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July 14, 2018

Rockefeller-Funded Pro-Divestment Report Full of Falsehoods

It’s been clear for a while now that momentum in the divestment movement is not on the side of activists.  Faced with a string of high-profile rejections, a loss of interest on college campuses and a strong resistance from most pension funds, the argument to indiscriminately sell off investments in fossil fuels has not emerged a winning one, for a multitude of reasons.

Undeterred, the Institute for Energy Economics and Financial Analysis (IEEFA) just released a report that attempts to lay out the “financial” case for divesting, since the political case has convinced next to no one.  One of the lead authors of the report is IEEFA Director of Finance Tom Sanzillo, who is personally leading the pro-divestment charge on newspaper opinion pages.  Back in late 2016, Sanzillo got into a heated argument at a divestment forum in New York after being challenged by New York First Deputy Comptroller Pete Grannis about the merits of a divestment policy.

What has prompted IEEFA’s interest in coming to the defense the ailing divestment movement?  Perhaps it’s the $895,000 the firm has received from the Rockefeller Brothers Fund (RBF) since 2013.  Of course, RBF is the torch-bearer for the divestment movement, backing not only firms like IEEFA, but also pro-divestment groups 350.org and As You Sow.

But we digress.  After taking a look under the hood, we found that this “new” report is nothing more than a recycling of tired and previously debunked claims packaged up in an explicit attempt to discredit research conducted by respected academics.

Indeed, the previous reports authored by Prof. Daniel Fischel of the University of Chicago Law School, and Prof. Hendrik Bessembinder, of Arizona State University are mentioned directly and frequently throughout IEEFA’s report.

Let’s note that, even though the title of the report is, “The Financial Case for Fossil Fuel Divestment,” the authors offer up this caveat:

“This report is not intended to provide, and should not be relied on for, tax, legal, investment or accounting advice. Nothing in this report is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund.”

The following is a catalogue of the misinformation, contradictions, and shortcomings included in the IEEFA report:

  • CONTRADICTION: Past performance is not an indicator of future returns; Divestment is preferable because of the energy sector’s recent 5-year performance

This first assertion is, on its face, an inherently true statement.  There is no way of definitively predicting the future when it comes to financial performance.  This claim was put forward in order to discredit research conducted by Prof. Fischel which found that divestment would have a sizable and negative impact on the value of funds after analyzing past performance over a 50-year period.

IEEFA’s concern is something Fischel acknowledges, and specifically addresses in his first report:

“Because returns on equities vary substantially over short periods of time, we analyzed the effect of divestiture over a very long historical period – as noted above, the fifty years from 1965 to 2014. It is possible that the future benefits of diversification will be larger or smaller than past effects, and moreover, the impact of divestiture can vary substantially depending on whether an investor happens to make trades during a downswing or upswing in the market or energy sector.”

“… Regardless of recent events, there is no way to reliably predict future returns in advance, and therefore, the best guide to the potential effects of diversification – and the standard approach of financial scholars and analysts to such questions – is to examine longterm averages.”

Despite raising the concern about making assumptions about performance based on previous data, IEEFA argues in the very same report that divestment is the right decision thanks to the recent underperformance of the sector in the past five years relative to the overall market.

So, it’s not permissible to analyze divestment based on a 50-year timeframe, which encompasses a multitude of market highs and lows and geopolitical changes, but it is permissible to base divestment upon a recent 3-5 year underperformance.

Let’s also note another problem with IEEFA’s conclusion.  They completely misinterpret Fischel’s ultimate findings.  The conclusion that divestment would lose money is not necessarily based upon market performance.  The report is about diversification.  Fischel’s first study argues that an investor either needs to 1) sacrifice returns or 2) take on higher risk; it also found that the energy sector has the lowest correlation with the rest of the market, thus producing the highest diversification benefits for a portfolio.  Removing an entire sector of the economy (energy) will lead to higher risk.  Therefore, Fischel found that divested portfolios that are risk-adjusted will underperform those not divested.  His subsequent research found that that underperformance would amount to billions, if not trillions of dollars for some of the largest pension funds over the long term.

