Goodridge and Jantz (2013)

Goodridge, Julie and Christine Jantz.  “To Paraphrase Mark Twain: The Cost of Fossil Fuel Divestment Has Been Greatly Exaggerated.”  Northstar Asset Management, May 2013.

Recently there has been a lot of talk about the role of fossil fuels and divestment of these types of investment holdings. At NorthStar, our contemplations on these issues led us to a paper by Mark Kritzman and Tim Adler that uses mathematical simulations “to quantify the expected cost of divestment.” Kritzman and Adler’s analysis showed that in certain circumstances “the financial cost of excluding investments based on criteria other than expected performance can be substantial, potentially amounting to hundreds of millions of dollars.”

So divestment is wildly costly then, right? After a careful review of this figure, we were able to determine that the actual cost of eliminating the energy sector translates to a real cost to the investor of about 0.3% per year.

LK comment:  Practitioner response to Adler and Kritzman (2008).  See also Ruud (2013).