The American University student paper announced this morning the school has reversed a previous rejection of divestment. Here’s what you need to know.
1) AU did very little divesting. According to Inside Higher Ed, “The university isn’t aware of any companies listed on the Carbon Underground 200 list of coal and gas producers in its private investment portfolio, but it acknowledges that it may have had ‘small and short-lived positions’ at some point.”
The University is also on record as having no direct energy investments for several years. The school paper reports that over the last few months the Board of Trustees has sold off the final $12.9 million of fossil fuel exposure within the University’s public endowment portfolio.
2) There is a cost to even this minimal divestment. In 2014, American University stated in its rejection of divestment that removing its indirect investments in fossil fuels would cause management fees to double. The report states:
“Divesting from these companies would require that AU investments be withdrawn from index funds and commingled funds in favor of more actively managed funds. Cambridge has estimated this withdrawal would cause manager fees to double, increasing from $1.1 million to $2.2 million per year.” (emphasis added)
The Eagle reports that AU’s small divestment was done by selling $350 million in commingled and index funds, where the indirect investments were located, and using the proceeds to invest in non-fossil fuel holdings. What did this active management and transaction cost the endowment?
A 2016 report by Prof. Hendrik Bessembinder from Arizona State University’s Carey School of Business also found the transaction and management costs related to divestment – what he refers to as “frictional costs” – have the potential to rob endowment funds of as much as 12 percent of their total value over a 20-year timeframe. This includes the onetime immediate transactions costs an endowment must endure, as well as ongoing annual management fees to stay in line with the changing definition of “fossil free.” For a medium endowment like American, the loss is equal to between $52 million and $298 million over 20 years.
3) The timing is interesting. Reports note that the decision was made by AU in a vote by the Board of Trustees in February, but “the legal and financial situation finally evolved enough to allow it to happen.”
The oil markets are in a uniquely complex moment today, with a foreign oil price war and pandemic impacting demand and supply dynamics in an unprecedented way. Did this give American University the cover it needed to make this news – even if it breaks for the old investment adage of buy low sell high? Or is it because students are off campus?
4) AU rejected divestment previously given its fiduciary duties. Back in November 2014, AU Board of Trustees voted to keep the University’s indirect fossil fuel-related investments. After consulting with its financial advisors, AU management concluded not to divest given the negative impacts on AU endowment’s investment returns, causing managing fees to double. AU also argued that fossil fuel divesting could violate its legal, fiduciary duty to maximize returns:
“Since the conditions for board’s primary fiduciary responsibilities cannot be satisfied, the finance and investment committee concluded that divestment is not an option the board can take to express a position on climate change.”
Since then, AU launched a Green Investment Fund, aligned with recommendations from the Advisory Committee on Socially Responsible Investing, available to donors to the University.
5) Divesting forfeits future advancements in the energy sector. While the AU divestment student group continues targeting fossil fuel investments and advocating for an “equitable transition,” many traditional energy producers have already transformed their business models. Both independent operators and large integrated companies have invested in new technologies, broadening their scope and commitment to sustainable solutions. For instance, Royal Dutch Shell recently announced its target to become a net-zero emissions energy business by 2050, expanding its offering to renewables, biofuels and hydrogen, all low carbon intensity energy sources. BP had also announced a similar commitment at the beginning of the year, while Eni pledged to cut its emissions by 80% by 2050.
Divestment is a loss for universities, not only imposing new costs for endowments that should focus on students and programming, but for institutions looking to be a part of the future of energy.
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