IEEFA over-simplified Prof. Fischel’s research and then hypocritically used shorter cherry-picked timelines in order to show that divestment would be a beneficial policy.  This is misleading—the truth is far more complicated than that.

  • IEEFA CLAIM: The most “egregious” assumptions made by divestment critics is that high fees and transaction costs will erode returns

This assertion is a direct rebuke to the research conducted by Prof. Bessembinder.  Bessembinder found that large investors like endowments or pensions rely predominantly on pooled investments and comingled funds, so eliminating all exposure to every individual fossil fuel stock would be costly.  This would require managers to sell off most assets (possibly prematurely and at a loss), reinvest them in a manner that avoids fossil fuel exposure and actively monitor these pooled funds to ensure that stocks related to the fossil fuel industry do not make it into the investment pool.  This active rather than passive management is usually accompanied by higher fees.  So, regardless of performance, the act of forced divestment would impose severe costs on a given fund.

Let’s not forget that different groups have different interpretations of what it means to be “fossil free.”  There is a widely used Carbon Underground 200 list, which is amended annually.  As divestment progresses, will it expand to companies that rely heavily on fossil fuels?  Manufacturing, airlines and car companies?  What about fossil fuel companies that are investing heavily in renewable energy? Should those be exempt?  Because of the ever-changing political and economic landscape, it’s safe to say that divestment is a long term commitment and not a one time transaction.

It’s a bit of a head scratcher that IEEFA calls this concern “egregious.”  IEEFA argues that there is a growing number of passively managed fossil free funds available on the market, so there shouldn’t be extra costs associated with investing in these vehicles instead. But this is not true.  Research by Morningstar, cited by Bessembinder in his study, shows that “green funds are generally not cheap. Most of the green ETF expense ratios fall in the 0.50% to 0.75% range, which does not include the brokerage costs that come with buying and selling them. Similarly, the mutual fund options’ levies range from 1.25% to a hefty 1.98%.”

This also does not account for the fact that financial managers need to sell existing investments to comply with a fossil free portfolio.  Selling is usually associated with some sort of fee.  Part of IEEFA’s argument is that investors can negotiate with their financial advisors to remove these transaction fees, but what about existing agreements?  What about maintaining access to the best financial managers?

Let’s also point out that several pension funds and university endowments analyzed divestment in depth and found the transaction costs untenable.

It was a major reason for the Vermont Pension Investment Committee passing on divestment last year:

“The largest measurable explicit costs of divestment to VPIC would be ongoing increased management fees. Management fees would increase under each of these three divestment scenarios because VPIC commingled funds, where the bulk of VPIC’s fossil fuel were held, would have to be restructured into materially higher-cost SMA funds.”

In their divestment analysis, financial consultants for the San Francisco Employees’ Retirement System found:

“Divestment incurs additional transaction costs that would be borne by the Retirement System, without prospect for offsetting incremental performance during the next investment cycle;”

This statement by Swarthmore College, the campus on which the divestment movement began, provides the most comprehensive rejection of IEEFA’s assertions:

“If Swarthmore decided to divest, we would have to find replacements for all the commingled funds because an institution has no power to impose a constraint on a commingled fund. Swarthmore’s commingled funds totaled $660 million at the end of the last fiscal year. Divestment would incur a very large cost. With divestment, an option would be to hire a firm (such as Aperio Group) to design customized index funds for the endowment. This group could put together portfolios of stocks designed to match desired indexes but without using the divested companies. The firm customizes this approach for an endowment’s specific constraints. If Swarthmore were to follow this approach, it would forego the 1.7% to 1.8% added return per year. This would amount to lost earnings each and every year … [T]he loss the first year would be $11.2 million, but by five years it would be a cumulative $73.1 million, and by ten years it would be $203.8 million. It would be even greater if all the affected portfolios of the endowment were invested in this way.” (emphasis added)

  • CONTRADICTION: The “risks” posed by fossil fuel investments “requires fiduciary action;” the goal of divestment is to “halt the use of fossil fuels” and elevate the issue in “popular debate”

There seems to be a bit of reverse engineering here.  We know that from the inception of the divestment movement, the ultimate goal was to stigmatize the energy industry and deprive companies of capital in order to curb fossil fuel usage.  IEEFA acknowledges that end goal in the above quote.  But when the political argument wasn’t strong enough to implore large investors to act, divestment activists were tasked with showing how the move is a prudent financial decision.  That is why it’s now being called a smart “fiduciary action” despite mounting evidence to the contrary.

