Let's Talk Money: Financial Arguments for Divesting Creighton's Endowment from Fossil Fuels

by: Mike Galeski

Above: Creighton’s Panel “Seeking Hope: Intentional and Ignatian Responses to the Global Climate Crisis”. Photo by Chelsea Nicholson.

Let us forget Creighton’s Jesuit mission for a moment. Let us pretend that Australia is not a red haze of smoke and one billion animals did not just die. Let us ignore the millions of climate refugees, the drought, the famine, the political instability, and the immense suffering climate change is causing around the world. Let us neglect Pope Francis’ call to “abandon our dependence on fossil fuels and move, quickly and decisively, toward forms of clean energy.” Let us overlook the reason why this university exists and who it serves. And let’s talk money.

After four years at this institution, I’ve learned the importance of the Almighty Dollar. The ethical arguments for divestment may be admirable, but inevitably, the discussion always regresses to finances. When 85.8% of the student voters supported Referendum #19-02 to gradually divest our endowment from fossil fuels, the response from Creighton President Fr. Daniel Hendrickson was:

“…we have decided at this time that implementing a policy of total divestment from fossil fuel companies as outlined in the recent nonbinding student referendum does not align with our goal of a properly diversified endowment, and could negatively impact Creighton and our students. It is important that the University follows a disciplined investment approach in its endowment, with a broad diversification strategy designed to achieve long-term returns.”

I get it. We cannot blindly follow a set of ideals off a cliff. We have to pay the bills and renovate to attract new students, so we can live our mission for generations to come. But if “proper diversification”, a “disciplined investment approach,” and “long-term returns” truly are the deciding factors, we need to at least be honest about them. Let’s really talk about money.

There is a prevailing assumption on Creighton’s campus that divestment would mean sacrificing endowment returns. At the recent university-wide panel on divestment, one of the panelists claimed that divestment could mean sacrificing up to $2.7 million per year, equating to 65 full scholarships. This deceptively implies that 100% of endowment returns are spent, when in actuality that number is between 2-5%. Further, only a fraction of that 2-5% is spent on financial aid and student scholarships, meaning that the actual scholarship and aid spending deficit would amount to less than $10,000 per year, not enough to fund a single full scholarship. But even saying that Creighton would be able to offer one less small scholarship per year goes against the overwhelming majority of academic literature on this topic. Nearly every study comes to relatively the same conclusion: divestment has had more or less a net-zero effect on portfolios historically and is likely to have a positive effect given the future projected decline of the fossil fuel industry. Below are just a few of the most recent studies which support this claim.

  • “While it is possible that divestment could still negatively impact endowment assets in ways undetectable to our methods, we find no credible evidence to suggest that divestment causes poor market returns. As such, endowment fiduciaries at institutions that have divested should rest easy with their decision to divest, given these findings. And endowment fiduciaries at institutions that are on the fence about divestment should consider our findings in light of their duties to make investment decisions that inure to the growth of the endowment value—even if the regime governing institutional fund management may not yet be explicitly permissive of this investment decision.” (Ryan & Marsicano, 2020).
  •  “We conclude that divestment is not only an ethical investment approach but also that it is able to address financial risks caused by climate change and, at the same time, is able to reduce the carbon exposure of investment portfolios” (Hunt & Olaf, 2018).
  • “Taken as a whole, the financial, moral and reputational risks associated with holding assets in fossil fuel companies create a compelling case for divestment, even without considering the rising opportunity costs of not transferring investments to cleaner alternatives” (Cutler and Reibstein, 2015).
  • “Contrary to theoretical expectations, we find that fossil-free investing does not seem to impair financial performance.” (Trinks, Scholtens, Mulder, & Dam, 2017).
  • “The tests show divesting as far back as 1998 would have yielded financial returns for investors, and with the advancements being made in more climate-friendly sectors like Materials, Consumer Staples and Telecom, we can only expect to see the return potential for divested portfolios grow” (Genius Capital, 2018).
  • “An endowment of $1 billion that excluded fossil fuel companies would have grown to $2.26 billion over the past 10 years, but an endowment that included investments in fossil fuel companies would have grown to $2.14 billion” (S&P Capital IQ).
  • A 2016 report from Aperio Group LLC found that the estimated tracking error between divested portfolios and an established benchmark was only 0.36% globally and 0.10% in the US.
  • A 2018 study found that the New York State Common Retirement Fund would have generated an extra $22.2 billion had it divested from fossil fuels ten years prior.
  • The British billionaire investor Jeremy Grantham proved in his 2018 commentary “The Mythical Peril of Divesting from Fossil Fuels” that any of the ten long-term sectors in the Standard and Poor’s 500 could be excluded from a portfolio without sacrificing even a percentage point of returns up to a 90-year time span. Notably, a portfolio which excluded the energy sector would have lost 0.07% over the last 60 years and gained 0.03% over the last 28 years.

