May 21, 2020

Headlines on University of California ”Divestment” a Year Late and a Dollar Short

On Tuesday, the University of California announced it had removed fossil fuel investments from its $126 billion investment portfolio. Too bad the flawed decision was actually announced back in September.

Here’s what you should know about this recycled headline.

The UC System has long opposed divestment as a political action. Back in September 2015, when UC System announced it would re-direct its investments towards other energy sources, it was made clear that UC was against divestment as a financial or moral strategy. In fact, UC System’s Chief Investment Officer Jagdeep Bachher argued that:

“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”.

In 2018, the UC System again clarified that a shift from select energy assets was a reallocation of UC investments for financial reasons, not political. And as reported by a story published by Vox in September 2019, “high-minded principles” are not guiding UC investment strategy, BUT economics are. “The reason we sold some $150 million in fossil fuel assets from our endowment was the reason we sell other assets: They posed a long-term risk to generating strong returns for UC’s diversified portfolios,” states Chief Investment Officer Jagdeep Singh Bachher.

The actual value divested is small. This reasoning also makes us wonder how much resources did the UC System actually relocate over recent years. Contrary to the publicity this decision has drawn, UC officials say the quantity is in fact very small:

“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.”

Disappointing as it may be, a couple hundred million dollars certainly does not represent the “grand gesture” everyone has been talking about, especially when UC System manages a $126 billion investment portfolio.

The UC System invests in utilities, transmission lines, and other industries reliant on fossil fuels. In April 2018, Chief Investment Officer Jagdeep Singh Bachher stated that while they sold some investment in energy companies they also increased investments in adjacent industries. From his remarks:

“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.”

Divest from upstream companies, but continue investments in the companies that bring that product to market, make it available for consumers, and drive our overall economy? Sounds like another empty gesture for a headline.

If this move makes the system money is still yet to be seen. So called “Green funds” might outperform fossil fuels sometimes, but the general trend says otherwise. According to the consulting firm Foster & Foster quoted by a storyin the WSJ:

“While green tech advocates may be able to cherry pick individual years when green energy has recently outperformed fossil fuels, the long view shows the opposite.”

In fact, the same WSJ story reports that between 2008 and 2018 fossil fuel related investments had an average annual return of 2.6 percent, whilst green energy funds gave negative returns: -3.94%. Certainly not the most clever, long-term financial decision.

This economic reality is exactly why back in 2018 Chief Investment Officer Jagdeep Singh Bachher emphasized investments in parallel funds like transmission and utilities: limit the diversification fall out.

And when did the UC System complete its sale of assets? If during the current low commodity market than the UC System can say goodbye to gains of a market rebound.

The UC System long avoided playing politics with its endowment and pension, only to end up playing politics.  Selling one’s investments in fossil fuels does take away any possible leverage or influence over oil and gas companies in the future. As voiced by Anne Stausboll, CEO for the California Public Employee’s Retirement System in an op-ed for the Financial Times:

“As a long-term investor, a seat at the table is the most effective way to shape how our investment capital gets put to use in a sustainable manner.”

In reality many of these companies have already announced significant commitments to transition to zero-emissions by 2050 and invest in renewable energies, transforming their companies into wholesome energy companies. The list includes some of the major oil companies: Shell, BP, Eni, Chevron and Total.

The UC System’s announcement is just old news packaged under a new headline.