It Would Harm the Fund
One of the principal arguments that is made against divestment is that it would limit profit optimization and consequently undermine the growth of the endowment. While this argument is problematic given the implicit prioritization of money over the wellbeing of current and future generations for which the endowment is being held in trust, there is not even conclusive evidence to support this claim.
Several studies have emerged quantifying the financial impacts of divesting from fossil fuels, and they have, in aggregate, found no evidence to suggest that a financial portfolio would incur significant risk. The Aperio Group conducted an analysis quantifying the effect of divesting from the “Filthy Fifteen” – U.S. coal companies that account for 40 percent of coal consumed and 60 percent of coal produced domestically – and the fossil fuel sector as a whole. The firm estimated a theoretical return penalty of 0.0002 percent for the Filthy Fifteen and 0.0034 percent for the entire fossil fuel sector. Another study by Advisor Partners estimated a predicted tracking error of 1.57 percent relative to the S&P 500 for a divested financial portfolio, which is still low when considering that the average portfolio has a tracking error of four percent. This data suggest that the concerns of doomsday forecasters are overblown.
The narrative changes when considering the question of performance, with various studies emerging with contradictory methodologies and conclusions that can be interpreted both ways. Advisor Partners analyzed the performance of a theoretical divested portfolio created as of the end of 1989 and found the performance to be “virtually indistinguishable” from that of the S&P 500. Whether the portfolio had a performance advantage or disadvantage compared to the S&P 500 depended on the time period and the time frame of the simulation. The Aperio Group also performed a similar 22-year simulation and found that a fully divested financial portfolio outperformed the Russell 3000 Index – which accounts for 3,000 publicly-held U.S. corporations – in 73 percent of all ten-year periods in the simulation. MSCI Inc. performed a similar analysis, finding that a divested California State Teachers’ Retirement System (CalSTRS) portfolio would have underperformed the MCSI World and USA Index for the 10-year period between 2003 and 2013, but would have outperformed for the one-, three- and five-year periods as of the same date.
Other organizations have been more optimistic, with S&P Capital IQ finding that a theoretical $1 billion endowment without fossil fuel investments would have yielded $119 million more than one with fossil fuel investments. Impax Asset Management found that a divested financial portfolio with investments in renewables and energy efficiency would have outperformed the MSCI World Index, with a tracking error of 1.6 percent between the years 2006 and 2013.
The implication of all this data is that full divestment will have a very trivial impact on returns, and that UH can actually achieve higher returns by instituting a well-defined Sustainable Investing policy that incorporates alternative energy and energy efficiency. Consequently, the question is not whether divestment will hurt the endowment; it is how UH will use the freed up financial resources in an ethical AND prudent manner under the real constraints of a low-carbon world to achieve returns. Indeed, UH may be missing investment opportunities by excluding fossil fuels, but the same could also be said about alcohol, tobacco and firearms, sectors from which many institutions have divested. In recognizing the moral and ethical implications of being invested in those industries, the institutions chose to prioritize social good over profit, and UH should follow suit with fossil fuels. Fundamentally, the question once again becomes whether UH wishes to choose money and extra single-digit returns or choose to live out its values in the world.