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Fossil Fuel Divestment: A Costly and Ineffective Investment Strategy

February 1, 2017
By Daniel R. Fischel

Anti-fossil fuel activists are pushing public employee pension funds and university endowments to divest their holdings of companies in the fossil fuel industry. Funds which have followed this advice have seen their investments decline, hurting retirees.

In recent years, anti-fossil fuel activists concerned with the potential effects of global climate change have urged institutional investors including university endowment funds and public employee pension funds to divest from securities associated with companies that explore for, produce, market and/or exploit fossil fuels. Research shows, however, the costs to investors of fossil fuel divestiture are highly likely and substantial, while the potential benefits minimal at best. Divestiture does not harm the companies divested from, while the substantial costs involved do reduce pension funds values, thus harming retirees and other investors depending upon the funds returns. From 1965 to 2014 period, portfolio diversified portfolios which included fossil fuel company stocks 0.7 percent higher gross returns, and a 0.5 percent higher risk-adjusted return, relative to a divested portfolio of only the non-energy stock index.