University of Michigan Latest to Reject Fossil Fuel Divestment

In a little noticed December 4, 2015 statement from the University of Michigan Office of the President, Dr. Mark Schlissel explains his reasoning for opposing fossil fuel divestment. The rejection by the University of Michigan is the latest blow for the national divestment campaign, which has suffered several setbacks this fall from New York to California. From Dr. Schlissel:

I very much appreciate the commitment and passion exhibited by students who have steadfastly advocated on the issue of climate change, specifically that U-M divest from fossil fuel companies in its endowment.

 In the previous two instances where we eventually divested, the investments – in tobacco and in South African corporations under that nation’s system of apartheid – were inextricably linked to immoral and unethical actions and ideologies. There was little to no redeeming social value related to the investments or the industries.

 In the case of the fossil fuel industry, it is a very different matter. Fossil fuels enable us to operate the university, to conduct research and to provide patient care. At this moment, there is no viable alternative to fossil fuels at the necessary scale. In addition, most of the same companies that extract or use fossil fuels are also investing heavily in a transition to natural gas or renewables, in response to market forces and regulatory activity. I do not believe that a persuasive argument has been made that divestment by the U-M will speed up the necessary transition from coal to renewable or less polluting sources of energy.

 For these reasons, I do not think that consideration of divestment from fossil fuels is the right step. We made a commitment to our donors to use income generated from the endowment to support our mission for today and for future generations –academic and research programs, student support, and life-saving patient care. The endowment should not be used to further other causes, however noble. 

The statement was made just ahead of the release of a poll commissioned by the Independent Petroleum Association of America (IPAA) which surveyed 275 major, individual college donors and found that 79 percent of donors did not expect divestment to have any “tangible impact” on the environment or climate change. What’s more, nearly two-thirds indicated that they would be less likely to donate to their college if they found out it had divested its endowment from fossil fuels.

Meanwhile, experts such as Professor Bradford Cornell of CalTech and Professor Daniel Fischel from the University of Chicago, have outlined the clear financial costs of divestment on university endowments. And, as Divestment Facts reported recently, the administration and students are listening. President Schlissel is only the latest to join the growing ranks of top-tier university presidents who have all voiced their opposition to the movement.

In fact, Schlissel calling divestment nothing more than a “symbolic action” and a “political argument” reinforces similar points made by Harvard President Drew Faust earlier this year, in which she stated:

“I don’t think that divestment is an appropriate tool, because I don’t think the endowment should be used for exerting political pressure. It is meant to fund the wide range of activities that the University undertakes.”

The University’s fossil fuel divestment campaign, Divest Invest, has reacted by calling President Schlissel’s arguments “unsound,” but it is clear from the overwhelming consensus among college donors, presidents, students and financial experts that divestment an ineffective and costly strategy with no real impact.

Cal investments chief explains again why divestment is a bad idea

Following the UC Board of Regents’ decision to conditionally sell a portion of its coal and oil-sands related investments, Chief Investment Officer Jagdeep Bachher was quick to clarify for the third time in less than two weeks that the move was not an act of divestment. According to Bachher 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.”

Bachher joins a large and growing group of officials associated with prestigious U.S. colleges and universities who have been vocal in their stance against divestment, calling it an ineffective strategy that diverts time, attention and resources away from meaningful solutions on climate change. Just yesterday, president of Harvard University Drew Faust spoke frankly about the goal of the school’s endowment and why she sees divestment as a “dangerous” strategy with “little effective outcome” to be achieved. To wit:

“I don’t think hat divestment is an appropriate tool, because I don’t think the endowment should be used for exerting political pressure. It is meant to fund the wide range of activities that the University undertakes. As we said before, 35 percent of our operating budget comes from the endowment. That is why people gave their funds to create the endowment. It should not be used as a weapon to exert pressure on one group or another.”

Faust’s concerns – which she has noted in the past — are far from unfounded. Caltech professor, economist and self-declared “wild-eyed” environmentalist Dr. Bradford Cornell recently published a report that quantifies the substantial costs that the endowments of Harvard, Yale, MIT, Columbia and NYU should expect to bear were they to pursue divestment. With a collective loss of $195 million among the five schools for each year they remained divested, Dr. Cornell concluded that, “a reduction in endowment fund returns as a consequence of divestment would have material impacts on an endowment’s ability to fund a university’s key institutional goal.”

But this position has been echoed far beyond California and the ranks of presidents, trustees and board members. Even if the sit-ins and protests manage to pressure institutions into pulling out their billion dollar investments in fossil fuels, economists and investment experts across the nation agree that divestment would have zero impact on climate change, or existing regulations, or the companies being targeted under a divestment scenario.

