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September 23, 2015

You Knew this $2.6 Trillion-Divested Number was Suspect, But You Won’t Believe How Fake It Actually Is

Divestment activists, aiming to generate headlines around the Pope’s visit to the United States this week, held a press conference yesterday to try to convince reporters that their campaign is gaining momentum. To do this, they brought in eco-activist Leonardo DiCaprio and released a report purporting to show that entities representing $2.6 trillion in assets have committed to divest. It’s a big number, for sure – and one that just so happens to be pure invention. They literally just made it up.

The report, dutifully compiled by divestment advocates Arabella Advisors, was released nearly a year to the day of Arabella issuing its inaugural growth-of-the-divestment-movement study in 2014, which pegged the total amount divested (also incorrectly) at a mere $50 billion. Recognizing this time around that the volume of press they’d be able to generate was going to be directly related to how high they inflated their number, Arabella decided to go all in.

Here are a few things you need to know:

$2.6 Trillion Claim Is Pure Fiction, Obviously

The Arabella report asserts that entities representing $2.6 trillion in assets are committed to divesting.  This figure is outright false in numerous ways. This figure in no way represents the amount that is being divested from fossil fuels or the amount that is being reinvested in non-fossil energy.  It is simply an aggregation of the total value of the combined assets of each entity that divestment activists claim they have pledged to divest. The actual fossil fuel holdings of each of these entities may in fact be a very small fraction of these totals, as we see often by institutions claiming they are divesting.

Consider the inclusion of the University of California. While the report explicitly advances the claim that the school has divested, school officials say otherwise. Chief Investment Officer Jagdeep Bachher explained in an op-ed in the Santa Barbara Independent, “Climate policy needs to be more than a divestment-or-nothing reflex. Blanket divestment from fossil fuels grabs headlines but doesn’t actively address climate change.” Meanwhile, UC Irvine Regent Bonnie Reiss stated that divestment is “just symbolism without real impact and maybe gets a quick headline like we saw with Stanford.”  As the Los Angeles Times reports, UC still holds “about $10 billion in various types of energy industry investments.” To most sentient humans, this would not appear to be an endorsement of divestment.

And actually, including the University of California in the report is particularly egregious when considering that the report tallies up $140 billion in assets divested by universities worldwide. The University of California endowment (and pension funds) makes up nearly $100 billion of that figure. So, in other words, 70 percent of Arabella’s university divestment figure is 100 percent false.

Many divestment pledges are empty gestures.

Undercutting the report’s claims even further is the fact that many of the institutions Arabella claims have divested don’t even have any fossil fuel holdings to divest from — or have only committed to partial divestment (i.e. divesting from coal but retaining other assets).

For example, the report highlights Georgetown as one of the institutions committed to divesting and counts the entirety of its $1.5 billion endowment in its total.  The problem? Georgetown barely has any meaningful fossil-fuel investments and characterizes its pledge on coal only as “a step to prevent future investments.”  Even Georgetown’s Fossil Free campaign admits that Georgetown’s pledge was “not a victory.”  And heck, Georgetown didn’t even commit to divesting from the comingled funds it has that include coal, but rather opted for a symbolic promise to not invest directly in coal in the future. Or something.

Next, the report touts Oxford University as another institution divesting from  coal and oil sands—and adds its $2.6 billion endowment to its running tally.  In fact, Oxford University doesn’t have any direct holdings in either coal or oil sands.  The same holds true for Syracuse University and its $1.18 billion endowment, which is included in Arabella Advisors’ figures despite the fact the Syracuse doesn’t have a single dime invested in any fossil-related equities as it is.

Even when schools pledge to divest themselves of assets they actually own, many of them opt for “partial divestment” from coal while simultaneously continuing their investments in oil and gas.  Of course, Arabella Advisors includes the entire endowments of those schools as well, including San Francisco State University, Stanford University, University of Maine, and the  University of Washington.   These universities possess endowments of $48 million, $21.5 billion, $589 million, and $2.9 billion respectively- all of which continue to be freely invested in oil and natural gas.

