Boston QWAFAFEW Meeting: Tuesday, 30 Apr 2013


A lot of discussion lately has centered on the notion that universities and other asset owners should divest their holdings in fossil-fuel companies as a way to counter climate change. I am an advocate of dealing with environmental challenges, but I believe we should do so responsibly. Recent public discourse, unfortunately, seems to ignore the inarguable truth that divestment would be costly.

A few years ago, my colleague Tim Adler and I conducted a series of mathematical simulations to quantify the expected cost of divestment. Each simulation included 10,000 iterations, to avoid dependence on a single path through history. The analysis showed that the financial cost of excluding investments based on criteria other than expected performance can be substantial, potentially amounting to hundreds of millions of dollars.

Consider, for example, an investor who chooses 250 securities from a representative sampling of world stocks and who is correct 52 percent of the time. If that investor were to exclude 20 percent of available securities, he would sacrifice about $270-million over 20 years, assuming an initial portfolio value of $1-billion and an average market return of 8 percent, the long-term expected return for many asset owners these days.

That estimate arises solely from the fact that restricted investment universes offer fewer opportunities to skillful investors. And it does not include the substantial transaction costs that one would incur by divesting part of a portfolio.

One could legitimately argue that the cost is worth incurring, given the urgency of a trend such as climate change. But that view demands some understanding of the potential efficacy of divestment. Through what channels and to what extent would divestment of holdings in fossil-fuel companies lead consumers and producers of fossil-fuel products to engage in more-responsible behavior? The answers to those questions should then be weighed against the financial impact of divestment.

Incurring a cost of $270-million, for example, equals more than 5,000 years of college education, assuming annual tuition of $50,000, or almost 2,000 years of a faculty member’s pay, based on an annual salary of $150,000.

Even if they conclude that countering climate change would warrant such a sacrifice, proponents of divestment should offer some evidence or reasoning that it is the best course of action. One could well argue, for example, that it is more effective to collect the incremental return from unrestricted investing and deploy it directly toward the discovery of new clean-energy alternatives, or toward policies designed to curb the consumption of fossil fuels, or even toward shareholder activism to influence company behavior.

Socially responsible investing demands that universities and their constituents carefully consider those vital issues, so that they deploy their resources wisely, and with the greatest impact, in pursuit of a healthier environment.


MARK KRITZMAN is President and CEO of Windham Capital Management, LLC and the Chairman of Windham’s investment committee. He is responsible for managing research activities and investment advisory services. He is also a Founding Partner of State Street Associates, and he teaches a graduate finance course at the Massachusetts Institute of Technology.

Mark served as a Founding Director of the International Securities Exchange and has served on several boards, including the Institute for Quantitative Research in Finance, The Investment Fund for Foundations, and State Street Associates. He is also a member of several advisory and editorial boards, including the Center for Asset Management at Boston College, the Advisory Board of the MIT Sloan Finance Group, the Consortium for Systemic Risk Analytics, the Emerging Markets Review, the Financial Analysts Journal, the Journal of Alternative Investments, the Journal of Derivatives, the Journal of Investment Management, where he is Book Review Editor, and The Journal of Portfolio Management. He has written numerous articles for academic and professional journals and is the author of six books including Puzzles of Finance and The Portable Financial Analyst.

Mark won Graham and Dodd awards in 1993 and 2002, the Research Prize from the Institute for Quantitative Investment Research in 1997, the Bernstein-Fabozzi/Jacobs-Levy Award in 2003, 2006, and 2010, and the Roger F. Murray Prize from the Q-Group in 2012. In 2004, Mark was elected a Batten Fellow at the Darden Graduate School of Business Administration, University of Virginia.

Mark has an MBA with distinction from New York University and a CFA designation.

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