A new report shows that the cost of divesting fossil fuels at most major universities is likely to be a lot more than previously thought as a result of the “hidden” costs of managing endowments to bring them in line with fossil free activists.
A new study conducted by Hendrik Bessembinder, a professor of finance at the Arizona State University’s Carey School of Business, shows that divestment has the potential to wallow out endowments, ultimately causing them to lose as much as 12 percent of their total value over a 20-year time frame.
Bessembinder believes the frictional costs, or those associated with managing the complex endowments, could cost an endowment fund as much as $7.4 billion in value over a 20-year period. It’s one thing to make a promise to divest, it’s quite another to carry out a divestment proposal.
“These costs have nothing at all to do with the speculative matter of how stocks or industries will do in the future. These are largely unavoidable costs, every institution that divests will incur them, and as my research shows, they significantly add up as time goes on,” Bessembinder said in a press statement.
Bessembinder analyzed 30 universities of varying endowment sizes across the U.S. and found that transactional costs are determined by the size of the endowment. He focused on large, medium, and small endowments. After calculating the data, and categorizing datasets, he estimated that the endowments would lose between 2 and 12 percent of their value due to divestment over a 20-year period, which is astronomically higher than the losses incurred due to weakened portfolio performances.
Todd Kendall, an economist with economic consulting company Compass Lexecon, told The Daily Caller News Foundation that environmentalists have dramatically downplayed the costs of fossil fuel divestment.
“If fixed costs are factored into divestment,” said Kendall, who helped conduct the research, “then the price of purging fossil fuels balloons to more than $7.4 billion for most major universities with sizeable endowments.”
As a consequence, the study adds, investment managers at schools would need to undertake reams of research to maintain compliance with divestment goals.
Kendall said he is not surprised that it has been the smallest universities to divest, as it is costlier for giant institutions to manage their massive endowments. Those universities with smaller number of investments have chosen to divest, he explained, have done so in a purely “Potemkin way,” or as a symbolic gesture.
Endowments also use private equity funds and mutual funds to manage their assets, which hold stock in both green energy firms as well as fossil fuel companies, neither of which are easily disentangled.
Because there is no way for a mutual fund to weed out specific assets, Kendall added, “You’ll have to sell off 100 percent of the funds — some of which would be in green energy investments.”
Of course, the nature of mutual funds seriously complicates the anti-fossil fuel crusaders’ plan of replacing oil with renewable energy resources – if getting rid of Exxon also means nixing a green investment, then what’s the use? Additionally, most of these commingled funds are not easily converted into cash, making it more difficult to sell them outright. In other words, it’s not as easy as simply going to a bank and emptying a checking account.
In fact, Kendall added, “You’re just as likely to make the problem worse, then make it better. You are just as likely to be forcing these universities into divesting their green energy policy assets.”
Bessembinder’s research seems to mirror points made by universities refusing to divest.
Swarthmore College, for example, cited in 2015 many of the points made in Bessembinder’s research as reasons for opting out of divestment.
“If Swarthmore decided to divest, we would have to find replacements for all the commingled funds because an institution has no power to impose a constraint on a commingled fund,” the school said in a press statement at the time. “The loss the first year would be $11.2 million,” the school said about the loss to the funds, “but by five years it would be a cumulative $73.1 million, and by ten years it would be $203.8 million.”
Divestment activists at the school don’t seem to care about the costs wrought by divestment.
Swarthmore Mountain Justice, the school’s divestment activists, for instance, argued in an editorial in February for the school’s newspaper, The Phoenix, “that the fossil fuel industry and investments in that industry have no place in a just and sustainable future.” They went so far as to blame the school’s Board of Trustees for supposedly being shills for the fossil fuel industry.
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