Fossil-Fuel Divestment Could Cost Public Pensions Big Bucks, Study Finds

Published August 18, 2017

A new study shows fossil fuel divestment is costly to investors. According to the report, university endowments and public employee pension funds that bow to environmentalists’ demands they divest their holdings from companies involved with the fossil-fuel industry could suffer significant losses, or at a minimum, have their endowments, portfolios, and retirement funds grow by substantially less than they otherwise would.

The study, “Fossil Fuel Divestment and Public Pension Funds,” published by Compass Lexecon, notes in recent years environmental groups have pressured more than 1,000 universities and state and city retirement funds to divest their holdings of stocks and bonds in companies that finance, produce, transport, or burn fossil fuels to produce electricity, which they blame for environmental destruction and climate change.

In April, several environmental groups, including Climate Hawks Vote, cofounded and chaired by RL Miller, chair of the California Democratic Party’s environmental caucus, called on the California Public Employees’ Retirement System (CalPERS) to sell all of its holdings in fossil fuel-related businesses. In February 2017, the climate change advocacy group and 30 other environmental groups signed a letter requesting New York City Mayor Bill de Blasio divest the city’s public-pension funds from and cease doing business with banks involved in financing the Dakota Access Pipeline project.

Compounding Losses

The study compared the performance of diversified stock portfolios and endowments that included the stocks and bonds of companies in the fossil fuel industry to funds lacking any fossil fuel holdings over a 50 year retrospective sample period. It found “an optimal equity portfolio including fossil fuel stocks outperforms a portfolio of equal risk that is divested of energy stocks by an average of 0.5 percent per year,” resulting in divested portfolios over a 50 year period having 23 percent lower value than diversified portfolios including fossil fuel-related companies. This amounts to trillions of dollars in foregone gains.

The lower annual returns and overall value over the period happened because “a divested portfolio is suboptimally diversified, as it excludes one of the most important sectors of the economy,” the authors write.

The study also found additional costs associated with divestment. Examining a sample of university endowments that shunned all fossil fuel-related investments, the authors found the transaction costs alone from selling divested securities, buying substitute securities, and monitoring these portfolios on an ongoing basis to maintain compliance with a divestment decision reduced the value of their endowments by 2 percent to 12 percent over a retrospective twenty-year period.

Disaster for Public Pensions

The research team noted many public pension funds currently are seriously underfunded and divestment from fossil fuels would make the situation worse.

The study analyzed the potential effects of fossil fuel divestment on 11 public pension funds, including CalPERS, the largest such fund in the United States, and various public employee pension funds in Chicago, New York City, and San Francisco. Over the 50 year sample period, had all 11 pension funds fully divested their portfolios of companies in or financing the fossil fuel industry, they would have experienced $4.9 trillion in lower returns, with CalPERS alone suffering $3.1 trillion in losses.

With a decline of 12.25 percent, the Teachers’ Retirement System of the City of New York would have experienced the largest percentage loss from full divestment, amounting to $313 million in lower returns over the period. The Municipal Employees’ Annuity and Benefit Fund of Chicago would have suffered more than $34 million in lost income, and the San Francisco Employees’ Retirement System would have lost nearly $202 million dollars had it divested from fossil fuels.

Symbolism vs. Substance

Rachelle Peterson, director of research projects at the National Association of Scholars, says pension-fund managers and universities that divest from fossil fuels are putting politics far ahead of fiscal responsibility.

“Fossil fuel divestment is mere virtue-signaling, assuaging eco-activists’ consciences while doing nothing for the environment,” said Peterson. “Divestment’s only real effect is to increase financial risk, jeopardizing investors’ assets and retirees’ nest eggs.

“I found when researching Inside Divestment: The Illiberal Movement to Turn a Generation Against Fossil Fuels, most divestment activists were idealistic college students more concerned with posturing politically than considering economics,” Peterson said.

Politics in Pension Management

Justin Danhof, director of the Free Enterprise Project at the National Center for Public Policy Research, says though divestment may appeal to liberal pension fund managers, doing so would violate their fiduciary responsibility to the institutions and people depending on those funds.

“It is wholly unsurprising some large pension funds would consider divestment from fossil fuels, since many have become little more than tools of liberal activists seeking to force corporations to adopt their worldview on social and environmental causes,” Danhof said. “Divestment may seem like the next logical step for liberal pension fund managers, but it comes with incredible risks for investors and taxpayers, and any public pension fund that would willingly divest from all fossil fuels would clearly be derelict in its legal fiduciary responsibility to act as responsible financial stewards.

“Pension fund managers should resist such political grandstanding,” said Danhof. “Depending on the fund, millions of former policemen, firefighters, and teachers have an expectation their funds will be invested in a responsible manner that looks out for their interests, yet as this study and others have shown, divestment is a money-losing policy in the long run, the opposite of responsible long-term investing, as it limits diversification within a given fund.”

H. Sterling Burnett, Ph.D. ([email protected]) is a research fellow at The Heartland Institute.


Daniel Fischel et al., “Fossil Fuel Divestment and Public Pension Funds,” June 2017, Compass Lexecon: