Financial Arguments for Divestment

Read our fact sheet responding to the Board’s arguments about the cost of divestment.

Why divestment won’t slow the endowment’s growth

  • The Board of Managers released a report asserting that divestment would cost the endowment hundreds of millions of dollars over the next decade that hinged on three assumptions. $856 million dollars of our endowment is in actively managed funds, external to the college. They argued that the fund managers of these funds would be unwilling to divest. Therefore, to divest, we would have to move our money into passively managed index funds. These index funds have made money less rapidly than actively managed funds in the past decade, and therefore we would make less money if we invested in them instead. Each of these assumptions is false.
    1. We don’t have to leave our actively managed funds to divest.
      • Don Gould, the chair of the Investments Committee at Pitzer College, which divested last spring, argues “this viewpoint [that we’d have to leave commingled funds] 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.”
    2. There are already other divested actively managed funds we could move our money into instead of index funds.
      • Cambridge Associates, an institutional investment advisor that serves endowments, and is Swarthmore’s highest paid consulting firm, recently announced it is willing to help colleges find fossil free managers. Acknowledging the divestment movement, they noted that “climate change is on the minds of many institutional investors, including endowments. Fortunately, there are a number of avenues institutions can elect to pursue to act on their concerns, from a focus on alternative energy and fossil-free investment managers, to various degrees of divestment within a portfolio.  Cambridge Associates stands ready to help institutions pursue any of these paths.”
    3. It is impossible to know if actively managed funds will continue to outperform index funds.
      • In a white paper by economics and finance professor Jay Prag, he asserts “This logic assumes that active managers do regularly beat market indices and the research there is clear – they do not… And even when an active manager beats the market on an annual basis, there is no good evidence to show that they can do so repeatedly”. He goes on to explain how selective data reporting is used to inflate the apparent performance of actively managed funds.
      • Using past performance to predict the future is borderline sacrilege in finance. Index funds may not have done as well over the past ten years, but there that does not indicate they will continue to underperform actively managed funds. If there was a tenable reason to think that actively managed funds would outperform passive index funds, then the fees that the active fund managers charge Swarthmore for their services would also be commensurately higher.

But what if a fossil free actively managed fund won’t perform as well?

  • This report was prepared for the Seattle City Council draws upon a range of reports to summarize why fossil fuel divestment can lower risk and increase investment returns.
    • “Analysis by Standard & Poors showed that if a $1 billion endowment had divested 10 years ago their endowment would have grown by an extra $0.12 billion when compared to if it had not divested”
    • “Already in 2013, First Affirmative Financial Network surveyed 500 industry professionals, and the findings of the survey showed that 77% see growing risks associated with fossil-fuel company holdings and 67% thought that 2013 was the time for investors to reconsider investing in traditional energy companies (Financial Advisor Staff, 2013).”
    • The financial risk posed by unburnable carbon to our endowment’s long-term health is clear. As Bevis Longstreth, who served as commissioner of the SEC under Ronald Reagan, argues, “fiduciaries have a compelling reason, on financial grounds alone, to divest these [fossil fuel] holdings before the inevitable correction occurs.” According to McGraw Hill and Standard and Poors estimates, fossil fuel shares have underperformed the market average by nearly 10 percent over last decade.
    • And fossil fuel investments are likely to become increasingly bad investments. 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, this would lead to a devaluation of fossil fuel companies by 40% to 60%. Obviously, we do not want to be invested in an industry when it takes that kind of hit. U.K. Energy Secretary Ed Davey warned that fossil fuel stocks could be the “sub-prime assets of the future.” 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,” and that continued fossil fuel investments constitute a “blatant breach of fiduciary duty.”
  • DC Divest put together an infographic distilling financial research into 7 Reasons to Divest. Click Here for the full image

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