A new report argues that students should expect tuition rates to increase by nearly $400 if their respective universities decide to purge their oil and gas assets.
Large public universities must raise tuition rates between $123 and $385 to offset the costs of fossil fuel divestment, according to a report published Monday by Hendrik Bessembinder, a professor of finance at Arizona State University. The actual numbers depend on the extent of a university’s reliance on oil assets.
“These very significant costs,” is one of the chief reasons why universities have used half divestment measures “to placate divestment activists while minimizing the proportion of the fund actually pledged to remain fossil-free,” Bessembinder wrote Sunday in an editorial announcing the report.
The Independent Petroleum Association of America commissioned the report.
Bessembinder conducted a similar report last year showing that divestment has the potential to reduce university endowments, ultimately causing them to lose as much as 12 percent of their total value over a 20-year time frame.
His research also shows the frictional costs, or those associated with managing the complex endowments, could lead endowments to lose 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.
Bessembinder analyzed 30 universities of varying endowment sizes across the U.S. in 2016 and found that the size of the endowment determines transactional costs. 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 over a 20-year period due to divestment. This 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. These funds typically hold stock in renewable energy 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, analysts have noted universities would have to sell off 100 percent of their funds, many of which invest in green energy platforms like solar power and wind turbines.
The nature of mutual funds seriously complicates the anti-fossil fuel crusaders’ plan of replacing oil with renewable energy resources. If ridding your fund of Exxon stock 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.
Universities have been making Bessembinder’s points for several months.
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.”
Public pensions face similar issues, the report noted. A typical retiree can expect to receive a five to seven percent reduction in benefits if their public pension moves to sell off coal, oil and gas assets.
Some pensions with few oil assets have moved to divest, while other funds, such as the California Public Employees’ Retirement System, argue oil purges are not a viable solution to climate change. The University of Cambridge also ruled out divesting its multi-billion-dollar endowment fund from oil and gas last year, arguing it was better to engage with fossil fuel companies.
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