From a purely economic standpoint, scholars such as Ivo Welch, professor of finance and economics at UCLA, have found that, “Individual divestments, either as economic or symbolic pressure, have never succeeded in getting companies or countries to change” and that, “Even if Stanford divested itself fully of all its stocks, both fossil and nonfossil, it would probably take the market less than an hour to absorb the shares. It would not lead the executives of the affected companies to engage in soul-searching, much less in changes in operations.”

In an article earlier this summer, Nature Magazine also featured scientists and climate experts who proposed lots of different ways to address climate change that would prove far more useful and effective than divestment. William Nordhaus, an economist at Yale, suggested that, “If you want to do something about climate change …You are not going to solve the problem by beating up on companies.”

Scientists, economists and leaders of academic institutions have all acknowledged student activists’ concerns and applauded their enthusiasm with respect to this critical issue. But what they’ve also made resoundingly clear is that every minute they’re spending on divestment is a minute they’re not investing in something that actually matters from a climate standpoint.

Univ. of Calif. shows us the difference between “divesting” from stocks and “just selling them”

Divestment activists were quick to declare a “huge win” stemming from an announcement last week by the University of California’s Chief Investment Officer (CIO) that he had decided to sell roughly $200 million in investments tied to coal mining and oil sands development companies. But a closer look at the actual video of the investment committee meeting at UCLA on Sept. 9 reveals quite a different story: as it turns out, UC didn’t sell those stocks for any amorphous moral reasons. It sold them for financial reasons – and may actually buy them back in the future, if conditions warrant.

Or, in other words, UC did what every investor with an E-Trade account does multiple times a week.

The University of California did not change its official policy with regard to fossil fuels, as Reuters reported. As video of the meeting reveals, the school made abundantly clear that the decision was an economic decision, not a moral decision. UC CIO Jagdeep Bachher states:

“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.”

Put simply, the decision to sell these investments took little time because the investments were small to begin with. Just as Bloomberg reported earlier this year, divestment campaigners have been quick to celebrate “empty gestures” in which a school either declares its intent to divest from securities it doesn’t actually own in the first place, or, in this case, sells stocks that it says it may buy back later if market conditions improve. That’s not divestment, friends. That’s just smart, everyday investing.

In a follow-up report from the Los Angeles Times, it was revealed that UC still holds “about $10 billion in various types of energy industry investments, about 10 percent of the $100 billion or so it holds in endowment and pension funds.” And, as it relates to the UC’s position on oil and gas, “there are no plans to extend the sell-off into oil and natural gas,” according to the Times.

But again: the most important thing that UC confirmed to the Times and other outlets is that, if market conditions change, the board would be open to purchasing back into these companies. UC spokeswoman Dianne Klein affirmed that the university is still free to purchase shares of those companies in the future if the market conditions warrant. Such a move would be nothing less than the opposite of divestment.

Meanwhile, a study released just last week by Caltech professor Bradford Cornell provides a more substantive look at just how much divestment policies would cost individual school endowments. Based on a 20-year history of returns, the study found that the exclusion of energy securities from the investment portfolios of five top American universities with some of the largest endowments in the nation (Columbia, Harvard, MIT, NYU and Yale) would create disastrous losses: based on calculations, Harvard alone would face $107.81 million in expected shortfalls in just the first year.

As this and other reports have found, whether your endowment has lots of energy-related securities in it, or just a little, the impact of divestment is likely to be significant – driven mostly by the loss of diversification benefits one receives from maintaining a balanced portfolio that’s spread across multiple sectors of the economy. While the Cornell report didn’t evaluate specifically how divestment would impact Cal’s endowment, the fact that the Cal portfolio generated a whopping return of 22.6 percent last year, when the rest of the market was returning only 11.4 percent, and with oil and gas prices in the tank, should tell us a lot. Turns out, even with under performing fossil-related equities (owing to the downturn in oil prices), Cal’s endowment crushed it.

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.”

The real lesson learned this past week from the media coverage generated around the UC announcement is that divestment organizers are in desperate need to show some momentum. The fact remains that school after school, including UC, has rejected divestment because it carries with it enormous real costs, while producing no real benefit. Rather than a divestment “win,” UC is just one of the many schools that have made a calculated, rational choice to not divest, but rather continue to buy and sell assets within the context of current market conditions. That’s all this is, irrespective of how the other side tries to sell it.

Fact Sheet: Report Finds Divestment Would Cost Harvard, Yale, Columbia, MIT, and NYU More than $195 Million per Year

New Report: Divestment Would Cost Harvard, Yale, Columbia, MIT, and NYU More than $195 Million per Year

As schools continue to reject calls to divest their endowments of fossil fuels, one common question is often left unanswered: How much does divestment actually cost?

In an effort to answer this critical question, a new report released today, commissioned by the Independent Petroleum Association of America (IPAA) and authored by a researcher from Caltech, quantifies for the first time the actual, real-world costs that individual, select schools could expect by divesting. Looking at the real-world cost of divestment for five leading U.S. universities with significant endowments — Harvard, Yale, MIT, Columbia, and NY– the report finds that these five schools collectively could lose more than $195 million by divesting from fossil-fuel related equities – $195 million for each and every year the portfolios are active in the market.

