Fact of the Week: October 2020

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Frictional Costs of Fossil Fuel Divestment
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Frictional Costs of Fossil Fuel Divestment

“The need to sell additional assets under a conventional divestment scenario arises because many investors hold substantial portions of their portfolio in funds of various types, including mutual funds, commingled funds, limited partnerships in private equity funds, and so on. If a fund includes fossil fuel assets that must be divested, it is generally not possible for an investor to sell only selected parts of the fund”
Hendrik Bessembinder
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Frictional Costs of Fossil Fuel Divestment
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Frictional Costs of Fossil Fuel Divestment

“For a typical large endowment growing at a historically reasonable rate, [divestment] would translate into a loss in value of between $1.4 billion and $7.4 billion by the end of the 20-year period. The equivalent range for medium endowments is between $52 million and $298 million, and the equivalent range for small endowments is between $17 million and $89 million. These frictional costs are in addition to any reduction in investment returns that divestment may impose due to foregone diversification benefits, as discussed in prior literature.”
Dr. Hendrik Bessembinder, Arizona State University Professor of Finance
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New report from Professor Fischel finds divestment would cost NY and Colorado billions
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New report from Professor Fischel finds divestment would cost NY and Colorado billions

“Over 50 years, the costs of divestment for New York State add up to $1.1 trillion under the narrow [divestment] approach and $1.5 trillion under the broad [divestment] approach. To make up for the substantial shortfall caused by divestment, the State will either have to lower pension payouts or seek new revenue from taxpayers.”
Divestment Facts Summary of Professor Daniel Fischel of the University of Chicago Law School (August 2020, citing Daniel Fischel’s August 2018 paper)
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Frictional Costs of Fossil Fuel Divestment
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Frictional Costs of Fossil Fuel Divestment

“Transaction costs associated with divesting and replacing existing fossil fuel assets in university endowments are likely to be substantial. Focusing on a sample of 30 universities, including large, medium-sized, and small endowments, conservative estimates of these transaction costs range between 60 basis points and 269 basis points for large endowments, between 25 basis points and 180 basis points for medium endowments, and between nine basis points and 124 basis points for small endowments”
Hendrik Bessembinder
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