January 14, 2021

Cato Institute Asks The Tough Economic Questions Around Efficacy of Divestment

The Cato Institute recently asked a couple of hard-hitting questions about the integrity of some recent divestment-related announcements. One area of focus was put upon the announcement out of New York State who adopted a decarbonization policy for its public pension last month.

While some were quick to champion the move as a win for divestment proponents, a closer look showed that to be a bit of an exaggeration. At the end of the day, Comptroller Tom DiNapoli did not commit to complete fossil fuel divestment but instead instituted a strategy to help the pension reach net-zero emissions. This process had also been underway before the announcement.

Of course, this is just one recent event that the Cato Institute touches on. The case of Comptroller DiNapoli’s net-zero, comprehensive review strategy to address climate risks is just one ongoing debate over the financial and economic implications of fossil fuel divestment.

Here are a few excerpts from the Cato Institute’s latest analysis on the economics against divestment:

The Future of Fossil Fuel Demand Is Already Priced In the Markets

According to the Cato Institute, the price and behavior of energy sector stocks is already taken into account by investors and suggests that divestment efforts have had a limited impact on investments:

“If investment markets are efficient, then all known factors affecting the future returns of assets are already incorporated into the values of stocks and bonds. Thus, if investors believe that future climate change policy will reduce the demand for and the future returns from fossil fuel investments, that knowledge already has been incorporated into the relevant stock and bond prices. New York State’s (or any other investor’s) decision to reduce fossil fuel investments over the next few years cannot prevent investment losses of this type because they have already occurred and will recur in the future if additional negative information arises.”

Moody’s and other financial experts have echoed similar statements, determining that divestment is “not a significant factor” impacting the fossil fuel industry’s financial prospects.

On Long Term Fossil Fuel Investments, fossil fuel assets provide higher returns

Another argument among the pro-divestment crowd contends that divestment also impacts the financing of fossil fuel companies and their infrastructure projects since it will make lending less profitable.

The Cato Institute does acknowledge that this is a long-term possibility but notes that the evidence thus far proves that divestment has not reached that goal. In fact, fossil fuel-related assets continue to be highly appreciated:

“Is there evidence consistent with this discussion of theory? A recent paper examines the returns of all public U.S. companies from 2005 through 2017. After controlling for variables that predict investment returns, firms with higher CO₂ emissions generate higher returns.”

“As long as all other factors remain constant, fossil fuel stock returns increase and all other stock returns decrease.”

Divestment Is Costly

Finally, the Cato Institute concludes by confirming a fact that we at Divestment Facts has upheld for years. Divestment is a costly measure without upside. According to the think tank, there is no evidence that suggests that divesting would not impact the organizations deciding to halt its fossil fuel-related assets:

“[B]ut claims that doing so is costless do not stand up to theory or evidence.”

To check out more of the Cato Institute’s article, click here.