Financial Impacts of Divestment from Fossil Fuels on University Endowments

Abstract

Campaigns advocating for divestment from fossil fuels have gained traction in recent years, putting pressure on universities with large endowments. The environmental benefits of such a decision have been disputed and Modern Portfolio Theory predicts that any form of divestment should be financially harmful by limiting the investible universe. I compile university endowment returns from public financial statements to evaluate the financial impacts of divestment from fossil fuels on these returns empirically, over the period from 2010 to 2020. In line with theoretical predictions, I find that fossil fuel divestment impairs endowment returns, although the type of divestment appears to be irrelevant, whether it be full or partial for instance. Another question of interest is whether more risk averse endowment managers are more likely to divest, from which one could infer whether green portfolios are perceived as risky by these experts. I use the Capital Asset Pricing Model to construct a measure of endowment managers' risk aversion, since true portfolio weights are not publicly available. I find that increased risk aversion does not appear to affect the decision to divest or the timing of divestment.