If Yale were to divest its endowment from fossil fuels, it would lose an estimated $51 million per year, according to a new study released last month.

The report, commissioned by the Independent Petroleum Association of America, calculated the projected impacts of fossil fuel divestiture on five universities’ endowments, concluding that collectively, the schools — Harvard, Columbia, MIT, NYU and Yale — could lose more than $195 million per year. For Yale specifically, author of the report Bradford Cornell, a visiting professor of financial economics at the California Institute of Technology, found that the University’s portfolio would experience a risk-adjusted loss of 0.21 percent, which over 50 years, would result in a 11.27 percent loss in value. Still, following the publication of the research, pro-divestment activists have raised questions about the objectivity of the study’s funding and have criticized the methodology behind its conclusions.

“My bottom line is that divestment is something that is costly to Yale and has absolutely no real benefit to solving any of the energy problems, energy shortages, climate change,” Cornell told the News. “The reason is that … if you take the ability to diversify as fully as possible out of the hands of the endowment managers, it is going to be detrimental to the expected performance.”

In order to model the performance of the different endowments, Cornell and his team of researchers utilized publicly available data and created thousands of “proxy portfolios,” approximations of each of the school’s investment funds. Using these compositions of assets, the study then compared the performance of the two portfolios — both divested and non-divested — over a 20-year period.

Still, because the exact holdings of Yale’s investments are not released publicly, Cornell conceded that the study is an approximation of the costs to the University.

“This is the first study that has been done that actually seeks to reverse engineer the endowment allocation and composition and try to put a real number on it,” Christopher Tucker, an IPAA spokesman, said. “The broader point here is there is a lot of stuff that could be done with climate change and needs to be done with climate change, but divesting doesn’t remove a single molecule of [carbon dioxide] gas from the atmosphere — there is a significant cost attached to it.”

Though the projected $51.09 million loss per year is only 0.2 percent of Yale’s current endowment, which stands at roughly $24 billion, Cornell argued that this cost is not insignificant for the University, which relies upon returns on the endowment to fund operations.

According to the 2014 Yale Endowment Report, spending from the endowment was projected to be $1.1 billion in the 2015 fiscal year, providing roughly one-third of Yale’s operating income, supporting such things as professorships, scholarship, campus maintenance and books.

“So $51 million is a big number for most people, but it is not big compared to Yale’s endowment,” Cornell said. “Nonetheless, Yale has huge operating expenses, and $51 million would fund a professorship for a finance guy and many other things, so it is what it is.”

Still, some remain unconvinced that the findings of the study should be taken at face value.

Brett Fleishman, senior analyst from the pro-divestment group 350.org, argued that because the research was commissioned directly by a pro-fossil fuel interest group, there are important questions to be raised regarding conflicts of interests. The IPAA represents independent oil and natural gas producers across the United States.

“The big questionable takeaway from this report is that it is an industry-funded report, and [the industry] profits and benefits from the conclusion that this professor is taking,” Fleishman said. “Where is our academic faith? … All other professors should be outraged that one of their colleagues is willing to be paid to do something like this — that is barring and setting aside the actual content.”

On a more substantive level, Fleishman took issue with the study’s reliance on past performance to predict future gains, which he said is particularly inapplicable to the discussion of the energy sector given how much things have changed in policy making, the economy and the environment over the past 10 years.

Representatives from Fossil Free Yale, the student group advocating divestment, were similarly skeptical of the conclusions reached by the study.

“The study and the IPAA and their press team are an extension of the misinformation and [public relations] apparatus that the fossil fuel industry uses to mislead the public and misdirect policy-makers,” FFY member Tristan Glowa ’18 said.

He argued that rather than seeing this type of research as harmful to the divestment movement, it confirms that activists are “chipping away” at the fossil fuel industry, which is now “intensifying their efforts” to maintain power.

Cornell flatly denied any accusation that his research was influenced by the group funding his study, claiming that he never spoke directly with members of the IPAA and has publicly opposed the group on other climate-related issues, such as implementing a carbon tax.

