May 2, 2016

NYU Divest’s letter adds little to the discussion

NYU Divest’s recent letter to the Washington Square News, “Let’s be Fair about Divestment” is unfortunately anything but.  Many of the claims made in the piece have already been disproven by other students, administrators, financial experts, and most importantly, NYU’s own Boards of Trustees.

First and foremost the authors downplay the cost of fossil fuel divestment to universities’ endowments.  Arguing that a study conducted by Bradford Cornell for the Independent Petroleum Association of America is the only piece of evidence to the contrary, they ignore numerous studies by economists, financial experts and the universities themselves, which have found the costs to be substantial:

• A study conducted by Daniel Fischel of the University of Chicago Law School, found that divested portfolios produced returns 0.7 percentage points lower than ones invested in energy on an absolute basis;
• A Tufts University report calculated that even under its most conservative model, its endowment would lose $75 million in value over five years, enough to fund scholarships for 100 undergraduates;
• Pomona College estimated that over a 10-year period divestment would result in a total decrease in the endowment’s performance of about $484 million. Similarly it concluded that it would cost the college between $10 and $20 million annually if it was not able to work with its current managers;
• Williams College found that the “initial cost of divestment would be in liquidating the portfolio which, even done in an orderly fashion over the course of a year, would cost $75 million or more” and;
• Swarthmore College estimated the cost of divestment at $200 Million over the course of 10 Years.

In response NYU Divest boasts of “diverse and sophisticated research demonstrating that divestment makes financial sense” but only actually reference a single report; a study by Corporate Knights which found that New York lost $5.3 billion by retaining fossil fuel stocks over the last three years.

Leaving aside the hypocrisy of challenging the ethics of the Cornell study while using data provided by the ‘magazine for clean capitalism’, the letter fails to acknowledge numerous problems.

For one thing it is only an indication of what has happened and offers no scientific basis for predicting what will happen. It might has well have told us that we should have bet on the Bronco’s in the Superbowl this year, for all the value it provides in forecasting future performance.

Indeed with the oil price at a 13 year low, the majority of colleges’ stocks are likely to have been bought at a higher price than they would be sold for today. Buying high and selling low hardly seems to be a sensible investment strategy, a point borne out by the fact that many analysts see the industry as a medium to long term buying opportunity.

Similarly, activists’ claim that retaining fossil fuels has resulted in significant losses for New York appears controversial at best. A recent report on the United States’ largest state pensions by Sonecon, found that oil and gas investment “significantly” outperformed other assets between 2005-2013 and delivered returns ‘twice as great as their share of the funds’ assets.”

Of course, the biggest issue with the author’s position is the argument that fossil fuel divestment will have any real impact on global carbon emissions.

Divestment can only affect share prices if the stock is not bought by others. But even if it isn’t, it has no direct impact on the profitability of operations because selling stock does not equate to removing funds from these companies. It is in short, a purely illusory strategy.

This was the finding of the New York University Divestment Working Group which investigated divestment and described it as “primarily a political action or statement”. Ultimately the Working Group advised that divestment would be ineffective and fiscally irresponsible – the same conclusion that many NYU students have themselves reached.

NYU Divest is right in calling for a well-researched consideration of the real impact divestment. Sadly this one-sided analysis which ignores of the facts and does nothing to advance that discussion is not it.