Claim that divesting could cost $1.3 million misleading

Some may say: “Divesting could cost the University an estimated $1.3 million dollars.”
However, the $1.3 million figure postulated is misleading. There are no inherent costs of divestment.

Based on reporting in the Gonzaga Bulletin and conversations with Faculty Senators, the Faculty Senate delayed a vote on the Fossil Free Gonzaga Resolution primarily for two reasons. In our earlier blog we responded to the first concern. In this blog we respond to the second concern: “Divesting from the 200 most carbon-intensive companies would cost the University an estimated $1.3 million dollars.”

At a recent meeting of the Faculty Senate, the claim was introduced that divesting could cost the University an estimated $1.3 million dollars. At the time it was not given any context or explanation. Subsequent inquiries yielded the following information about how this figure was derived:

“The University has not commissioned a study, internally or externally, to measure the cost of transition to fossil fuel divestment. … In lieu of a more exhaustive divestment study, a reasonable starting point for such an estimate, in very rough terms, is to look to the market of active fund managers that provide negative screens. It is not uncommon for such funds to charge 20 to 50 basis points (0.20% to 0.50%) annually for the administration of such a program. This also does not include any internal costs to administer or any frictional costs of making the transition.

So, for conversational measurement of the cost of implementation, a working estimate is .50% x $250,000,000 (our pooled endowment figure), which approximates $1.3M. The actual figure … could be lower or higher. This analysis also does not factor in the opportunity cost of what such fees could have earned over time had they not been charged annually to the portfolio. Assuredly, there are additional costs required to administer such a portfolio.”

There are several responses to this claim.

1. This analysis seems to misrepresent the fraction of the endowment potentially affected by divestment. Less than half of the Endowment Fund is in equities. Thus, even if the analysis above were reasonable, and we do not believe that it is, the estimated cost would not be $1.3 million, but less than $650,000.
2. As Gonzaga’s former President Fr. Robert Spitzer is fond of saying: “Arbitrarily asserted, arbitrarily denied.” The fact that this “conversational estimate” picks the high end of an arbitrary range suggests that the University is looking for excuses not to divest, rather creatively discerning responsible paths to divestment.
3. It is important to put the proffered 0.5% number into some perspective. The challenge of managing the Endowment Fund is to achieve adequate risk adjusted returns over time. $1.3 million is not a small amount of money, but it is dwarfed by the massive market uncertainties. Historically there have been decade-long periods where the S&P 500 has lost money and decades where the returns have been in the high teens. Will the endowment be worth less than $250 Million in a decade? More than $1 Billion? These are the fundamental challenges for the Endowment Fund, not a rounding error discussion about divestment.
4. If divestment is done over a responsible period of time, which is what we are calling for, it is possible to achieve desired risk adjusted returns while gradually shifting to fund managers willing to assist with negative screens. There is no inherent reason that a fossil free endowment would be more expensive to manage and transition costs will be negligible if done responsibly over time.
5. Insufficient justification is given for the .5% figure. Specifically:
   • There is no mention of the costs of the existing program, either portfolio management, advisory or mutual fund, or separately managed account costs, nor is there any comparison to the costs reasonably available with an intelligent asset management strategy.
   • As we see in the discussion lead by finance expert Randy Cerf last fall, there is no reasonable justification available for this assumption of .5%.  It is not uncommon for an asset management fee to be charged whether a portfolio is fossil free or not and there is no inherent reason for it to be any different with or without divestment.
6. Any reasonable comparison would involve actually doing the work of constructing a before and after portfolio. Anything short of that is not worth taking seriously. If one were tasked with doing so to prove that divestment was expensive, one could clearly construct portfolios that proved that divestment was costly. No doubt one could generate costs even more expensive than 0.5%. Similarly, if one wanted to prove that divestment was costless, one could construct a lower cost portfolio, perhaps with 0.5% lower costs. Neither of these are meaningful because neither approach replicates anything like reasonable portfolio strategy.  Both ignore the most important goal of maximizing returns on a risk adjusted basis after all fees.

Bottom line: there are multiple responsible paths to meaningful divestment. Gonzaga just needs to commit itself to finding one that works for us.

(See our comprehensive list of objections and replies to fossil fuel divestment. )