Potential trading, ongoing monitoring and management costs of divestment of fossil-fuel companies from portfolio holdings “would substantially reduce the value” of college and university endowment funds over 20 years, ranging on average from a cumulative $17 million for small endowments to $7.4 billion for large ones, concludes a research paper by an academic at the W.P. Carey School of Business, Arizona State University.
The costs — which amount to an average 2% to 12% reduction of an endowment fund’s cumulative value over 20 years — “are in addition to reduction in investment returns that divestment may impose due to forgone diversification benefits,” wrote Hendrik Bessembinder, professor of finance and Francis J. and Mary B. Labroila endowed chair, in the paper, “Frictional Costs of Fossil Fuel Divestment.”
“These frictional costs directly reduce the value of an endowment’s portfolio in return, for at best, speculative benefits from divestment,” the paper states.
The research, which did not examine any reduction in investment return, provides estimates of the potential costs of divestment for endowment funds and other asset owners in general, Mr. Bessembinder said in an interview.
“The aim of this paper really is just to try to shine a slightly better spotlight on the costs so decision-makers can make a decision with a better assessment of the costs,” Mr. Bessembinder said in the interview.
The potential reduction is based on the weighted average potential divestment costs, using publicly disclosed asset allocations of a sample of 30 endowment funds to estimate portfolio holdings in equities, fixed income and alternative investments, including private equity. The endowments’ actual portfolio holding were not available for the study, Mr. Bessembinder said in the interview.
For trading costs, he used estimates that included transaction costs of traditional equities, fixed income and alternatives, using data that ranged from highly liquid Standard & Poor’s 500 stocks, including bid-ask spreads and price execution impact, to lesser liquid secondary markets for private equity. Transaction cost estimates, as detailed in the paper, include those for hedge funds and natural resources funds. The costs include “collateral damage” from having to sell parts of portfolios “allocated to assets that have nothing to do with fossil fuels” but must also be sold, such as in a commingled fund, Mr. Bessembinder said in the paper.
Mr. Bessembinder used 10 endowment funds in each of three asset size categories. For large funds, the assets ranged from $36.4 billion for Harvard University to $9.9 billion for the University of Michigan endowment. For midsize endowments, the sizes ranged from the $887 million University of Miami endowment to the $642 million Auburn University endowment. For small endowments, the funds ranged in size from $266 million for the University of California, Santa Barbara, to the $195 million California Polytechnic State University.
“We feel confident costs of this type would be incurred” by endowments divesting fossil-fuel holdings, Mr. Bessembinder said in the interview.
”Any individual endowment should be able to come up with more precise estimates than we’ve come up with precisely because they know the exact answers … that we could only make educated guesses at.”
Mr. Bessembinder couldn’t say whether any of the endowments had divested, but many of the schools have rejected divestment at least for now, based on their public statements.
The research does not include the potential costs of reinvesting proceeds of divested assets, which Mr. Bessembinder said in the interview would increase the total costs of divestment. “In that sense, we are being conservative,” he said in the interview.
The study was commissioned and financed by the Independent Petroleum Association of America, the paper states. “I’ve never interacted with them,” Mr. Bessembinder said in the interview. “They did not review any drafts of the paper. I was simply asked to do the study — no interference from them.”
The paper can be found on the divestmentfacts.com website.