In addition to recent underperformance, IEEFA says “risks” posed to fossil fuel investment include the growth of renewables taking up market share and reducing demand for oil and natural gas.  Never mind that the International Energy Agency’s World Energy Outlook expects fossil fuels to constitute 77 percent of overall energy use by 2040 and global energy demand to increase by 30 percent in that same timeframe.  It’s also important to note that natural gas is largely responsible for the fact that domestic emissions are at 20-year lows.  Natural gas and renewables actually complement each other quite nicely, with the former acting as a bridge fuel for the later by providing clean burning baseload energy when the wind isn’t blowing and the sun isn’t shining.

Another “risk” they point to is the “growing global climate protection movement.”

“In addition to traditional lobbying and direct-action campaigns, climate activists have joined with an increasingly diverse set of allies—particularly the indigenous rights movement—to put financial pressure on oil and gas companies through divestment campaigns, corporate accountability efforts, and targeting of banks and financial institutions. These campaigns threaten not only to undercut financing for particular projects, but also to raise financing costs for oil and gas companies across the board.” (emphasis added)

So in essence, the logic here is that the risk of being targeted by the divestment movement is reason to divest.

  • CLAIM: Divestment is an effective way to deal with climate change and deprive companies of capital

From a purely economic standpoint, divestment is the act of selling stock from one owner to another.  It does not impact the price of the security, which has been reiterated by academics, fund managers and universities alike.

IEEFA says the claim that “divestment alone will not lead to lower stock prices and a higher cost of capital for oil and gas companies” is a falsehood.  Yet the report doesn’t offer any concrete evidence to the contrary.  It just adds that divestment is one tool of many to impose reputational harm on the targeted company.

“few see fossil fuel divestment as the only mechanism desired or required to bring about change.  The movement uses a host of strategies and tactics to advance society toward a reduction of fossil fuel use around the globe.”

Many of the institutions that have rejected divestment pointed to its ineffectiveness when compared to its cost as a major reason in doing so.

As the Massachusetts Institute of Technology wrote in 2015:

“In our judgment, a symbolic public move to divest is not the most effective way for MIT to drive progress on climate, and pursuing it would interfere with two promising strategies: active engagement and bold convening.”

Mount Holyoke wrote this when they rejected divestment in April of last year:

“Given the College’s limited financial exposure to fossil fuels, divestment would sacrifice the strength and stability of our endowment without, we believe, having the desired impact on the fossil fuel industry. The move also would likely reduce the investment returns on the endowment and therefore distributions to the College.”


Divestment is a costly strategy with no upside.  It has been shown to be a money loser time and time again, and has been rejected by most of our largest pension funds and most prominent universities.

While the IEEFA report makes assumptions and puts forward hypothetical statements, we have a trail of actual evidence that shows divestment is a losing proposition.

It was just recently reported that Harvard University’s endowment lost $1 billion by prioritizing “feel good” investments over ones that deliver solid returns.

The California Public Employees’ Retirement System (CalPERS), the nation’s largest pension fund and one that has expressed sympathy to pro-divestment arguments in the past, voted unanimously to curtail its divestment policy last year.  CalPERS’s previous divestment initiatives have cost the pension more than $8 billion since their adoption.  This, at a time when the pension is facing funding shortages and missing performance benchmarks.

The IEEFA report just the latest Rockefeller-funded attempt to resuscitate a struggling movement lacking many victories, but it doesn’t bring forward cogent arguments to the debate.