February 10, 2015

Industry Funded Divestment Study Cherry-Picks Data and Reaches The Wrong Conclusion

Brooklyn, NY — The Independent Petroleum Association of America commissioned study on fossil fuel divestment released today cherry-picks and misrepresents data to reach the exact opposite conclusion of most independent reports, namely that divestment won’t increase financial risk at endowments, and could save institutions money in the long run.

“This oil industry funded study cherry-picks data to arrive at the exact opposite conclusion of most financial experts,” said Yossi Cadan, Global Divestment Senior Campaigner for 350.org “Report after report has shown that divestment would not increase portfolio risk. A number of independent studies have concluded that, in fact, the average college endowment would have saved money if it had fully divested a decade ago. But as any smart investor knows, past returns are rarely an indicator of future success. Rather than getting stuck in the past, endowment managers should think about the next 50 years. That future demands divestment.”

The most glaring sleight-of-hand in the IPAA commissioned study is the choice of a 50 year timeline. First of all, as any smart investor knows, past performance is no guarantee of future returns, especially in a sector that faces such an unpredictable policy landscape as the fossil fuel industry. Numerous studies have shown that the industry is at risk of a carbon bubble that could wipe out nearly a trillion dollars in value as governments look to curb greenhouse gas emissions.

But even looking at past returns, the reality of the situation is that while the “energy sector” has performed decently for the last 50 years the last 5-10 years have told a very different story. As many studies have concluded, including ones by Aperio, Impax, and MSCI (linked at the bottom), over the last five years major oil companies have been spending more to produce less oil, diminishing their returns for shareholders.

That research showed that over the last ten years, the S&P 500 without fossil fuels had higher annualized returns and weathered the 2008 crisis better than the regular S&P 500. A fossil free global market (MSCI ACWI) and domestic market (Russell 3000) each outperformed their corresponding indices over 16 and 22 years respectively. The S&P 500 without fossil fuels has also had a higher sharpe ratio over the last 10 years, just the sort of indicator a responsible endowment manager should be looking at. Even looking back over more than 10 years, fossil free portfolios would have had a tracking error of less than 1% (compared with an average 5% tracking error of active managers).

The Associated Press, perhaps a bit more unbiased than the IPAA, commissioned a study by the research firm S&P Capital IQ that found that an endowment that divested from the 200 fossil fuel companies targeted by the Fossil Free divestment campaign would have saved money. According to the AP, “The firm calculated the total returns of the broad U.S. market as tracked by the S&P 500 index, with and without the companies singled out by Fossil Free. An endowment of $1 billion that excluded fossil fuel companies would have grown to $2.26 billion over the past 10 years, but an endowment that included investments in fossil fuel companies would have grown to $2.14 billion. That extra $119 million could pay for 850 four-year scholarships, assuming tuition of $35,000 per year.”

The other questionable assumption made by the author of the IPAA commissioned report is that the transaction and management costs for fossil free funds will inevitably be higher. That is simply untrue. Fossil free portfolios and index funds already exist, with many more coming into existence each month as the demand for the product increases. Just last May, FTSE Group, BlackRock BLK and the Natural Resources Defense Council launched a fossil free index fund. If big players like Harvard or CalPERS indicated they were looking seriously at divestment, many more fund managers and advisers would surely jump into the game.

Perhaps the best evidence that the IPAA commissioned study is wrong comes from looking at a few of the colleges who have actually divested from fossil fuels. When Naropa College in Colorado decided to divest their $6.5 million endowment, th

Almost exactly a year later, Patricia Farrar-Rivas, the CEO of Veris, said: “It hasn’t had a significant change on their portfolio.”

In conclusion, the IPAA commissioned study manipulated their timelines and assumptions to try and disprove what numerous, far more independent, studies have found to be true: fossil fuel divestment is not the risk that endowment managers should be worried about. The real risk is climate change–and when managing that risk, divestment is a wise course of action.



  1. MSCI: Responding to the Call for Fossil-fuel Free Portfolios
  3. Aperio Group: Do the Investment Math: Building a Carbon-Free Portfolio
  4. Aperio Group: The Impact of Carbon Underground 200™ Divestment on Financial Risk
  5. Advisor Partners: Fossil Fuel Divestment: Risks and Opportunities
  7. Mercer: To Divest or Not to Divest is Not the Right Question
  8. Fossil Free Indexes: Historical Analysis and Performance