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April 10, 2018

Let’s Take a Look at the University of California System’s Investment Policy

For the second time in recent memory, activists are hailing actions taken by the University of California (UC) system as “divestment” when in reality all that was announced is a portfolio reallocation.  Case in point: a tweet by Bill McKibben that read, “Um, the giant Univ of California system, already divested from coal and tar sands, now plans to stop investing in all fossil fuels. This is large.”

We are simply seeing the same over-reaction to a financial decision made by an entity who has repeatedly rejected divestment as a strategy.  Let’s take a closer look at what McKibben characterizes as “plans to stop investing in all fossil fuels.”

During last month’s UC Board of Regents Investment Subcommittee meeting, Chief Investment Officer, Jagdeep Singh Bachher, did disclose some changes to investment strategy for the endowment’s real assets allocations:

“So where we see an opportunity to reshape our real asset portfolio is in the context of the fossil fuels, oil and gas, upstream assets. I can see a point in the near future where we will start to fundamentally reduce those private assets holdings.”

So after these assets are sold, where will UC reinvest the extra funds?  Bachhner continued:

“Now what do we like? You just can’t sell one thing and not buy something else. Well what we like is cash flow yielding assets with downside protection, we like inflation protection, we like some upside, so we like infrastructure, we like transmission lines, we like utilities, we like things that are more real assets in nature with those types of characteristics that add diversification to the broader portfolio.” (emphasis added)

So really, this announcement just shows that the UC system is looking for an alternate way to get exposure to the energy sector.  We’ve seen this play out before, with divestment proponents selling their fossil fuel assets, just to invest those funds in stocks or bonds closely tied to fossil-fuel dependent countries like Russia or Norway.  The economies of these countries tend to be aligned with the energy sector, so it’s another way to invest in the industry while nominally getting rid of fossil fuels.  It’s clever, but not divestment.

But, as previously mentioned, this isn’t the first time activists have seized on an investment decision and over-exaggerated its significance.  The UC System has remained against divestment as a financial or moral strategy. UC System’s Chief Investment Officer Jagdeep Bachher had announced back in September 2015 that he decided to sell around $200 million in investments tied to coal and oil sands development.  During the meeting in which he announced this move, Bachher made clear that the decision was made purely on financial grounds and that the University of California did not change its official policy when it comes to fossil fuel stocks.

“Now when I say we sold, it’s important to note that to begin with we had less than a couple hundred million dollars of these direct holdings so it wasn’t really a big debate for us in terms of selling these investments and we came to this conclusion on the basis of economics.”

In fact, during the UC’s Board of Regents meeting, one official mentioned that he hoped the stock sale was being done “because of investment considerations, not social ones,” to which CIO confirmed once again: “Absolutely this is for economic reasons.”

In an op-ed for the Santa Barbara Independent, Bachher reiterated his opposition to divestment as a strategy:

“Climate policy needs to be more complex than a divestment-or-nothing reflex.  Blanket divestment from fossil fuels grabs headlines but doesn’t actively address climate change.”

Last year, the UC Investment Office released a comprehensive statement outlining plans to increase sustainable investments and lower emissions on campus. Telegraphing much of what was discussed during last month’s investment meeting, the statement established ways in which the UC system would pursue clean energy and increase sustainability–but made a point to stop short of divestment.  Why?

“As we join together as a community in the fight against climate change, it is vital nonetheless to recognize the Office of the Chief Investment Officer of University of California’s (OCIO) fiduciary responsibility to over 500,000 current and former employees to protect and grow our retirement assets. Symbolic gestures must be placed in this context of the financial health of our university endowment and retirement plan. We respect the voice of UC students who would like to argue otherwise. We listen carefully to their concerns and take their views into account. We are deeply concerned about the future of this generation and their children’s generation. But we do not anticipate the Board of Regents will vote immediately for full divestment…” (emphasis added)

It appears the UC system is looking for tangible ways to improve their sustainability—something divestment is not proven to do.  Instead of helping the environment or affecting the targeted companies, divestment is simply an empty gesture that gets headlines and costs money.

As research by University of Chicago Law School’s Daniel Fischel shows, the divesting from the energy sector lowers risk adjusted returns significantly over the long term—to the tune of a possible 23 percent loss over 50 years.  It’s not prudent to remove an entire sector of the economy from investment—especially one that provides the highest level of diversification benefit.  That’s why UC continues to invest in the sector via alternatives like utilities or energy infrastructure.

It’s clear that what was discussed at recent UC Board of Regents Investment Subcommittee meeting was based on a pragmatic investment strategy. After all, endowments are meant to support universities and their expenditures, including but not limited to academic research, faculty and staff support, and facility development.

Let’s hope the UC Board of Regents remains committed to the health of the endowment over falling victim to the pressures of the politically charged and empty gesture divestment movement.