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February 11, 2016

Prof. Cornell Talks Downside of Divestment on Vermont’s WDEV

Yesterday, Prof. Brad Cornell sat down with WDEV’s Common Sense Radio in Vermont to talk about Gov. Shumlin’s push for divestment.  Many of Vermont’s pensions have already spoken out against the plan in fairly strong language.  As an economics professor at Caltech, Prof. Cornell explained in plain terms how divesting can hurt a portfolio’s performance by reducing diversification and eliminating an entire sector from investment.  At the same time, divestment has not been shown to impact climate change in any meaningful way, because as Prof. Cornell puts it:

“The fossil fuel companies are not consumers, they’re producers…so if we want to do something about climate and the environment, we have to look at the consumption side, not the production side.”

In addition, from an economic standpoint, divestment does nothing to impact the targeted companies and ends up backfiring on the entity divesting. As shares become available on the market, other investors will simply buy them back up, making divestment a pointless exercise.  And yet, ridding a portfolio of fossil fuels will cost millions, as Prof. Cornell explains:

“…for that, in my view, you’d get nothing.  Because there are a lot of investors that don’t care about all this political brouhaha or realize it’s not really addressing the problem.”

This is not only true for Vermont pensions, which State Treasurer Beth Pearce says will lose millions per year by divesting, but colleges as well.  Prof. Cornell has done extensive research on the impact of divesting on university endowments.  His analysis found that it would cost the likes of Columbia, Yale, NYU and MIT millions per year, with Harvard losing more than $100 million annually.

Though some activists like to claim that divesting would have saved money over the past few years, Prof. Cornell explains why that is not a realistic argument, or prudent investing strategy:

“…if you’ve been following the markets recently, there’s so much volatility.  Companies going up and down.  And energy companies recently have done poorly because of the decline in the price of oil.  But that tends to balance out over time.  So if you limit yourself in the menu you can choose from, you are going to have poor performance in the long run.”

The entire interview is interesting and deserves a listen.

The full audio is available here: