Fossil fuel divestment by five prestigious US universities would cost them $195m per year – study

The study, done by a CalTech economics professor, was funded by the main US oil lobby.

A new study has found that if five of the US’ most prestigious universities, among them Harvard and Yale, were to divest from fossil fuel stocks it would erase 0.23% from their annual returns, or expressed in currency, a loss of $195m (€172m) per year.
The study, entitled ‘The Divestment Penalty,’ was conducted by Bradford Cornell, a Professor of Financial Economics at the California Institute of Technology (CalTech). It was commissioned and funded by the Independent Petroleum Association of America, in a sign that the divestment movement is becoming of increasing concern to the oil industry.
To compile the study, Cornell analysed the returns generated by the endowments for Harvard, Yale, the Massachusetts Institute of Technology (MIT), Columbia and New York University (NYU) between March 1995 and March 2015. The five portfolios included fossil fuel holdings. He then calculated the average annual return over the same period for each portfolio, with coal, oil and natural gas securities excluded. Using the annual returns for the invested portfolio and the returns of the corresponding divested portfolio, Cornell said he calculated the gross difference in return due to divestment.
The results, according to Cornell: Columbia would see its annual return reduced by 0.16%; Harvard’s by 0.30%; MIT’s by 0.14%; NYU’s by 0.12%; and Yale’s by 0.21%. The average shortfall across all five universities works out to 0.23%. Over a 50-year timeframe, Cornell also found that divestment of fossil fuel stocks would reduce the size of Harvard’s $35bn endowment by almost 16%. This is followed by 11.3% for Yale; 8.1% for Columbia; 7.4% for MIT; and 6.1% for NYU.The CalTech professor also rebutted the argument that, going forward, the fossil fuel sector was an unattractive investment due to the threat of stranded assets. “It seems far from clear that even as a speculative investment, oil, gas and coal securities are likely to be poor investments,” he said. One reason for this was that any future regulation would prompt more consolidation in the fossil fuel sector and increase the profitability of those remaining. Allowing for the possibility that divestment might increase fossil fuel firms’ cost of capital, Cornell replied that it would ultimately make little difference. “When a company faces such an increase, the response is to forgo investment in marginal projects. This is unlikely to involve the bread-and-butter business of producing carbon-based fuels,” he wrote.
“Instead, what is more likely to be cut is research and development into investments involving alternative energy. In this way, divestment advocates might actually accomplish the opposite of what they hope to achieve,” he added.
In other news, Carbon Tracker, the London-based think tank behind the stranded assets argument, has published a new study assessing public subsidies to thermal coal. One of its key findings is that if the US were to end subsidies to the fuel source, this could save between 700 million and 2.5 billion tonnes of carbon dioxide by 2035. It said scrapping subsidies of almost $8 per tonne in the main Powder River Basin (PRB) US producing region and $4 per tonne in Australia would save the taxpayer $2.9 billion a year in the United States and $1.3 billion a year in Australia.

Link to Cornell study
Link to Carbon Tracker study