Don’t Waste Energy On Fossil Fuel Divestment

Posted on Sat 02/14/2015 by


Nick LorisBy Nicolas Loris and Marshal Wilson ~

Global Divestment Day(s) take place Feb. 13-14, and a movement is afoot to encourage entities to sell their portfolios of conventional fuel stocks.

According to a new study, the strategy, known as fossil fuel divestment, would be a loser for those who participate. But more importantly, encouraging divestment ignores the massive benefits conventional fuels bring the world.

CO2 Image 03Fossil fuel divestment encourages institutions such as universities, municipalities and philanthropic institutions to shed securities that are related to coal, oil and natural gas because, according to Fossil Free, an environmental activist group, “Fossil fuel investments are a risk for both investors and the planet.”

The economic evidence indicates otherwise.

The recent analysis by Compass Lexecon looked at two different investment portfolios over a 50-year period. One portfolio included fossil-fuel-related stocks, and the other did not. The study found that on average, the portfolio that invested in energy-related stocks produced annual returns 0.7 percentage points above the alternative portfolio. Over 50 years, that 0.7 percentage difference equates to a 23 percent gain for the energy portfolio versus the portfolio that divested its energy equities.

If universities’ endowment returns were reduced by 0.7 percent per year, considering universities hold approximately $456 billion in endowments funds, then divestment would cost around $3 billion in lost gains.

Daniel R. Fischel, chairman and president of Compass Lexecon, stated in an op-ed before the report was released that “Every bit of economic and quantitative evidence available to us today shows that the only entities punished under a fossil-fuel divestment regime are the schools actually doing the divesting.”  Divestment would not have any significant effect on the way firms conduct business because people all over the world still will want to buy energy.

The potential hazards of divestment run deeper than lost returns. The costs of managing “energy-free” portfolios would be significant. It is easy to sell the Exxon-Mobil stock, but what about companies that don’t produce energy but rely on it for their livelihood? How much reliance is too much considering energy is necessary for nearly everything we do and most of that energy comes from conventional fuels?

That means investments must be micromanaged, hard decisions made and then the portfolio itself managed, all costly propositions. Trading costs alone could add up to $220 million a year above that already lost to lower returns.

Losses of this magnitude would significantly hinder the ability of those institutions to conduct business. Such was the case at the University of Tennessee, where divestment was rejected because “90 percent of the endowment’s payout went to supportive scholarships, instruction and research. Eliminating a broad segment of the market from investment could hinder future funding of these endeavors” according to Charles Peccolo, UT’s treasurer and chief financial officer.

Yes, when energy companies perform well financially, it boosts stocks, mutual funds, IRAs and pension funds owned by millions of Americans. But perhaps the biggest problem with conventional fuel divestment is the ignorance of all the benefits oil, coal and natural gas bring the world. These resources have been a critical catalyst in propelling billions of people across the world to a better standard of living. Access to affordable and reliable energy has made the world more prosperous, healthier and cleaner.

If individuals or universities want to steer clear of portfolios with conventional fuels (or any product for that matter), it is their prerogative to do so. But they shouldn’t be pressured into doing so under the guise that using energy is bad.

Access to dependable energy, of which conventional fuels play an integral part, is an essential requirement for development, underpinning our ability to produce goods and services more efficiently, communicate more easily and trade with other parts of the world. We should embrace that and be thankful for the energy and the human ingenuity used to harness it, rather than demonize it.

Nicolas Loris,  is the Herbert and Joyce Morgan Fellow at  The Heritage Foundation .  Nick Loris researches and writes about energy and other economic effects of environmental policies and regulations.

Marshal Wilson is a member of the Young Leaders Program at The Heritage Foundation .

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