Led by Dr. Bradford Cornell, a visiting professor of financial economics at Caltech and a senior consultant at Compass Lexecon, the report draws on publicly available data to model thousands of different proxy portfolios for each school studied. Dr. Cornell and his team were then able to approximate the composition of each school’s investment fund, and then analyze those portfolios’ performance under both divested and diversified scenarios. Among the schools evaluated, Cornell and his team found that Harvard would experience the most significant loss if it decided to divest – roughly $107 million per year. Yale’s losses are projected to exceed $51 million year per year. MIT would lose $17.75 million; Columbia would lose $14.43; and NYU would see a reduction of $4.16 million.

As Dr. Cornell highlighted upon release of the report, “The fact that divestment has the potential to generate lower returns for schools and other institutions isn’t particularly earthshattering news. But the fact that the projected shortfalls associated with divestment are this significant, and this universal – that is the real critical finding here, and one that schools would be smart to evaluate as part of any discussion on divestment moving forward.”

IPAA senior vice president for operations and public affairs Jeff Eshelman also noted that, “This report adds to the growing body of research and real-world evidence out there showing that divestment is a bad policy based on a bad premise, with the potential to produce really bad outcomes for the schools and institutions that adopt it.” In fact, the Cornell report builds off previous research by University of Chicago Law School professor Daniel Fischel that analyzed the performance of two investment portfolios over a 50-year period: one that included energy-related stocks, and another that did not. The Fischel report found that fully diversified portfolios generated average, absolute returns 0.7 percentage points greater than portfolios that excluded energy stocks — meaning the “divested” portfolio lost roughly 70 basis points relative to the optimal scenario for each and every year over the 50-year period in which the portfolios were active.

As experts and prominent universities alike have already stated, divestment comes with serious costs and little tangible benefits. We suggest you read this report in full, but here are a few key findings you don’t want to miss:

• “Consistent with basic financial economic principles, divestment almost always generates long-term investment shortfalls due to reduced diversification, and the shortfalls are typically substantial, given the size and importance of the energy sector being divested.” (p. 3)

• “The mean risk-adjusted shortfall due to divestment for a weighted average across the five universities is approximately 0.23 percent per year, each year.  This mean shortfall varies across the universities: 0.16 percent (Columbia), 0.30 percent (Harvard), 0.14 percent (MIT), 0.12 percent (NYU), and 0.21 percent (Yale).” (p. 4)

• “As applied to these schools’ current endowments, shortfalls of this magnitude would translate to annual reductions in endowment value of $14.43 million (Columbia), $107.81 million (Harvard), $17.75 million (MIT), $4.16 million (NYU), and $51.09 million (Yale).  Therefore, these five schools alone stand to forfeit more than $195 million in investment returns each year, without changing portfolio risk.”  (p. 4)

• “On a gross (not risk-adjusted) basis, the mean annual shortfall due to divestment for a weighted average across universities is 0.31 percent per year, and, for individual universities, the gross shortfall is 0.24 percent (Columbia), 0.37 percent (Harvard), 0.19 percent (MIT), 0.17 percent (NYU), and 0.33 percent (Yale).  Whether risk-adjusted or not, reductions in investment returns of these magnitudes would likely have a meaningful impact on universities’ ability to satisfy their institutional goals of research and education.” (p. 4-5)

• “Using a weighted average across the five universities, fully 91 percent of these proxy portfolios produce a risk-adjusted divestment penalty over the past 20 years that would generate a shortfall for the endowment fund.  This indicates that, regardless of how successful my attempt to proxy for these schools’ endowment holdings is, it is in any case very likely that the actual endowments would experience a shortfall due to divestment.  Focusing on the five universities individually, the share of constructed portfolios for each university with a risk-adjusted shortfall is never less than 88 percent.” (p. 3-4)

• “Sizeable declines in the endowment fund … would likely have material impacts on a university’s ability to achieve its institutional goals.  Specifically, endowments fund a material share of the operating budget for all five universities, and reductions in returns specifically harm key institutional objectives, such as funding research and student support.” (p. 10)

• “Due to the plasticity of the capital markets and the diversity of investors worldwide, basic financial economic theory indicates that it is unlikely the divestiture movement, with or without any specific university’s participation, will have any material effect on the cost of capital of the divested companies or any other relevant outcome.  The history of prior divestment campaigns is consistent with this basic theory.” (p. 13)

Report: Divestment Would Cost Harvard, Yale, Columbia, MIT, and NYU More than $195 Million Per Year

Harvard University Professor

The concerns of the students are understandable but the message from the divestment movement is fundamentally misguided…We should be focusing on actions that will make a real difference.