Notably, there are six key studies that run contrary to the overwhelming majority of evidence and the conclusions above. All six conclude that divestment would be highly costly for universities due to frictional expenses, active management fees, and limited portfolio diversification. Three of these six papers were written by Dr. Daniel Fischel, two were written by Dr. Bradford Cornell, and the final paper was written by Dr. Hendrik Bessembinder. Unlike the largely independent studies cited above, all six of these studies were funded by the Independent Petroleum Association of America (IPAA), an oil and gas lobbying group. These studies have been widely debunked by experts, but have been highly effective in shaping public thought. The three authors of these six papers frequently write op-eds in the Wall Street Journal and cite each other’s work, creating an anti-divestment propaganda echo chamber which has infiltrated our campus. Many of the Creighton PhDs on the divestment panel referenced divestment could be costly, but when asked if they could cite a single study not funded by a fossil fuel lobbying group that concluded divestment would reduce returns, not a single panelist was able to do so. Too often, feelings are confused for facts. Those who confidently assert that divestment would be too costly without any evidence or peer-reviewed research to support their claim erode academic dialogue by inserting their own preconceived biases and assumptions. Careless assertions which do not embrace the complexity and academic rigor of this issue are simply insufficient. The future of our society is at stake.

While most of the research cited above seeks to measure the impact on investment portfolios in aggregate, Creighton’s specific endowment performance has yet to be analyzed. In order to ensure divestment is right for Creighton, our unique asset allocation must be considered.

Much of my junior year of college was devoted to determining the percentage of Creighton’s endowment invested in the fossil fuel industry. Polite requests to administration for access to this number were only met with empty promises unfulfilled, and it took a demonstration that attracted over 250 students and local news coverage to leverage enough pressure to disclose the number. There was good reason to keep it a secret; it was incredibly alarming. In a private meeting on April 30th, 2019, it was revealed to four other students and me that Creighton University has 10.6% of its $587,024,000 endowment (as of June 30, 2019) invested in direct extraction fossil fuel companies. According to a 2013 study by the Smith School of Enterprise and the Environment at the University of Oxford, the average US university had 2-3% of their endowment in fossil fuel assets. Based on this data, Creighton is investing over $62 million dollars in direct extraction fossil fuel companies at a rate roughly 4-5 times higher than the national average for universities. Student activists double-checked with experts at DivestEd and The Intentional Endowments Network, and they confirmed that this level of investment was “out of line with industry standards.” Fr. Hendrickson is right to be concerned about a “properly diversified endowment.” He is comically wrong to assume our current asset allocation is “properly diversified.” Creighton’s reckless overexposure to the fossil fuel industry represents a material risk to the financial success of our endowment. 

We do not have to theorize what would happen to our endowment if fossil fuel stocks performed poorly. We can simply look at the most recent financial data. According to a January 14, 2020 article in the New York Times, “In the past 10 years, through Friday, companies in the S&P 500 energy sector had gained just 2 percent in total. In the same period, the broader S&P 500 nearly tripled.” In four of the past six years, the energy sector performed dead last among the eleven sectors in the Standard and Poor’s 500. This poor recent track record of the fossil fuel industry has naturally translated to higher returns for more sustainable portfolios recently. An eighteen-year study conducted by the Harvard Business School found that companies with strong sustainability policies outperformed companies with low sustainability standards, by 4.8% on a value-weighted base and by 2.3% on an equal-weighted base while exhibiting less volatility. But there is no need to study the deleterious effects of overexposure to fossil fuels on other portfolios when we can access our own.

Creighton’s consolidated financial statements are currently available online dating back to 2011. When compared to the NACUBO Study of Endowments, an annual report of roughly 800 various-sized university endowments, Creighton under-performs. Since 2011, Creighton has totaled a yearly annual return of 7.8% net of fees, relative to the national average of 8.0% net of fees. That gap has widened in the past 5 years, in which Creighton generated 4.6% annually net of fees and the average university generated 5.2% annually net of fees. In four of the past five years our annual return has been lower than average.

Of course, this data alone is insufficient in proving any sort of causation regarding our overexposure to fossil fuels. Despite student requests over the past two years, we have not gained access to the specific fossil fuel companies we hold investments in. The withholding of this data has severely impeded a more robust understanding of why Creighton’s endowment has under-performed, and therefore this analysis falls short. Nevertheless, the correlation between unprecedented levels of fossil fuel investment and lower than average returns is worth exploring. Further, the data above disproves the prevailing myth that Creighton’s endowment is managed by infallible financial wizards. In reality, we are below average.

