Fossil fuel divestment finances fact sheet, Prepared by Swarthmore Mountain Justice

0) Background on the endowment and terminology

• Swarthmore’s endowment is valued at approximately $1.876 billion. Over the past 10 years, the average return on the endowment was about 8.4%. Every year approx. 3.8% of the returns on the endowment are spent, 1.7% is lost to inflation, and 2.9% is returned to the endowment.
• There are three main funds types in which endowments invest; index, separately-managed, and commingled.

• Index funds earn the average of the performance of a large group of stocks (eg: the S&P 500). Index funds do not require active management and thus offer low fees.
• Separately-managed funds are customized for specific investors and actively managed, which some say lead to higher returns, despite very large fees. Swarthmore has near total control over these funds.
• Commingled funds are the same as separately-managed funds, but instead of the fund being customized for just one investor, many firms pool together different clients into one fund to slightly reduce fees.
• Swarthmore currently invests in commingled and separately-managed funds, but not index funds

• Our ask: over five years, stop investing in the 200 fossil fuel companies with the largest carbon reserves.

In May 2013, Chris Niemczewski released a report arguing that divestment could reduce the endowment’s growth by $10-15 million a year. He argued that:

1. If we divest, we would need to move our investments from commingled funds to index funds, which they said would hurt our endowment’s returns.
2. If we divest our separately-managed funds (which are customized for us), they would underperform.

In 2013, this report was flawed. As a result of a surge in availability of fossil fuel free investment options and a growing concern about the stability of fossil fuel investments within the financial community, today, this report is egregiously erroneous and outdated. Even studies funded by the fossil fuel industry about the alleged costs of divestment do not argue divestment would cost nearly this much. This fact sheet outlines major flaws in the report’s 4 central assumptions.

1) The report assumes fossil fuel shares will perform at or above the market average. This isn’t true now and if the world prevents catastrophic climate change, it cannot be true.

• According to McGraw Hill and Standard and Poors estimates, fossil fuel shares have underperformed the market average by nearly 10 percent over last decade.

• If the world takes the necessary action to avoid catastrophic climate change (which UN scientists say means warming must not exceed 2 degrees Celsius), fossil fuel companies must leave 60% to 80% of current carbon reserves in the ground, stranding $20 trillion in assets. According to the investment bank HSBC, if the world prevents warming of over 2 degrees Celsius, fossil fuel companies would be devalued by 40% to 60%.
• And as UN Climate Chief Christiana Figueres ‘79 notes, climate science dictates that “we will move to a low-carbon world because nature will force us, or because policy will guide us.” She calls continued fossil fuel investments constitute a “blatant breach of fiduciary duty.”

2) The report assumes that index funds underperform commingled funds, which is hotly debated, and that we cannot move our investments to divested commingled funds, which is unequivocally false.

• The report notes that there were few reliable divested index funds in 2013. As a result of growing demand, even Blackrock, the world’s asset management company, now offers a fossil fuel free fund.

• The report argues that our managers wouldn’t be willing to assist us divest. Don Gould, the Pitzer’s Investments Chair says, “this viewpoint assumes that endowments must passively accept whatever the asset-management industry offers. In fact, money managers are nothing if not adaptable to client demand, and are already offering funds free of fossil-fuel companies.” Our Investments Office agrees.
• Last fall, our largest investment advisor, Cambridge Associates, offered to help us divest and find fossil-free commingled funds. This invalidates the Board’s main claims.

3) It assumes that divesting from fossil fuels will increase risk and decrease returns

• Jay Prag, a Claremont Professor of Finance and endowment manager debunked a similar report, arguing:

• Since fossil fuel shares are not exceptional performers, they can easily be replaced with other stocks with similar performance and risk, thus meaning risk and returns would stay stable.
• “The bottom line is, again, that there is no way to accurately claim that a fossil-fuel free investment strategy underperforms other diversified, market-based strategies.”

• According to Aperio Group, divesting would only reduce returns by 0.0034% a year.

4) The report is relies in part on cost estimates from a deeply flawed and discredited report.

• Alder and Kritzman make a lot of dubious assumptions -- two of the worst are:

• It assumes there are only 500 securities in the market  -- there are nearly 63,000 publicly traded companies worldwide and that endowments divest from 250 securities (half the market!). We are asking Swarthmore to divest from 200 companies, or 0.32% of the market, no where near 50%.
• It assumes that investors that divest some stocks randomly choose other. This is not how portfolios are managed -- divested stocks are substituted for others with similar risks and returns.

• Northstar Asset Management reviewed the report. They put realistic numbers into the model for number of securities and found that even with the other problematic assumptions, divestment would only decrease returns on the endowment by 0.07% a year -- compared the the Board’s claims of 1.7%.

• They said our board’s “rationale to not divest has been based upon inaccurate assumptions.”

In addition to the the report’s dubious assumptions, it was authored by Chris Niemczewski, the Board’s Investment Committee Chair, and who’s conflict of interest the Phoenix exposed last fall. Niemczewski is the President and Founder of Marshfield Associates, which was Swarthmore’s highest-paid investment manager in 2011, costing us $191,381. According to Marshfield’s SEC file, he owns between 25 and 50 percent of the company, meaning he indirectly receives between $46,000 and $95,000 from Swarthmore each year. Niemczewski’s firm specialized in a specific type of investment (they invest in just 18 companies) that makes it highly difficult for them to divest. Therefore, Niemczewski would stand to personally lose $46,000 and $95,000 a year if Swarthmore divested and moved to other managers. While we hope this did not affect his judgement, it clearly is not in his personal interest for Swarthmore to divest.