Compass Lexecon Releases Fischel Study on Effect of Fossil Fuel Divestment Proposals on University Endowments

Colleges and Universities across the country are being pressured by student groups and political organizations to divest fossil fuel stocks from their endowments. In response to this pressure, the Independent Petroleum Association of America retained Compass Lexecon and its President, Professor Daniel R. Fischel, to perform a study to analyze the effect of these divestment proposals on university endowments. The Fischel study was released on February 10, and concluded that fossil fuel divestment is likely to substantially impair university endowments, with little or no effect on the companies being targeted. Professor Fischel summarized the results of the study in a Wall Street Journal Op-Ed published on the same date.

More specifically, the Fischel study found that, of the 10 major industry sectors in the U.S. equity markets, energy has the lowest correlation with all others, followed by utilities—meaning that companies in these sectors provide the largest potential diversification benefit to investors, and that divestment would reduce returns substantially. In particular, Professor Fischel's study tracks the performance of two hypothetical investment portfolios over a 50-year period: one that included energy-related stocks, and another that did not. The portfolio which included energy stocks generated average annual returns 0.7 percentage points greater than the portfolio that excluded them on an absolute basis and 0.5 percentage points per year higher on a risk adjusted basis. In other words, the "divested" portfolio lost roughly 50-70 basis points each and every year over the prior 50-years. Professor Fischel's study also found that ongoing management fees are likely to be as much as three times higher for a portfolio divested of fossil fuel stocks.

Taken together, these and other costs have the potential to reduce annual endowment growth by billions of dollars annually. If applied to total U.S. university endowments, divestment could decrease investment returns by over $2 billion annually due to lost diversification benefits, and further incur an additional $230 million in annual compliance costs. A reduction in wealth of this magnitude could have a substantial impact on the ability of universities to fund research, services and scholarships.

Professor Fischel was supported by a team in Compass Lexecon's New York and Chicago offices that included Alex Rinaudo, Todd D. Kendall, and Chris Fiore.

The Wall Street Journal Op-Ed can be found here.

Click here to download the report.