Fossil-Fuel Divestment Is Fiscally Irresponsible, Study Finds

Published March 10, 2017

University endowments and public employee pension funds that heed environmentalists’ calls to divest their holdings from companies in the fossil-fuel industry impose substantial costs on the donors, employees, and taxpayers funding them, a new study shows.

Additionally, the study found divestment does not harm the coal, gas, and oil companies whose stocks are targeted for divestment.

In recent years, environmental groups have pressured more than 1,000 universities and state and city retirement funds to sell off their holdings of stocks in companies that finance, produce, transport, or burn fossil fuels to produce electricity, which they blame for environmental destruction and climate change.

For example, on February 14, the climate change advocacy group led more than 30 environmental groups in endorsing a letter calling on New York City Mayor Bill de Blasio to divest the city’s public-pension funds from and cease doing business with banks involved in financing the Dakota Access Pipeline project.

The letter noted the Seattle City Council voted unanimously on February 7 to end its $3 billion business relationship with Wells Fargo over the bank’s involvement in financing the pipeline.

Divestment a ‘Bad Idea’

Divesting from fossil fuels is a costly investment strategy, according to the new report by Daniel R. Fischel, president of Compass Lexecon, an economics and regulatory consulting firm.

In his report, Fischel calls divestment a “bad idea” if an institution is seeking an optimal return from its portfolio of investments. Fischel says the costs of divesting from fossil-fuel-related companies are substantial. Specifically, Fischel cites the costs of trading the stocks, the reduced diversification of stock holdings, and monitoring and compliance.

Less-diverse investment portfolios are exposed to higher risk and commonly suffer lower returns on investment, Fischel writes. Fischel found from 1965 through 2014, diversified portfolios that included fossil-fuel and utility stocks experienced an average annual return above 6.5 percent. The return for diversified portfolios without fossil-fuel or utility stocks was only 5.8 percent, a reduction of 0.7 percentage points per year, amounting to trillions of dollars in lower returns over the period.

No Positive Effects

Fischel found anti-fossil-fuel divestment is “unlikely” to improve the targeted companies’ overall value or prevent environmental harms. Even the activist organizations pushing divestment recognize this fact, Fischel writes.

“Divestiture proponent organization Fossil Free readily admits that divestment ‘[is not] primarily an economic strategy, but a moral and political one’ … primarily intended to ‘spark a big discussion, [and] might not have an immediate impact on a fossil fuel company,'” Fischel wrote.

As a result, “[A]ny benefits from fossil fuel divestment are likely to be non-existent,” Fischel wrote. “There is no basis to believe that divestment can affect the stock prices or business decisions of targeted firms.”

Symbolism Over Substance

Steven Greenhut, director of the Western region for The R Street Institute, says activists’ push for fossil-fuel divestment is about making a statement and feeling good about themselves, not protecting the environment.

“Such divestment policies are about virtue signaling, not about protecting the Earth,” said Greenhut. “Pension funds that take this approach are not acting in the best interests of the public employees whose pensions are on the line or in the best interests of taxpayers, who ultimately back these pensions.

“Many pension funds are severely underfunded, so this is no time to put politics above rates of return,” Greenhut said.

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 ahead of fiscal responsibility.

“The decision to divest oil, coal, and gas companies carries significant financial risks,” said Peterson. “Divestment on the basis of a political viewpoint, rather than economic value, is to engage in precarious political posturing that could leave investors with low returns and jeopardize retirees’ nest eggs.”

Michael McGrady ([email protected]writes from Colorado Springs, Colorado.


Daniel Fischel, “Fossil Fuel Divestment: A Costly and Ineffective Investment Strategy,” Compass Lexecon, February 1, 2017:

Rachelle Peterson, “Inside Divestment: The Illiberal Movement to Turn a Generation Against Fossil Fuels,” National Association of Scholars, November 2015:–against-fossil-fuels