This report also emphasizes the role that faith-based institutions have played in the divestment movement. While some institutions have announced plans to divest, the Wall Street Journal reported that “Interfaith Center for Corporate Responsibility, which claims 300 member organizations controlling $100 billion in invested capital, called instead for more shareholder engagement with such companies.”

When Divestment Does Not Mean Divestment

Arabella’s report contends that, “thanks to increasing commitments to invest and a proliferation of fossil free products, more capital is flowing toward climate solutions.” In reality, divestment from fossil fuels and investment in renewable energy are entirely separate deals. In fact, many investment advisors recommend pairing divestment with investment in parallel funds related to the energy sector so that the portfolios continue to benefit from diversification.  As explained by divestment activist Dan Kern of Advisor Partners:

The approach we often recommend for clients, in which divestment proceeds are redeployed into companies that may be statistically correlated but are not directly involved with energy activities. For example, industry groups such as construction and engineering, aerospace and defense, and machinery have high historic correlations with oil companies.  Another option for investors with a global perspective is investing in the currencies or non-energy equities of countries that are major energy producers, such as Canada, Norway and Russia. The broader economy in these countries tends to do well when oil prices rise, so investing in them could be a way to benefit from rising oil prices without providing direct funding to fossil fuel companies.”

Meanwhile, actual climate experts continue to oppose divestment, say it will have no effect on climate.

The report tries to make the case obliquely that divesting from fossil fuels will somehow help mitigate climate change, stating that “the leaders of several of the largest institutions to divest in the past year have cited climate risk to investment portfolios as a key factor in their decisions.” The report does not include mention of the Univ. of California’s Chief Investment Officer Jagdeep stating in the Santa Barbara Independent that “divestment from fossil fuels grabs headlines but doesn’t actively address climate change.”

Robert N. Stavins of Harvard, an expert whose climate bona fides exceed by several orders of magnitude any of those associated with developing the Arabella report, has also stated that “we need to focus on actions that will make a real difference, as opposed to actions that may feel or look good but have little real-world impact, particularly when such symbolic actions have opportunity costs—that is, they divert us from what really matters.”

In addition, fossil fuels like natural gas are critical to meeting future carbon reduction targets. As Stavins says, “Divestment of fossil fuel stocks would hurt, not help efforts to address global climate change,” noting that “natural gas is the crucial transition fuel to address climate change” and that “even if divestment were to reduce the financial resources of coal, oil, and gas companies (which it would not do), this would only serve to reduce research and development at those same companies of carbon capture and storage (CCS) technologies, as well as other potential technological breakthroughs; and could reduce the development of some renewable sources of energy (which the fossil fuel companies are carrying out as part of their financially rational diversification strategies).”

Similarly, Bill Gates, who is heavily supportive of efforts to invest in sustainability and renewable energy, has also opposed divestment, stating “I think the solution is investment…My concern is that I love the fact that students and people care about climate change, and I don’t want to make them think that if they get people to divest that they’ve solved climate change. I don’t see a direct path between divesting and solving climate change. I think it’s wonderful that students care and now the Pope cares. But that energy of caring, I think you need to direct it towards something that solves the problem.”

Stranded asset argument also misses the mark of future energy consumption

The Arabella report states that “growing recognition of the financial risks of invest in fossil fuels is helping to drive divestment commitments on a large scale,” noting the common argument “stranded asset” argument of pro-divestment activists to suggest that these fossil fuel companies will lose their value in a future carbon-constrained world.

In reality, however, the stranded asset argument only takes hold under “either significant near term regulatory change or significant consumer behavior change,” according to Dan Kern of Advisor Partners. Given the continued and extensive reliance on fossil fuels to heat our homes and fuel our cars, it is highly unlikely such a rampant change in regulation or consumption would impact the entire fossil fuel sector.

Bottom line

Despite the fact that the Arabella Advisors’ report paints a picture of an expanding and wildly successful movement combating climate change, a look beneath the surface reveals that divestment may be good at capturing headlines, but doesn’t do quite as well on the stuff that actually matters – forcing its advocates and exponents to literally make stuff up in support of their narrative.