Economist Says Fossil Fuel Assets Connected To Every Facet Of A School’s Endowment

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Chris White Tech Reporter
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Fossil fuel divestment crusaders at major universities are probably in for a rude awakening as oil and gas assets are tied to nearly every sector of a university’s endowment, according to one an economic analyst who researchers the costs of divestment.

“Divesting from fossil fuels is an incredibly complicated undertaking,” Todd Kendall, an economist with economic consulting company Compass Lexecon, told a panel on hosted by the American Fuel & Petrochemical Manufacturers on Wednesday. “What makes it so complicated,” he added, “is that oil assets are literally tied to every sector of the economy, not to mention every asset of a university’s endowment.”

It’s like “seven degrees of Kevin Bacon,” Kendall told those in attendance, in that some assets are from financial institutes that give loans to oil companies, while still others are tied up in technology firms that, among other things, develop tools that help distribute oil from one place to another. It’s like trying to toss a boulder in a glass factory without shattering a window vase — the probability of success is almost nil.

The assets are indirect, for sure, he said, but they are nonetheless linked to the oil industry.

Kendall, who co-researched a study in May explaining the “hidden costs” of divestment, told The Daily Caller News Foundation in early June that environmentalists have dramatically downplayed the costs of fossil fuel divestment.

“If fixed costs are factored into divestment,” Kendall said at the time, “then the price of purging fossil fuels balloons to more than $7.4 billion for most major universities with sizeable endowments.”

The former Clemson University economics professor took the bulk of his time explaining and fleshing out the “hidden costs” study, which was conducted by Arizona State University’s Carey School of Business researcher Hendrik Bessembinder.

Bessembinder and Kendall analyzed 30 universities with small and large endowments and found that transactional costs are determined by the size of the endowment.

They focused on large, medium, and small endowments. After calculating the data, and categorizing datasets, they estimated that 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.

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.

Since mutual funds cannot technically 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.”

Kendall and Bessembinder’s research addressed an issue already being discussed by other large university endowments across the U.S., but mostly ignored by fossil fuel divestment crusaders.

Swarthmore College, for instance, 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.”

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