Fossil Fuel Divestment Yields ‘No Discernible Effect’ on Endowments

Although the divestment movement has stirred institutional investors in recent years, asset managers still struggle with what’s right for the environment versus their fiduciary responsibility. A big question is whether the two are mutually exclusive or go hand in hand.

In a reflection of this split, the $248 billion California State Teachers’ Retirement System (CalSTRS) announced earlier this month that it would not divest from fossil fuels as it could have a detrimental effect on its investment portfolio. Conversely, more than half of UK universities have pledged to divest from fossil fuels. And the CEO of the Blackrock, the world’s largest asset manager, recently declared that “climate is investment risk” and vowed to shift entirely toward sustainable investments.

To determine the impact divestment has on the investment portfolios or endowments, two academics took a closer look.  Christopher Ryan, a law professor at Roger Williams University School of Law, and Chris Marsicano, a professor of educational studies at Davidson College, studied the impact of divestment on endowment values at universities that both fully and partially divested from fossil fuels.

Ryan and Marsicano examined the impact of total or partial divestment on endowment values for all universities, as well as a select group of institutions that are illustrative of their peers by endowment size.

The results of the study, however, will likely do little to settle the matter.

“Our research found no discernable, consistent, average impact of divestment on endowment assets,” the two wrote in their research paper Examining the Impact of Divestment from Fossil Fuels on University Endowments. “We find that divestment had limited effect on the value of mid-sized and large endowments, with inconclusive evidence of the effect of divestment for small and very large endowments or private university endowments more generally.”

The researchers said the preliminary results should be interpreted with caution. It said one of its methods of analysis “suggests that the negative consequences of divestment may be overstated in the near-term.” And they said the results “suggest that there is not a negative effect associated with divestment for mid-sized and large endowments.”

In an interview with CIO, the two professors acknowledged their study may provide fodder for both sides of the divestment argument.

“Is there something for everyone in these findings? Perhaps there is,” said Ryan. “And this is because we find no discernible effect of the divestment decision on those universities that have elected to divest,” adding that “we essentially get a null result.” 

Ryan said their research allowed them to compare a university that has divested from fossil fuels to itself by creating a kind of “Frankenstein version” of the university. They did that by “taking a leg from this college, and an arm from that college that is close enough to extrapolate the effect divestment had, or where they would be in the absence of that decision,” and compare the difference.

“And there we do find that the divestment decision had a marginally positive impact for mid- and large-size endowments,” said Ryan. However, he added that ultimately their results found no discernable adverse effect of divestment.

“The no discernible effect effectively means it’s not going the help you, it’s not going to hurt you, at least at the level we detect,” added Marsicano. “If you’re going to say that divesting doesn’t do anything, you also have to acknowledge that staying invested doesn’t necessarily better your endowment returns.”

The paper said “at the very least” ESG concerns might be used as a “tiebreaker” when endowment fund managers are faced with deciding between continued investment in fossil fuels or an investment in renewable energies or divestment from fossil fuels.

“A university could reasonably consider its reputation and institutional concerns for social responsibility as encompassed in making a decision consistent with the university’s best interest,” said the paper. “Our results may indeed provide evidence that ESG factors could further the charitable purposes for university endowments … without sacrificing their value.”

Ryan and Marsicano said the difficulty in studying the effect of fossil fuel divestment on endowment portfolios is the paucity of data because the fossil fuel divestment movement is relatively new. Their research only shows the effect of divestment over the course of a few years. And as any endowment will point out, they invest for the long term and are more concerned about how it will affect them over the course of decades, not years.

The professors will continue to study the subject, and will publish more studies on divestment as time provides them with more data to investigate.

“We want to look at the longer-term effects of divestment over a period of fiscal years that we aren’t able to do now, given the data restrictions,” said Ryan.