Todd Kendall: June 7, 2016


New Report Shows the Costs related to Divestment have the potential to rob endowment funds of as much as 12 percent of their total value over a 20-year timeframe


Todd Kendall

Senior Vice President with Compass Lexecon


A new report released on June 1st  clearly demonstrates that campus efforts to divest from fossil fuels backfires, and in fact, costs the divesting institutions enormous amounts of money.

The report specifically analyzes the fixed costs related to executing often-complicated transactions and then actively managing an endowment to ensure it remains compliant with ever-changing definitions of what it means to actually be “fossil-free.” In other words, regardless of the symbolic opinions around divestment or the view on whether or not having fossil fuels in your portfolio will carry an impact, this report shows that divestment has a real cost for endowments, no matter the motivation.

The report is authored by Prof. Bessembinder of the W.P. Carey School of Business at Arizona State University on the financial impacts of divestment from fossil fuels on endowments and pension funds.

By way of background, the report comes as the New York Times reports that the anti-fossil fuel divestment efforts “appear to be meeting some resistance. This spring’s crop of protests on campus did not produce major victories at premier schools.” Even the so-called “wins” activist have pointed to over the years have turned out to be, as Bloomberg called them, “empty gestures.” The most recent example of this empty gesture came just last week when UMASS announced it was divesting its direct investments from fossil fuel investments. The total the school actually divested? Five million dollars, or less than one percent of its $770 million endowment.

Here are some key findings from the report: 

·         That transaction and management costs related to divestment – what he refers to as “frictional costs” – have the potential to rob endowment funds of as much as 12 percent of their total value over a 20-year timeframe.

·         Focusing on a sample of 30 universities, including large, medium-sized, and small endowments, conservative estimates of these transaction costs range between 60 basis points and 269 basis points for large endowments, between 25 basis points and 180 basis points for medium endowments, and between nine basis points and 124 basis points for small endowments.

·         For a typical large endowment growing at a historically reasonable rate, this would translate into a loss in value of as much as $7.4 billion over 20 years.  For medium and small endowments the loss is equal to between $52 million and $298 million, and $17 million and $89 million respectively.

·         Since many endowments hold assets in structures such as mutual funds, commingled funds, and private equity funds, divestment of fossil fuel assets generally requires the sale of an entire fund – leading to “collateral damage” and imposing substantial transaction costs for a fund.

·         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.

More About Todd Kendall

Todd Kendall is an economist and senior vice president with Compass Lexecon, the research firm that worked with Arizona State University and the University of Washington on the report, “Frictional Costs Of Fossil Fuel Divestment.” Kendall is a recognized expert in public policy, government regulation, financial markets, public finance and labor markets.  Previously he was Assistant Professor of Economics at Clemson University in South Carolina. He has been published in a variety of articles in academic journals

Recent University Divestment Rejections:

·         Williams College (rejected divestment 9/10/15): “The initial cost of divestment would be in liquidating the portfolio which, even done in an orderly fashion over the course of a year, would cost $75 million or more… [T]he expected cost to Williams of divestment has nothing to do with projecting whether the particular class of targeted companies are themselves good or bad investments, and is entirely a result of the expected cost of fundamentally changing the college’s strategy for managing the endowment.” LINK

·        Middlebury College (rejected divestment 8/28/13): “At this time, too many of these questions either raise serious concerns or remain unanswered for the board to support divestment.  Given its fiduciary responsibilities, the board cannot look past the lack of proven alternative investment models, the difficulty and material cost of withdrawing from a complex portfolio of investments, and the uncertainties and risks that divestment would create.” LINK

·         CUNY College (rejected divestment 8/26/15): “The majority of spending derived from the University’s investment pool is utilized for student scholarships. We are concerned that a restructuring of current investments would restrict diversification, lower expected returns, and result in higher transaction costs.” LINK

·         American University (rejected divestment 11/21/14): “[D]ivesting from these companies would require that AU investments be withdrawn from index funds and commingled funds in favor of more actively managed funds,” and cited the results of an internal study indicating that “this withdrawal would cause manager fees to double.”   LINK

·         Swarthmore College (rejected divestment 5/2/15): “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…If Swarthmore were to follow this approach, it would forego the 1.7% to 1.8% added return per year.  This would amount to lost earnings each and every year…The loss the first year would be $11.2 million, but by five years it would be a cumulative $73.1 million, and by ten years it would be $203.8 million.  It would be even greater if all the affected portfolios of the endowment were invested in this way.” LINK

·         Bates College (rejected divestment 1/21/14): “To guarantee divestment from these 200 public companies, our investment advisers estimate that between a third and a half of the entire endowment would need to be liquidated and replaced with separately managed accounts.  Were we to guarantee a fossil fuel free endowment more broadly than the 200 companies, greater than half of the endowment would need to be liquidated.  In either scenario, the transition would result in significant transaction costs, a long-term decrease in the endowment’s performance, an increase in the endowment’s risk profile, and thus a loss in annual operating income for the college…In short, divestment would potentially threaten core aspects of the college’s mission.” LINK

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