“Even if I were a complete oil industry whore, the ultimate question is, is the stuff that I had written accurate?” Cornell said. “Ultimately, what I have done should be weighed on the basis of what’s in the report.”

The Yale Corporation voted against divestment in August 2014.

  • Nancy Morris

    The YDN just ran an article on new financial aid initiatives provided to incoming students and revealed at Camp Yale. The financial aid described in that article would not be available but for the Yale endowment income that finances it.

    The study of the effect of “fossil free divestment” on the Yale endowment described in the present article concluded that such “divestment” would reduce income from the endowment by about $50 Million a year. That’s a lot of financial aid. One should look especially askance at any “fossil free” advocate whose family is able to afford the full cost of Yale without benefit of financial aid, since such people are asking those less fortunate than themselves to finance the weakly supported enthusiasms of wealthier activists. The YDN should require any of its reporters or columnists who is not receiving financial aid to disclose that fact in any article respecting the “fossil free” movement.

    It is important for those who endorse “divestment” to understand the consequences of their positions. Sadly, many such people resort to naked denial, choosing to believe that “divestment” would constitute costless virtue, and relying on the opinions of incompetent pseudo-economists or wishful thinking and excessive references to supposed “conflicts of interest” in those pointing out the costs in lieu of actual examination of studies demonstrating the costs. “Divestment” may be justifiable on some grounds, but it would definitely NOT BE COSTLESS. Those who say “divestment” would be costless are deeply naive or charlatans, and the recipients of the financial aid described in the YDN’s earlier article are among their prospective victims. Self indulgence is not virtue.

    While exaggerating the significance of the putative “conflicts of interest” of analysts reporting the likely high costs of “divestment,” activists in the area often ignore or downplay the more significant conflicts and problems of those claiming divestment comes without costs. For example, comments included in this article predictably, exclusively and obsessively focus on the putative “conflicts of interest” arising from the commission of this study by the IPAA, with no consideration given to the study’s sound methodology, the well-established reputation of Dr. Cornell and Lexecon and the rather obvious and dramatic (and expensive) restrictions on endowment diversification a “fossil free” approach would entail.

    Yet “fossil free” activists often cite studies by the money managers NorthStar Asset Management and Aperio Group finding academics overstate the risk and costs of divestment. But these entities specialize in “sustainable investing,” meaning they have personal, intense and direct conflicts of interest. Not surprisingly, their methodology is highly questionable.

    Mercer has issued recent reports, sometimes cited by divestment activists, regarding potential financial impacts of global warming, including likely reduced profitability of the coal industry. But Mercer’s conclusions depend on highly uncertain assumptions more relevant to the weighting of investments in a portfolio than to divestment. Further, Mercer has a troubled recent history. For example, in 2004, Mercer admitted giving the NYSE board a compensation report that contained “omissions and inaccuracies” that led to a $139.5 million pay package for former NYSE Chairman Richard Grasso. Mercer had been brought in to advise the stock exchange on Grasso’s 2003 contract and his request for $139.5 million. The consultancy returned $440,000 in fees it collected from the NYSE and provided key documents in the lawsuit. Such lapses do not render Mercer’s thinking generally irrelevant or corrupt. But the cherry picking by divestment activists of the histories and conflicts of interest of those providing analyses in this area is not intellectually honest and is not likely to lead to sound predictions.

  • sy

    Investment losses are speculative. What does Yale lose if it divests its own “unethical” fossil fuel power plant? What does Yale lose if it divests its own “unethical” energy alumni, including the Standard Oil Harkness family and Texas Bass family? The ones who stopped people burning renewable forests for heat and burning renewable whale oil for light. The “unethical” alumni/corporations who fuel ALL current engines for long-distance auto, jetliners, ships, trucks, trains, and for winter heating, except the very old nuclear and hydro power. Those losses are real. The divestment movement wants to increase low hydrocarbon fuel prices (for the 99%, and for the 1%) before bothering to invent any alternative fuels to hydrocarbon transportation and heating fuels. Unless through a carbon tax (on the 99%, and on the 1%), higher prices make fossil fuels an even better investment. Have any more good ideas? Maybe plant 5,000 new elm trees in New Haven–imagine what that carbon sequestration would look like at the 40th reunion.

