As more universities consider divesting from fossil fuels, they should consider that a new study finds that those divestments could come with a massive price tag. According to a recent article in the Washington Examiner, the typical cost for a university endowment could be as much as $7.4 billion dollars over the next twenty years.
Divesting from fossil fuels forces universities to spend more time actively managing investments as opposed to simply letting the money grow with time, explains Arizona State University professor Hendrik Bessembinder. Actively managing the investments along with the costs of transactions makes up the the “hidden costs” of fossil fuel divestment. Bessembinder says that those hidden costs can often exceed the returns in investments made by universities.
“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 writes. “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.”
Fossil fuel divestment has become a popular topic for activism on college campuses as a way to weaken fossil fuel companies, a central goal of some climate change activists. Some have urged universities to divest as a way of punishing fossil fuel companies, believing that their stock values will decrease or that divestment will make fossil fuel companies alter their business models. But there isn’t much reason to believe those claims. Plus, divestment critics point out that the amount of holdings that universities have in fossil fuel companies is too small to make a real difference.
“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.”
Recently, PACE wrote about Stanford’s decision not to divest from fossil fuels. The university came to that decision because it “could not evaluate whether the social injury caused by the fossil fuel industry outweighs the social benefit it provides.” While other universities are choosing to divest, regardless of the costs and the net benefits of fossil fuels, Stanford chose to look at the bigger picture. The Board of Trustees says they “do not believe that a credible case can be made for divesting from the fossil fuel industry until there are competitive and readily available alternatives.”
Hopefully other universities thinking of divesting from fossil fuels will consider all the costs before making any divestment decision. Making the wrong decision could be a very expensive mistake.