Global Divestment Day will kick off on Friday. In the run-up to this two-day event, college administrators will come under increasing pressure to accede to climate activists’ demands and sell off the fossil-fuel-related equities in their endowments. Should they?
Any rational investor should make a clear-eyed comparison between the potential benefits and costs of a divestment strategy. A new study that I and my colleagues at Compass Lexecon are releasing on Tuesday indicates that fossil-fuel divestment could significantly harm an investment portfolio.
No single piece of financial advice is more widely accepted by academics and savvy investors than portfolio diversification to increase returns and manage risk. Divestment advocates typically assume that investors can exclude fossil-fuel stocks with little or no loss. One California-based investment manager, for example, was quoted in a recent Rolling Stone article as saying that divestment would have “very low impact. If you take the fossil-fuel companies out, you’re still very well diversified.”
Our research shows the opposite: Of the 10 major industry sectors in the U.S. equity markets, energy has the lowest correlation with all others—which means it has the largest potential diversification benefit. The sector with the second-lowest correlation with others is utilities, which includes many fossil-fuel divestment targets such as Southern Company and Duke Energy.
Read more at The Wall Street Journal