  • alasti

    As you can see from my comments under an article similar to this one in Harvard’s The Crimson, the methodology used by Cornell is very flawed. The second link below shows that the Goldman Sachs global director for ESG investing believes Harvard’s President Drew Faust is not necessarily correct in her statement about risks of divestment. I would additionally recommend that anyone interested in a comprehensive explanation for the rationale of divestment peruse Harvard Faculty for Divestment’s site.



    • Nancy Morris

      Nonsense. Notably absent from both of these cited articles is any actual track record of investment returns justifying such claims, which on their faces defy common sense and standard diversification concepts. Far more significant is the resistance to “divestment” by every competent endowment fund manager, including those that have had “divestment” rammed down their throats by their employers, as is the case with Stanford, as just one example. Sure, Goldman Sachs will be very happy to take your savings and charge you a juicy fee to invest it in whatever crackpot thing you like, and tell you it’s just fine to do so … and it is if you are happy to give up diversification and returns for the peace of mind “divestment” buys you. Of course, history tells us that other people at GS will be telling other clients exactly the opposite.

      Denying that “divestment” is expensive is intellectual dishonesty on stilts, and it’s ACTUAL dishonesty if the fine print in the prospectus doesn’t take it all back. My bet is that the Goldman fine print DOES take it all back. But, if it doesn’t, Goldman should be prepared for some very nasty investor lawsuits in the future. And university trustees who indulge in this nonsense had better check up on their E&O coverage. They’ll be needing it.

      • alasti

        The facts are that the premises of both those petroleum-industry funded studies are bogus; that California’s public pension funds (and presumably Harvard) have lost big money on their fossil-fuel stockholdings, and to the extent that Stanford dumped coal stocks, its endowment was done a big favor by activists; and, that among the many funds which have by now divested (see 350.org’s lengthy list) are quite a number whose managers have deep experience with the fiduciary issues involved.

        • Nancy Morris

          Nothing to which you cite has any bearing whatsoever on whether “divestment” is appropriate policy. What your arguments indicate is that you haven’t the slightest understanding of portfolio or investment structure.

          Here’s just one note to take: Short term losses of the variety to which you appeal do not matter.

          • alasti

            There’s a significant amount of informed opinion that for a number of reasons, prices are likely to remain low for the longer term. Harvard has already sold off much of such holdings in recent years – as SEC filings show – probably for that very reason. Objections on financial grounds don’t hold water. Certainly any assumption that prices will again rise significantly is very speculative, given the current political and supply-surplus realities.

          • Nancy Morris

            It is absolutely bizarre to cite to any California public pension fund, especially the California Public Employees’ Retirement System, as having any competence in the area of environmentally sensitive investment. These funds have historically had terrible returns and provide no support for your position. For example, Calpers, America’s largest public pension fund, has truly outdone itself with its disastrous “green” investments.. In a characteristically Californian combination of poor financial management and green energy failure, Calpers has lost millions in green energy investments that saw an annualized LONG TERM return of NEGATIVE 9.7 percent, according to media reports.. In light of these losses, Calpers has … much later than good sense would dictate … chosen to back off such investments, although sadly, this realization comes after it invested $900 million in “clean tech”:
            “We’re all familiar with the J-curve in private equity. Well, for CalPERS, clean-tech investing has got an L-curve for ‘lose,’ [CalPERS chief investment officer Joseph] Dear told the conference, the Sacramento Bee reported. “Our experience is that this has been a noble way to lose money. And we’re not here to lose money. We have dialed back.”
            This was a significant reversal. Calpers has a history of making “noble” investments in “clean” companies dating back to the 90’s, and Governor Jerry Brown has only added fuel to the fire by pushing hard for more investment in green technology. They apparently actually reviewed their long term results.
            Calpers is a case study in politically driven poor investment decisions, although you are far from grasping that. California public pension systems may have as much as one trillion dollars in unfunded obligations. You are urging on private university endowments policies that lead to exactly such situations.
            What you also don’t grasp is that “divestment” does not just prohibit buying the stocks of energy companies…it prohibits all investments. There are many investments off a company or sector that is losing money or whose stock is expected to DECLINE. Hedge funds – in which endowments frequently invest – frequently make huge profits by “shorting” stocks and commodities, thereby making profits when the shorted items DECLINE. John Paulson, who just gave Harvard $400 Million, made billions by essentially shorting the US housing market.

