June 3, 2016

Study Supports Cornell Trustees’ Vote Against Divestment, Cites ‘Substantial Costs’

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The cost of implementing and maintaining fossil fuel divestment will invariably strain University endowments, according to a study published on May 11 by Prof. Hendrik Bessembinder, finance, Carey School of Business.

Bessembinder’s study aimed to shed light on the lesser-known frictional costs of divestment — the cost that “college and university endowments incur in implementing fossil fuel divestment” — which he said is often excluded from discussions about the merits of such a policy.

“These frictional costs of divestment are large enough to impose substantial costs on institutions that decide to divest,” he said.

Bessembinder did not state whether or not divestment would ultimately augment University endowments, but he did claim that the alleged benefits of fossil fuel divestment were “speculative.”

“Overall, I estimate a total cost to endowments over 20 years due to the frictional costs of divestment that range between approximately two and 12 percent of the endowment’s value,” he said.

If Cornell were to divest, its endowment would decline in value by $120.75 million to $724.5 million over 20 years, according to Bessembinder.

Bessembinder explained that university endowments hold illiquid assets that are “costly to sell,” because they are “perpetual institutions that make long-term investments.”

“Since there is no well-defined and agreed-upon list of assets that are fossil-fuel-related, investment managers must undertake a degree of active management in order to maintain compliance with divestment goals,” he said.

This “active management” yields “sustained management fees” required to keep the University endowment free of fossil fuels, according to Bessembinder.

Bessembinder added that many university endowments hold assets in pooled funds that themselves contain a number of investments.

“Divestment by a fund investor of the fossil fuel assets owned by a fund generally requires sale of the entirety of the fund,” he said. “For this reason, the magnitude of assets that would need to be sold and replaced to achieve fossil fuel divestment is generally larger than the fossil fuel assets themselves.”

Bessembinder noted that several colleges and universities — including Williams College, American University and Swarthmore College — have chosen not to divest based in part on the potential of incurring high frictional costs.

According to a statement by the Williams College Board of Trustees and President Adam F. Falk, the expected cost to Williams of divestment has “nothing to do with projecting whether the particular class of targeted companies are themselves good or bad investments.”

“[The cost of divestment] is entirely a result of the expected cost of fundamentally changing the college’s strategy for managing the endowment,” according to the statement.

These findings come roughly three months after the Board of Trustees’ vote against University divestment in February, which generated pushback from students and professors. The board pledged only to divest from companies if their actions are “morally reprehensible,” The Sun previously reported.