Letter to the Editor: Financial Impacts of Divestment are Uncertain - Climate Impacts Less So

Divestment is an incredibly timely issue. This past week, Skidmore's Task Force on Divestment held an open forum on to answer questions and receive input from the community.  by Silas Phipps-Costin '16

The Skidmore News recently ran an editorial suggesting that a proposal to divest from the top 200 fossil fuel reserve holders is unrealistic. The plan, which calls for the liquidation of all assets including these companies, has been the topic of over a year's work by the Skidmore Task Force on Divestment, a committee of students, faculty, staff, and a trustee. The committee was formed in response to a petition signed by 498 students, and 58 others, demanding that the college "withdraw from direct investment in fossil-fuel companies and withdraw from direct ownership and from comingled funds including fossil-fuel equities and corporate bonds within five years," (Skidmore Divestment Petition to President Glotzbach and Board of Trustees). This petition was endorsed by the SGA.

The main objection that the editorial raises is that divestment would result in a massive loss of returns on our endowment. This is a valid concern - this endowment fuels Skidmore's ability to provide financial aid to underprivileged students, to teach and prepare students, and to work on local sustainability initiatives. It would be foolish to ignore the potential risk to these extremely important goals.

At the same time, it would be just as foolish to assume that such losses are inevitable. Colonial Consulting, the firm that assessed the financial implications of divestment, provided the estimate of a $127 million loss. This seems like a dire consequence, and would almost certainly make divestment a highly irresponsible decision. However, this value is not a precise prediction of the actual cost. Even within the model used for analysis, the firm acknowledges that it "prefers to focus on potential worst case scenarios," (Colonial Consulting LLC).

More importantly, their model is based off the fact that the majority of Skidmore's endowment is invested in comingled funds, run by managers for whom Skidmore is but one of many clients. This means that Skidmore would need to liquidate all of its assets in the fund. In making their predictions, Colonial assumed that this money would then be invested in unmanaged funds, which would track the market as a whole (managed funds often do 1-3% better than the market). This is where their predicted losses come from - there is nothing inherently less profitable about portfolios without fossil fuels (in fact, a MSCI-ACWI index suggests that over the past 10 years, the market without fossil fuels has had 1.2% better returns than the market as a whole.

There is absolutely no reason to trust this assumption. It is an absolute worst-case scenario, in which the endowment is unguided and dependent on the whims of the market. This would absolutely not be the case in a divestment scenario. Although Colonials report did no research on managed funds that exclude fossil fuels, they do exist - a cursory search yielded 19 Asset Management Firms and 8 Mutual Funds with fossil free portfolios. Even if Colonials unfounded assertion that these are "simply not the best investors" were true (which would certainly call for some actual data), as trained financial analysts, they are almost certainly able to produce returns greater than market average. This means that, in addition to being an extremely poor model of actual outcomes, Colonials predictions are exaggeratedly conservative, giving the false impression of catastrophic endowment loss. It is disconcerting that Skidmore News is citing this deeply flawed, highly tenuous report as absolute fact.

Additionally, the editorial suggests that divestment would prove purely a symbolic gesture. The 4% of our current $377 million dollar endowment that is in fossil fuel reserves represents a volume of oil with the potential to release about 129 million pounds of CO2 - the equivalent of driving three and a half million miles (around the world 144 times) in an average passenger car. To fail to divest In the name of funding a bike share program is absurd.

Moreover, the nominal value of divestment does not necessarily represent its impact - in addition to depriving the fossil fuel industry of capital, which would allow exponential expansion of their harvesting efforts, it would also be providing demand for fossil-fuel free managed funds, and setting a precedent for ethical action with academic endowments. Even the smallest endowment represents an enormous increase in demand in the burgeoning impact-first investment industry, and the potential to attract top managers who will improve its viability.

It's important to acknowledge the limitations of our ability to predict the financial impact of divestment. It will almost certainly be less than the worst-case figure provided by Colonial Consulting. It could be anything between that value, and an improvement in return on investment (like what happened at Unity College when it divested). Divestment may be somewhat of a risk - but it is not the only risk at play. We also cannot evaluate what the consequences of failing to act now will be – and in a world where our actions have far-reaching consequences, we must also have far-reaching perspective. Stuck dealing with uncertainties as we are, we should act with precautions against the greatest potential threat. Nowhere in the Skidmore mission is the size of our endowment mentioned - but it is quite clear on the need to "make the choices required of informed, responsible citizens."

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