Divesting from fossil fuel companies could cost major universities with large endowments as much as $7.4 billion over 20 years, according to a new study released Wednesday.
Arizona State University professor Hendrik Bessembinder wrote that divesting from fossil fuels would require universities to more actively manage their investments, instead of simply letting the money grow over time. The costs of more actively managing the investments, with the costs incurred during the actual transaction, make up the “hidden costs” of divestment, he wrote.
In a study commissioned by the Independent Petroleum Association of America, Bessembinder, a finance professor, wrote that those hidden costs often can exceed the smaller returns on investments incurred by universities that divest from fossil fuel companies.
“I estimate that endowments would lose between approximately 2 and 12 percent of value due to these frictional costs of divestment over a 20-year period,” Bessembinder wrote. “For a typical large endowment growing at a historically reasonable rate, this would translate into a loss in value of between $1.4 billion and $7.4 billion by the end of the 20-year period.”
Divesting from fossil fuel companies has become a popular activist idea on college campuses to try to weaken fossil fuel companies, which many scientists blame for creating the greenhouse gas emissions driving manmade climate change. However, many critics of the idea say that the amount of holdings that universities have in fossil fuel companies is too small to make a real difference in those companies’ financial future.
Bessembinder said there are three reasons activists usually give for wanting universities to divest: fossil fuel companies should be punished, their stocks are overvalued and will decrease, and divestment will make fossil fuel companies change their ways.
However, there is not a lot of evidence for those claims, he wrote.
“Divestment activists appear to rely on the reasoning that divestment will spur such a shift away from reliance on fossil fuels,” Bassembinder wrote. “However, there is little economic support for the claim that divestment of fossil fuel assets will have a material impact on the targeted companies in a way that would produce such a shift.”
