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Divesting From Fossil-Fuel Companies Is Unlikely to Harm Endowments, Report Says

College-endowment managers who resist the growing call to divest their holdings in fossil-fuel companies may be doing so for little or no financial reason, according to a new report.

An analysis released on Tuesday by the Aperio Group, an investment-management firm that offers its clients a “socially responsible index,” among other investment strategies, found that while divesting from fossil-fuel companies does not necessarily add value to a portfolio, it does not subtract value from it either, and it increases the risk to investors at such a modest level as to be negligible.

In recent months, student groups at more than 200 colleges across the country have begun pushing their institutions to divest from fossil-fuel companies. A handful of smaller institutions, including Unity College and Hampshire College, have recently adopted strategies to reduce their investments in such companies, but most colleges have responded warily to the notion.

No doubt part of that wariness is that fossil-fuel companies are viewed as reliable profit generators, and divesting from them is seen as a financial handicap, even less attractive at a time when endowments have struggled because of the recession.

The Aperio report, titled “Do the Investment Math: Building a Carbon-Free Portfolio,” examines the “tracking error” between the ordinary risk an investor faces in the stock market, as measured against the Russell 3000 Index, and the risk an investor runs when excluding the publicly traded stocks of the “Filthy 15”—a selection of companies that are involved in coal mining or burning coal to generate electricity and that a coal-divestment campaign has designated as the dirtiest. The report also analyzes the risk when excluding all fossil-fuel companies altogether.

When the “Filthy 15” companies were excluded, the additional risk to investors as factored into ordinary market risk rose by less than 0.001 percent, the analysis found. As the report’s author, Patrick Geddes, told reporters during a Web conference, “Statistically, it’s basically noise.”

When all fossil-fuel companies were excluded, and the resulting tracking error was added to overall market risk, the additional risk increased by about 0.01 percent.

Mr. Geddes, who is Aperio’s chief investment officer, said that an active human stock picker could be expected to introduce a tracking error of about 5 percent.

“I’m not here to malign the oil companies, I’m here to malign faulty mathematics,” he said. “You have to do the math, and that’s getting out of the conversation” about divesting in fossil fuels.

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