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Divestment doesn’t always come cheap

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Matthew Lau: UBC’s decision to divest from the natural resource industry almost certainly means diminished financial returns. That either means less money for the university, or more money asked for in subsidies.

Several weeks ago, the University of British Columbia announced in a news release that it had “joined communities and organizations around the world in declaring a climate emergency.”

UBC was following in the footsteps of the councils of North Vancouver and West Vancouver, which along with other governments in British Columbia, also declared a climate emergency earlier this year.

Among UBC’s efforts is a divestment of the university’s financial assets from the fossil fuel industry. The university will undertake financial and legal reviews of transferring $380 million of endowed funds into a fossil-free and low carbon fund, and the UBC Board of Governors also directed administration to produce an analysis to support the divestment of the main endowment pool of $1.71 billion from fossil fuels.

The expected result of fossil fuel divestment is reduced investment income on a risk-adjusted basis. We know this because if the university believed it was unprofitable to invest in the fossil fuel industry, or in funds that hold oil and gas stocks, it wouldn’t hold any such investments to begin with. There would be nothing to divest.

Reducing or eliminating its investments in fossil fuels is not just part of the university’s climate emergency declaration, but an expansion of its environmental, social, and governance (ESG) investment criteria. The problem with an ESG investing strategy, which UBC adopted in 2013, is that it delivers lower returns relative to the amount of investment risk taken.

Eliminating an industry from the investment mix makes a portfolio less diversified, increasing risk without any increase in expected returns. Investing based on the carbon-intensity of the industry rather than financial considerations might result in having too much money concentrated in some industries, which has the same effect – reduced diversity and an increase in risk but not expected returns. ESG funds also tend to have higher expenses.

In short, it costs more to manage a portfolio when social and environmental analyses are required in addition to financial analysis.

Ordinarily, there should be no objection to people or organizations investing money as they want to. If somebody wants to divest from fossil fuels because they believe it’s the responsible thing to do, that’s their choice. But UBC is a taxpayer-supported institution. This fiscal year, UBC will receive as much revenue in provincial government grants as it receives in undergraduate tuition. Federal taxpayers will also be on the hook for research dollars and student loans and grants.

When UBC next goes to the government for subsidies, it’s fair to ask why taxpayers should transfer more money when the university is deliberately forgoing investment income to make a political statement.

Matthew Lau is an economics writer. His columns have appeared in newspapers and online publications across Canada.

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