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June 6, 2016

The Syracuse Model: Empty Gestures

As leading news outlets like the New York Times and Politico recently noted, the fossil fuel divestment campaign is “meeting some resistance” and “largely rebuffed.” In the face of this reality, divestment activists are being forced to change their tactics and lower their demands.

Their approach, dubbed the “Syracuse model,” by an administrator at the University of Massachusetts (UMass), pushes universities to only divest their direct holdings rather than their full endowment. Yet, as Bloomberg reported one year ago, these are “empty gestures” because schools rarely have any direct investments to begin with.  This maneuver is intended to quiet unruly divestment activists without incurring the sizeable costs associated with fossil fuel divestment.

UMass is the latest school to employ the Syracuse model with its announcement to divest its direct holdings from fossil fuels. When all was said and done, UMass is divesting less than 1% of its $770 million endowment.   Furthermore, by only giving up its direct holdings in fossil fuels, UMass made the conscious decision to retain a number of its comingled funds that contain fossil fuels.  How did this empty gesture go over with divestment activists? Apparently well. Divestment activist Bill McKibben praised UMass’ partial divestment saying it will “have a serious impact on (the fossil fuel industry’s) social liscensure.”

Dartmouth College seems to be considering a similar approach.  A recent report issued by its Advisory Committee on Investor Responsibility (ACIR) recommended the University divest its direct holdings.  Similar to UMass, Dartmouth’s direct fossil fuel holdings are a tiny portion of its total investments in fossil fuels.  From the report:

“Of more direct relevance to Dartmouth is the fact that, while Dartmouth directly holds approximately $43M in fossil fuel related assets, the vast majority (>95%) of that amount is held in working capital pools, with only about $2M held in the endowment.”

The report goes on to assert that because the University’s direct fossil fuel holdings are so small and approximately $41M will remain invested in fossil fuels, the financial impact of divesting will be minimal but it will nonetheless:

  • “Greatly enhance” the perception of the University acting consistently with its moral duty;
  • “Enhance” vigorous and open debate of ideas;
  • “Enhance” the University’s ability to affect social change;
  • ‘Enhance” the University’s relationship with the broader world;
  • “Slightly enhance” the public’s perception of Dartmouth as a leading institution;
  • “Slightly enhance” positive relations with alumni; and
  • “Slightly enhance” the university’s ability to attract and retain faculty as staff.

That is, as long as no one calls out Dartmouth on its empty gesture.

The reason universities are opting for the Syracuse model is because the cost of actually divesting is way too high for what is ultimately only a political gesture.  While study after study has concluded that fossil fuel divestment would confer significant losses on endowment returns, a new report by Professor Hendrik Bessembinder of Arizona State University, determines that the transaction and compliance costs associated with divestment would also be significant.

In his thorough study, Professor Bessembinder estimated that these often overlooked costs would amount to between 2 and 12 percent of an endowment’s value.  These costs are considerable for several reasons.  First, endowments are long-term investors that tend to hold illiquid assets that are costly to sell. Second, endowments frequently invest in mutual funds/ comingled funds and a university would have to sell off the entirety of these funds (including non-fossil fuel assets) to truly comply with divestment. Third, since there is no agreed upon list of assets that are fossil-fuel related, investment managers would have to undertake a degree of active management to maintain compliance with divestment goals.  This active management is much more costly.

What’s more the costs outlined in Professor Bessembinder’s study would be in addition to any decrease in returns caused by divesting.

While it is certainly understandable that university trustees and administrators would want to put a stop to the seemingly endless divestment demonstrations, sit-ins, and walk-outs it is a disservice to the students to pretend to divest instead of articulating the very real financial reasons divestment is a bad idea.