November 21, 2016

Trinity College Dublin Rushes Divestment Decision; Fails to Consider Costs

Media reports this week state that Trinity College Dublin has announced its plans to sell off €6.1 million in indirect fossil fuel investments after just a year of deliberations on the policy.  While the speed of this decision was praised by divestment activists as “one of the fastest divestment campaigns in the world,” it raises concerns about whether the College fully considered the true costs and effectiveness of a divestment policy.

For starters, it’s worth noting that the college has yet to release an official announcement on its decision, so some details remain to be seen. According to media reports, however, Trinity will be pulling its indirect investments from “oil-related” companies, a process that has been shown to confer substantial transaction costs and management fees for other leading universities. These so-called “frictional costs” could cost Trinity’s endowment as much as 12 percent of its total value over a 20-year timeframe.

Although the divestment decision impacts only 3.5 percent of Trinity’s total €170 million endowment, this decision comes at a time when the level of state funding is rapidly deteriorating, thus rendering the College increasingly reliant on its endowment.  In fact, a recent financial report from Trinity College Dublin notes that “since 2008 the core recurrent grant to Universities has decreased by over 50 percent” and that the College’s endowment has become increasingly important for “maintain[ing] the quality and integrity of academic programmes,” a mission that will become all the more difficult as the endowment bears the cost of a divestment policy.  The report continues:

“Trinity College has faced, and indeed continues to face, a number of challenges particularly in recent years given the straitened economic circumstances in Ireland and the continuing decline in State funding for higher education as highlighted in the annual HEA grant allocation letter.”

What’s more, it remains unclear how Trinity would actually divest.  The indirect funds that Trinity is promising to divest are managed by Irish Life Investment Managers, according to a 2015 Freedom of Information (FOI) request. And as stated by University Times, “the college does not currently invest directly in fossil fuels, and it has no control over where the overall Irish Life funds are invested in.”

Since Irish Life does not have a green or sustainable fund listed, it is possible Trinity would have to move its investments entirely — a far more expensive venture.  In fact, the top 10 actively managed funds with an environmental focus charge management fees 10 basis points higher than peers in the active management space, and 73 basis points higher than the passively managed funds that long-term investors tend to favor.

It seems unlikely, then, that the College’s financial reality was taken into consideration when the divestment decision was made.  While Trinity’s Chief Financial Officer (CFO), Ian Matthews, credited only a “cogent argument for divestment” from student activists and Trinity’s  desire to be a “leader in sustainability,” the college’s accelerated decision process stands in stark contrast to the comprehensive studies launched by the Financial Advisory Committees of many American universities, which have by-and-large rejected divestment on the grounds of its enormous cost and general ineffectiveness.  The latter point has especially been remarked upon by universities, including the President of Harvard University, who observed that divestment would achieve very little because “plenty of other people will invest in those firms.”

Unfortunately, as this policy is enacted and the endowment is impacted the College as a whole will face the consequences of this short-sighted decision.