Divestment Facts
Prof. Daniel R. Fischel President and Chairman, Compass Lexecon Christopher R. Fiore Vice President, Compass Lexecon Todd D. Kendall Executive Vice President, Compass Lexecon
The fossil fuel divestment movement promises that the problem of climate change can be ameliorated if investors in certain companies refuse to hold the securities of those companies in their portfolios. In 2015, Professor Fischel, an author of this report, released a study examining this claim from an economic and financial perspective.2 Based on well accepted economic theory and the academic literature studying previous divestment attempts, 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. Moreover, not only is fossil fuel divestment ineffective, it is also costly to investors.
In particular, based on a 50-year retrospective sample period, the study found that an optimal equity portfolio including fossil fuel stocks outperforms a portfolio of equal risk that is divested of energy stocks by an average of 0.5 percent per year.3 These annual losses add up to a 23 percent reduction in the value of a divested portfolio over a 50-year period.4 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. In fact, the diversification benefits of the energy sector exceed those of any other major sector of the economy.
Read All