Universities that divest from fossil fuel companies risk harming the economic performance of their endowments, according to a new study.
The study from Daniel Fischel, a consultant and former University of Chicago law school dean, said pulling endowments out of fossil fuel stocks weakens portfolio diversity, involves hidden administrative costs and jettisons high-performing stocks, all of which reduce returns.
The study set up stock indexes to compare returns between portfolios with and without energy stocks. The analysis showed the performance of carbon-free portfolios was as much as 0.7 percent weaker than those with fossil fuel stocks. A 0.5 reduction in performance across $456 billion of university endowments would slow returns by $2 billion annually, the study said.
“A reduction in wealth of this magnitude could have a substantial impact on the ability of universities to achieve their goals, such as the research, scholarships and services that universities are able to offer,” said Fischel, whose study was backed by the Independent Petroleum Association of America.
The fossil fuel divestment campaign has been building in recent years with a goal of pressuring companies to abandon fossil fuel assets.
The campaign has racked up some successes by getting 24 universities — including Stanford University, which pledged to drop coal company stocks — to divest from fossil fuel companies.
Proponents argue doing so would slow climate change by keeping otherwise developed fossil fuels and the greenhouse gases they produce in the ground. They contend that as pressure builds on policymakers to adopt climate change policies that increase the cost of burning fossil fuels, companies will find leaving the fuel in the ground to be fiscally prudent.
The divestment push has grown to philanthropies and churches, and it has alarmed the energy industry. But the effort is still small. While university energy stocks account for $23 billion across all endowments, that’s barely a blip on the $3.8 trillion market capitalization for the top 200 companies ranked by fossil fuel reserves.
Fischel said divestment is also unlikely to have its intended effect of reducing stock prices, noting previous divestment efforts such as the 1980s campaign against apartheid South Africa.
Many universities, such as Harvard University and Duke University, have rejected divestment. As Fischel cited in his study, Harvard President Drew Faust said of the institution’s decision that divestment would have “negligible financial impact on the affected companies” and “diminish the influence or voice we might have with this industry.”
