Report: Fossil Fuel Divestment Would Cost Pension Funds Trillions

Divestment could lead to reduced payments to pensioners, taxpayer bailouts

Supporters of the Standing Rock Water Protectors call on banks to divest from the Dakota Access Pipeline / Getty Images

A move away from fossil fuel investments by 11 of the nation's major public pension funds would lead to a nearly $5 trillion shortfall over the next 50 years, according to a new report from University of Chicago professor Daniel Fischel.

The report comes as environmentalists renew their push to get pension funds to divest from fossil fuels following President Trump's withdrawal from the Paris Accord. Elected officials in both New York state and New York City have pushed for both to rapidly divest their billions of dollars worth of fossil fuel investments.

"By fully divesting New York City pension funds from coal, oil, and gas, we would take a prudent step toward protecting 1.5 million pension holders," said city council member Helen Rosenthal last month.

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The report from Fischel, formerly the dean of University of Chicago Law School, says that those pension holders would actually see the city's funds shrink by over $100 million annually if they were to divest, and that it would have "minimal or no environmental impact."

"The study concluded that fossil fuel divestment has minimal or no environmental impact because it is highly unlikely to affect the production or distribution of fossil fuels on the part of targeted companies," the report states. "Moreover, not only is fossil fuel divestment ineffective, it is also costly to investors."

The study, which calculated the effects that divestment would have on the nation's largest state pension fund (CalPERS) and all the major funds for New York City, Chicago, and San Francisco, found that portfolios including fossil fuel stocks outperformed divested portfolios annually.

"These annual losses add up to a 23 percent reduction in the value of a divested portfolio over a 50-year period," the report found.

"This loss from divestment is due to the simple fact that a divested portfolio is suboptimally diversified, as it excludes one of the most important sectors of the economy," it states. "In fact, the diversification benefits of the energy sector exceed those of any other major sector of the economy."

The report estimates that the CalPERS fund would lose between $210 million to $289 million annually depending on the extent to which it abandons fossil fuels. Over 50 years, the losses are estimated to range from $2.3 trillion to $3.1 trillion.

In New York, the range is from $98 million to $120 million annually, and $1.2 trillion to $1.5 trillion over the 50-year timeframe.

Fischel has long cautioned against funds divesting from fossil fuels or, more broadly, making any investment decisions based on a political movement.

"I’m encouraging people to leave politics out of a very important tool colleges and universities have to promote higher learning," Fischel wrote in a Chicago Sun-Times opinion piece urging universities not to divest endowment funds from fossil fuels.

"There is a national movement focused on removing any fossil fuel company holdings from pension funds, university endowments and family foundations," Fischel, who chairs the Chicago city council's education committee, wrote. "This divestment push is based on moral or ethical stances, not the fiduciary responsibility the fund has to its beneficiaries."

Fischel argues in his report that divesting from fossil fuels would likely lead to reduced payments to pensioners or pension funds to seek out taxpayer money to make up for losses.

New York State comptroller Tom DiNapoli, a Democrat who is the sole trustee for the third largest pension fund in the nation, rejected the recent call to divest, stating that he prefers to engage with companies regarding their green house gas emissions.