          • alasti

            The divest-invest movement isn’t asking for merely “noble” investment in just anything “green”; the idea is to reinvest smartly – as many companies and funds are doing successfully.

            It’s ironic that on the one hand you’re disparaging CalPERS’ aptitude for choosing good alternative-energy investments, but you tout the fund CEO’s judgement about engagement. The Investor Network on Climate Risk [INCR], of which CalPERS is a founding member, has given good evidence as to the profound limitations of any “engagement” strategy. Likewise the faith groups which have attempted to change fossil-fuel companies’ practices at best have spurred more transparency about lobbying, and have pressured managements to produce elaborate justifications for continuing with business as usual, but that’s about the extent of the potentiality. Stockholder resolutions cannot address fundamentals of business models, and only the plunge in prices has put a damper on exploration and new extraction expenditures.

            INCR was originated by the organization Ceres, formerly the Coalition for Environmentally Responsible Economies. Ceres’ former president Bob Massie, who was involved in the creation of INCR and co-founded the Global Reporting Initiative, is an eloquent and compelling advocate for divestment, and he affirms that the history of engagement efforts shows definitively there is no possibility of that stratagy accomplishing what humanity needs for a sustainable future. The Rockefeller Brothers Fund and others with decades of engagement experience have come to the same conclusion.

            You talk about costs…what’s been happening to California’s economy as a consequence of drought, and the impacts of that on the public pension funds’ beneficiaries, is just a small foretaste of what climate change will be doing to investors and stakeholders globally. Those are and will increasingly be costs associated with endorsing via investments the unconstrained production of fossil fuels Additionally, any costs of divestment pale in comparison to the losses which are occurring due to maintaining holdings. The Massachusetts Public Pension Reserves Investment Trust lost $10 million per week on its fossil-fuel stocks last year.

            Projects in the North Sea, the location from which Norway’s pension fund derives its assets, are being scaled back or put on hold. Those assets are a legacy of what has brought civilization to the point where it is now, but the remaining reserves are not, for the future, going to be more than partially exploitable without significantly contributing to ruination for millions of people; therefore, divestment by that pension fund is by no means hypocritical.

            As indication of to what extent alternative-energy investments are in fact viable: Google is investing $300 million; IKEA, $680 million; Amazon is constructing an 80-megawatt solar “farm”, Intel has installed 18 such arrays, and Cisco also is setting up a 153-acre solar farm in California; Berkshire Hathaway is investing $30 billion; China’s outlay last year was $89.5 billion, in the U.S it was 51 billion, in Europe it was $9.5 billion. The American Petroleum Institute’s ” State of American Energy” report has a section titled: “Solar Energy in America Shines Bright.” CalSTERS is going to be dedicating $9.5 billion to alternative energy. CalPERS has made mistakes, and is taking away from that experience some very erroneous lessons.

            As regards the future of fossil-fuel values, not only Goldman Sachs and Mercer, but also HSBC, Citigroup, Bank of England, and the International Energy Agency have indicated that there is significant and quantifiable risk to such holdings.

