WASHINGTON, May 1, 2017 /PRNewswire-USNewswire/ -- Numerous reports conclude that fossil fuel divestment is a costly and ineffective endeavor for universities and pension funds to undertake, but little research has calculated how this impact affects the people that matter most: students, faculty, and retirees. Released today, a new report commissioned by the Independent Petroleum Association of America for the first time quantifies the true price of divestment for these groups.
Previous studies have calculated the general costs divestment inflicts upon a portfolio due to higher risk, reduced diversification and increased transaction fees. This new research by Prof. Hendrik Bessembinder, professor of finance at the Arizona State University's Carey School of Business, applies these financial principles to understand the direct impact of divestment on endowment spending and, in turn, the services such funds support. Focused on analyzing the finances of the nation's public and private universities, Prof. Bessembinder found that divestment would lead to a 15.2 percent average reduction in endowment spending.
"Endowments are a vital financial resource for university spending," stated Prof. Bessembinder. "Due to the significant financial shortfall imposed by divestment, universities who choose such a strategy will have to make serious decisions on how to make up for this loss in funding or lower their endowment spend by increasing tuition, cutting faculty, or reducing on campus services."
Since private institutions typically rely more heavily upon endowments for expenses, these colleges pay an even higher price for the same amount of divestment than do public universities. Prof. Bessembinder calculates that to fund fossil fuel divestment, private universities would be forced to raise annual tuition by approximately $1,043 to $3,265, depending on how reliant each school is upon its endowment. A private university could also make up for lost endowment value by cutting spending on faculty by 11.5 percent, leading to fewer classes and increased class sizes. Though smaller in dollar value, most public universities would also face difficult financial decisions from divestment, such that keeping spending at current levels would necessitate tuition increases by approximately $123 to $385 on average or reductions in spending on faculty costs of 3.5 percent, or a combination of these. Universities could also forego future expected spending increases and spend down their endowments, but that would simply delay the costs of divestment at the expense of future students, alumni, and faculty.
"Divestment would make a college degree even more expensive for students who are already graduating with record levels of debt," said Jeff Eshelman, senior vice president for operations and public affairs at IPAA. "Activists should not ask students to pick up the tab on this symbolic act which has no impact on the environment. When it comes to the impacts of divestment, whether in the form of increased tuition or cuts to instruction time and faculty, students only stand to lose."
Prof. Bessembinder also calculated that the financial losses a typical pension fund would incur due to divestment would equate to a reduction in monthly benefits to be paid to pensioners of approximately five to seven percent, depending on the extent of the pension fund's fossil fuel assets. Read the full report and fact sheet online, and read Prof. Bessembinder's op-ed on the report in Fox News.
SOURCE Independent Petroleum Association of America