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Fossil fuel divestment makes no sense

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At colleges across Maryland, and indeed the whole nation, fossil fuel divestment-- forcing a university to get rid of all funds in its endowment related to fossil-fuel producers-- has incited a small, but spirited minority, to take action. They are well-intentioned, but woefully misinformed.

I have no doubt that my colleagues in support of divestment have good intentions—ideals of service to others that form the foundation of a liberal arts education. And yet, we all know that good intentions, without the grounding of common sense, empirical evidence, and discerning the context of the situation at hand, can only go so far.

Immediate and drastic divestment as articulated by the affirmative would fail to accomplish its purported purposes or to uphold the primary purpose of universities: to provide its students with resources and the education necessary to grow into the leaders of the future. Divestment harms the ability of colleges to educate its students by undermining its financial resources and holding the well being of its students hostage to a spurious moral claim. To allow divestment negates opportunity, not only for us but also for others.

Colleges requires funds in order to function. Endowments makes it possible for clubs to go on retreats and put on events, for departments to hire the best faculty, and for more students to receive financial aid. In some way, shape, or form, all of us are direct beneficiaries of the holistic education funded at Boston College. As Eagles, we all want to see a growing and empowered BC, which is why investment decisions have included energy companies to this point.

A 2013 Sonecon study by Robert Shapiro, a former U.S. Department of Commerce official, concludes that oil and natural gas holdings in college endowments have achieved higher rates of return over 10 years than all other asset classes. How high? Those returns were a whopping 326% higher than the average annual 10-year, 2.7% returns on all U.S. stocks and 105% greater than average returns on college and university endowment assets. Over the past decade, oil and natural gas stocks also outperformed the S&P 500 by 28%. For BC not to invest in these companies would hobble its funding abilities especially within the timeframe proposed by the affirmative.

If anything, the increasing usage of natural gas as a transportation fuel, heating source, and cleaner alternative (as stated by both the EPA and the EIA), would only increase demand for these companies’ products and increase the attractiveness of their holdings.

Institutions and even some conservation heavyweights agree with this analysis and even go so far as to say that similar divestment schemes would harm endowment rates of return. Divestment supporters neglect to mention that divestment is not just a process of simply calling a broker and saying sell; rather, we do know that the overwhelming majority of endowments are in co-mingled funds run by a manager, whose purpose is to get the best returns for the community.

To divest would mean moving huge proportions of endowments to other managers—who may not want our business with newfound restrictions. For example, Bowdoin College concluded that 25% of its endowment would have to be turned over, and assuming that a manager could be found, a fossil-free endowment rate of return would be 5% lower. These are not small numbers. Even 5% of their endowment is $100million. In June 2013, an analysis published by University Business stated that divestment leaves the investor with a more volatile portfolio in the end, due to inferior risk-adjusted returns.

Harvard could see the writing on the wall. Its President Drew Faust stated in October 2013, “logic and experience indicate that barring investments... come at a substantial economic cost.’ And if these individual analyses were not compelling enough, a Kritzman and Alder study published in the Chronicle of Higher Education in 2013 showed that in 10,000 iterations, divestments imply an 8% lower rate of return. They also mention that studies demonstrating the so-called effectiveness of divestment fail to include hefty transaction costs to move funds, which thereby reduce the profitability of the affirmative strategy—a claim backed up by Wellesley College, Cambridge Associates, and many others.

Herein lies the glaring fact of the matter: if divestment, as contended by the affirmative, is such a good idea then why have so few institutions done it? And for that matter, why have so few conservation and environmental groups?

Conservation International, National Wildlife Federation, The Sierra Club Foundation, World Wildlife Fund… the list goes on. They all hold fossil-fuel investments in the same manner that all major universities do—comingled investments that would be costly to move and fundamentally harmful to their mission.

What we can even take away from these groups is that harming endowment returns could reduce college's ability to implement efficiency and green measures to reduce fossil fuel use, to fund research in alternative technologies, or to send their students on trips to see areas affected by climate change.

There is no financial or operational benefit to divestment, no sense in dropping all fossil fuels right now, no reason to incur huge transaction costs, and no incentive for us to shoot ourselves in the foot by not being able to invest in the highest performing hedge and pooled funds.

What then are divestment honchos left with? Their evidence fails to mention the immense financial downsides to divestment. Their understanding of the situation forgets the nature of our comingled investments, and common sense, shared by reputable sustainability gurus, shows that divestment is an extreme measure that could undermine the very purpose of these institutions.

Endowments are intended to generate high rates of return—not to support political causes—and rightly so. The affirmative argues for a weakening of the financial mechanisms that ground the education and/ or livelihood of every single individual in the room. Nor does divestment constitute a moral position on fossil fuels. Even my esteemed colleagues will continue to use fossil fuels to heat their buildings and drive their vehicles. And in a larger moral sense, the ideal divestment outcome would drive up energy prices, thereby harming those most vulnerable in our society.

I do not question the motives of the divestment movement, but colleges cannot afford a strategy that hinders their educational missions, reduces resources for other students, and limits opportunities for both the advocates of the future and all current students.

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