            Whether shorting stocks is precluded by divestment mandates is a question, because those may not ever be on the books as assets, given that they’re borrowed to begin with and are then returned to the lender after being sold and repurchased. Shorting is only going to be an issue whatsoever if those stock values continue to fall, in which case, given the likelihood of that being a long-term scenario, obviously the higher priority should be the prior divestment. It won’t be much of an issue for CalPERS, because the fund is getting out of hedge funds completely, as other pension funds are contemplating doing, due to the ridiculous fees they’ve been paying.

            John Paulson, as you must know, committed fraud with Goldman Sachs in selecting sub-prime mortgage-backed securities for collateralized debt obligation investments which it was known would do poorly, and which were then marketed to GS clients without disclosure of Paulson’s involvement, while he bet against those securities and made $1 billion (in addition to $15 billion with other such shorts), so his practices are not an example of anything which should be recommended to fund managers. Goldman Sachs paid out $550 million as a settlement. See “John Paulson, Goldman Sachs, and Harvard: The Conclusion of the Abacus Story.”

            What it all boils down to is that fossil-fuel companies need to accept what science and real-world planning scenarios show will be the necessary constraints on their production for the future, and they must dedicate their full capacities to being participatory in creating the transition to energy sourcing which will not cause catastrophe. They’re not going to do this on their own, so it’s a public-policy matter to ensure that it happens, just as has been the case with tobacco, apartheid and genocides.

            No university, pension fund or other investor operating according to ethical principles should be deriving profits from sources which are persisting with practices causing widespread suffering and death, it’s as simple as that.

            Stausboll of CalPERS doesn’t understand that in the course of getting to $2.6 billion in divestments, a phenomenal amount of public discourse has occurred, and that is where the strategic value of such a decision manifests.

            For long-term endowment and fund investors, the cumulative impacts to their beneficiaries from climate change will be as critical a matter as anything else which is affected by investment decisions, and fiduciary responsibility should reflect that.

            The points in favor of divestment are manifold. I recommend – for anyone wishing to look further into how widely there is agreement on this – the just-released study from Arabella Advisors: “Measuring the Growth of the Global Fossil Fuel Divestment and Clean Energy Investment Movement.”

          • Nancy Morris

            That’s an awful lot of verbiage to attempt obscuring the simple fact that private and public California fund managers uniformly believe that “divestment”‘is expensive, directly contrary to your claims. The funds that have “divested” at all have done so on command of political operatives over them.

          • alasti

            They’re mistaken, and there’s a surfeit of evidence for that, was just one of the points I was making.

          • alasti

            See: “CalPERS Staff Demonstrates Repeatedly That They Don’t Understand How Private Equity Fees Work,” in Naked Capitalism, for an indication of just how much faith we should put into the judgement of CalPERs managers.

          • alasti
          • Nancy Morris

            There is no real question that CalPers is incompetent, politicized, ignorant. That CalPers staff does not understand hedge fund fees is par for the course. In fact, CalPers is a dinosaur and should not exist in the first place. Nor should the defined-benefit pensions it allegedly finances. The whe mess is a product of public worker capture and corruption of the California government.

            But NONE of that, nor ANYTHING else you have adduced supports the claim that CalPers investment professionals think divestment is cost less.

          • alasti

            I’m just saying that for the reasons I’ve given, and those you cite, I don’t put much “stock” in what CalPERS managers may think.

          • Nancy Morris

            Yes, Calpers utter incompetence is one of the many reasons why you should not have cited to CalPers as “informed opinion.” Another reason is that Calpers’ fund managers don’t even have the opinion you ascribed to them.

          • alasti

            If you’ll reread what I said, I never indicated that I thought CalPERS has been a source of informed opinion about such matters – only that I think they are capable of learning from their mistakes of the past.

          • Nancy Morris

            I’m pleased that we agree that no significant fund manager – public or private – has expressed the belief that “divestment” would be costless.