The most obvious counterargument to the recent paragraphs would likely resemble the following: “Sure, the fossil fuel industry has had an abysmal run recently, but volatility is the nature of markets. Who is to say the future will not be brighter?” Unfortunately for our endowment, the answer to that question would be, “the largest asset manager in the world.” BlackRock, Inc. manages over $7 trillion dollars in assets, nearly one-tenth of every dollar on the planet. On January 14th, 2020, BlackRock’s CEO, Larry Fink, declared in his letter to investors that climate change has now put us “on the edge of a fundamental reshaping of finance.” To respond, BlackRock will begin by “making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk, such as thermal coal producers; launching new investment products that screen fossil fuels; and strengthening our commitment to sustainability and transparency in our investment stewardship activities.” It was described as a “seismic shift” for the future of investing, but anyone paying attention could see it coming.

Increased regulations on fossil fuels, the potential for removal of subsidies, and the increasing likelihood that the vast majority of known reserves will become unburned “stranded assets” are all serious threats to the “carbon bubble” bursting. According to a 2015 study by Nature, an estimated third of oil reserves, half of gas reserves, and more than 80% of known coal reserves must remain unused in order to limit warming to 2 degrees Celsius relative to pre-industrial levels. These cuts will need to be far more extreme to limit warming to 1.5 degrees, as scientists recommend. Our current carbon budget is dwindling. The most recent IPCC report estimates we can only release somewhere between 580 and 770 gigatons of carbon to have a 50% probability of limiting warming to 1.5 degrees. Our best estimates of the known fossil fuel reserves on the planet would emit over 2,700 gigatons of carbon if burned. That is roughly 3.5-4.5 times the amount of carbon we can emit to have a 50% chance of avoiding disastrous levels of warming. This has led many investors, like those at BlackRock, to conclude that the vast majority of fossil fuel reserves must remain “stranded” to avoid catastrophic warming and economic collapse.

No matter how many fossil fuel assets are ultimately stranded, future climate changes are inevitable, and we would be prudent to pay attention. Climate risk is investment risk. Stanford Sustainable Finance Initiative Managing Director Alicia Seiger, who was part of a panel to mitigate climate risk in the New York State Common Retirement Fund, asserts that “The endowments on which our university students and pensioners depend are recklessly ill-prepared for climate change. It is the responsibility of every fiduciary to take appropriate action to protect their assets from the physical and transition risks of a changing climate.” Serious investors are going beyond divestment and analyzing how the changing climate will impact their portfolio in other ways as well. If we were truly interested in “long-term returns”, as Fr. Hendrickson assures us, these are the substantive conversations we would be having.

The preponderance of financial evidence for the gradual divestment and reinvestment of fossil fuel funds naturally leads one to inquire why student action to initiate this process has been met with such resistance. The recent article “Ad Majorem Petroleum Glorium: Why is Creighton acting against students’ climate referendum?” astutely ties Creighton University Board of Trustees members and billionaire donors like the Koch Brothers to “dark money” with a vested interest in the success of fossil fuels. Stacking investments which put the Board of Trustees’ interests over that of the university is alarming, but ignoring critical facts to save public face is equally insidious. When the student body presented a well-researched, 11 page document with 78 citations that had passed through four levels of student government and endorsed by 75.8% of student voters, we were met with weak rebuttals that were overly-simplistic at their best, and downright dishonest at their worst.

I wanted to attend college because I saw it as an opportunity for expressing my freedom to speech, and pursuing truth. But too often, I have been conditioned by my own university that truth is only worth being pursued when it is convenient and speech only free when it supports the status quo. When peer-reviewed literature and data-driven arguments are disregarded for self-assuring, blatantly deceitful platitudes on “proper diversification,” something has gone awry. We have opposed the pursuit of truth, and our reputation as an academic institution has been compromised for it.

It is time for Creighton to begin honestly talking about money. In the words of Mr. Fink “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.” Will we, as a university, recognize the call of the poor, the call of the Earth, the call of our students, and even the call of the market – and reallocate this capital? Or will we retain our present form as ostriches, burying our heads deeper in the sands of denial, hiding from the very truth we claim to teach our students? Ethics and morals are not needed to make the case for the former. Mr. Fink and his colleagues at BlackRock did not make their announcement last week for any particularly altruistic reasons. They have no mission to adhere to, other than to maximize their returns for their shareholders. At Creighton, we do indeed have a broader mission, but I promised I wouldn’t trouble anyone by talking about that here. Once again: let’s talk money.

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