Five prestigious U.S. universities could lose nearly $200 million in endowment money combined if they divest from securities associated with fossil fuels, according to a report commissioned and financed by the Independent Petroleum Association of America (IPAA).
In a 20-page report, Bradford Cornell -- a visiting professor of financial economics at the California Institute of Technology -- said that while a few universities have pledged to make a clean or partial break from fossil fuels, most of the others haven't, believing that such a move would have little impact on oil and gas companies, "while creating the potential for endowment shortfalls due to lack of investment diversification and other costs."
According to Cornell, Harvard University could see an endowment shortfall of $107.8 million, based on a risk-adjusted calculation of more than 2,187 proxy portfolios. Yale University ($51.1 million), the Massachusetts Institute of Technology ($17.8 million), Columbia University ($14.4 million) and New York University ($4.2 million) would also see shortfalls.
Cornell said he picked the five universities because they rank among the top 30 U.S. schools in terms of total endowment assets, and because they have been targeted recently by divestment supporters. But those supporters, he said, are wrong to automatically assume that investments in fossil fuels will have poor returns, or that divesting would force major energy companies to abandon oil and natural gas projects.
"When a company faces an increase in its cost of capital, the response is to forego investment in marginal projects," Cornell said. "At major energy companies, those marginal projects are unlikely to involve the bread-and-butter business of producing carbon-based fuels. Instead, what is more likely to be cut is research and development into more speculative investments, such as those involving alternative energy.
"In this way, divestment advocates might actually accomplish exactly the opposite of what they hope to achieve."
Cornell added that while some divestment supporters believe the universities would "send a message" to other market investors, which in turn would "somehow [spur] favorable action on climate change issues.
"Exactly how this would occur is unclear, and divestment advocates have not shown that divestment would not instead serve to polarize public debate further, nor have they shown that the market has reacted to past divestment announcements in ways they consider favorable to their goals."
Commenting on the report, Karthik Ganapathy, spokesman for the environmental group 350.org, told NGI that “no one takes something like this seriously because the words 'petroleum-funded study' say it all.
“Of course Big Oil paid for a study to show it's a bad idea to pull money out of Big Oil, but when you look at analysis from actually credible sources...it's clear that divestment from the fossil fuel industry could actually save money, big time,” Ganapathy said Tuesday.
State lawmakers in California recently passed a bill to compel the state's two largest public pension funds to divest nearly $300 million from investments in the coal industry (see Daily GPI, Sept. 3). Gov. Jerry Brown has yet to either sign or veto the bill, SB 185.