          • alasti

            We absolutely do not agree whatsoever on that topic. Quite a number of large divestments at this point are taking place exactly because it no longer makes sense financially to have holdings in coal companies and such as the tar-sands projects. With the bankruptcies, mass layoffs, projects being cancelled or mothballed, coal mines and companies being sold for a fraction of previous values or nothing, the future is looking grim for this asset category. Even in China, a coal company is laying off 100,000 workers. The costs for unloading direct holdings of such stocks is nill, and the sooner it’s done, the better off investors will be. This is what Stanford has done, and there hasn’t been any indication from there that there were any problems involved. For commingled funds and private equity, disengaging is more complicated, which is why divestment campaigns advocate for a five-year process. Here’s what Cambridge Associates – which handles quite a few endowments’ funds – had to say about the whole issue, prior to the radical changes which have occurred during the past year:

          • Nancy Morris

            O, in that case please name one substantial fund manager who has stated that he or she personally believes “divestment” is costless and has “divested” on that basis.

          • alasti

            From an Inside Higher Education article on the subject:
            “When you look at coal and you see what the future holds, and we are a long-term investor, it just did not make financial sense,” said Dianne Klein, a spokesperson for the UC System. “It was not purely an ethics-based decision. It was primarily a financial decision …. As fiduciaries this is, and will remain, our primary responsibility.”

          • alasti
          • Nancy Morris

            This is not a statement of a fund manager of the opinion that divestment is costless. You have no such example.

          • alasti

            Look, there are plenty of obvious circumstance where the only consideration of cost is what would it cost the funds to hold onto the fossil-fuel assets, and this statement is acknowledgement of that. Nobody is going to make a blanket statement, because the specifics for different holdings and categories of holdings vary. The overall scenario for fossil fuels is quite problematic, as Bank of England Governor Carney has recently been quite emphatic in stating. As shown by the statements from Cambridge Associates, divestment is feasible, if done by discerning and knowledgeable managers. See the additional details below about the Stanford, AXA and Oxford divestment decisions.

          • alasti
          • Nancy Morris

            Your comments make an additional serious error in implicitly equating adoption of “divestment” by a fund with a conclusion by the fund managers that “divestment” would be costless. In fact, almost all “divestment” decisions imposed on funds have been made over the strenuous objections of the fund managers. The California legislature has passed legislation that would require significant “divestment” by the University of California endowment, but the required “divestment” is not complete owing to the objections of the fund managers that “divestment” would suppress returns. Ann Stausboll, the Chief Executive of Calpers, told the Financial Times last year that “divestment” would not only be expensive for Calpers but that large institutions “walking away from” their investments in fossil fuel companies would not help tackle the threat of climate change: “As a long-term investor, a seat at the table is the most effective way to shape how our investment capital gets put to use in a sustainable manner,” she wrote. Contrary to your claims, there is no significant “informed opinion” coming from investment professional at Calpers, the University of California endowment, Stanford or any other significant California fund supporting the claim that “divestment” is costless.

            Once again, California investment funds provide no support for the position that “divestment” is costless, or even regarded by fund investment professionals as anything other than counterproductive in addressing climate change.

            While “divestment” has been adopted by investors controlling an increasing quantity of assets (current estimates are in the range of $2.5 Trillion), that is not evidence that “divestment” is costless. Overwhelmingly, it is evidence that those imposing “divestment” on such funds are willing to pay, or make fund beneficiaries pay, the real and substantial price of their decision to “divest.” As with Calpers’ decision to abandon its “green” energy investments in the face of remorseless losses, time will tell if these “divestment” investors are willing to pay the price of “divestment” into the future. It will be a very steep price. In the case of Norway’s sovereign wealth fund, which has adopted “divestment,” constitutes a very significant portion of that $2.5 Trillion total, but is completely funded with the proceeds of fossil fuel sales, the price to be paid includes the obvious and hideous hypocrisy that comes with that “divestment” decision. Hypocrisy is generally cheap and plentiful within the “divestment” movement.