Last week, the New York Times reported on a growing trend in campuses across the U.S. – college students are demanding that their university endowment funds rid themselves of fossil fuel stocks. Energized by Bill McKibben’s Do the Math Tour, the students see this divestment campaign as a tactic that could force climate change back onto the national political agenda and pressure oil, gas and coal companies to start taking serious steps to fight global warming.
It wasn’t surprising to read that “at colleges with large endowments, many administrators are viewing the demand skeptically, saying it would undermine their goal of maximum returns in support of education.”
But are they right? Will college and university endowments lose money if they will accept the students’ demands? And if so, is still fair to ask colleges and universities to take this step given the important role endowments have in funding the operations of educational institutions?
First, let’s take a look at how involved American college and university endowments are in socially responsible investing (SRI). According to a report released on July by IRRC Institute and Tellus Institute, these endowments, which have more than $400 billion in combined assets under their management, “constitute an important segment of institutional investors involved in sustainable and responsible investing.” At the same time, they “no longer appear to be leaders in the greatly evolved institutional ESG investment space.”
US SIF 2012 Trends Report shows that more than $253 billion in assets (63 percent) of the total assets managed by endowments are affected by ESG issues, making educational institutions the second largest pool of institutional capital that is subject to some form of responsible investment policy. While this figure is impressive, apparently the number of endowments applying some form of ESG criteria to portfolio holdings is in decline –from 178 in 2009 to 148 in 2011.
The endowments that stay involved in some form of ESG investing activity tend, according to the IRRC report, to remain confined to single issue negative screening of public-equity portfolios. The most common issue is divestment from investing in companies doing business in Sudan ($200 billion in assets), followed by tobacco ($133.3 billion), terrorist/repressive regimes ($10.7 billion), military/weapons ($7.9 billion) and products/other ($7.7 billion).
As you can see, about 92 percent of the endowments’ SRI activity is related to two negative screenings – Sudan and tobacco. Both criteria are a result of a values-driven SRI approach, or in other words, endowments choose not to invest in companies involved in Sudan or in tobacco companies because of ethical grounds.
Is divestment in fossil fuel companies any different? Technically, no. In both cases, we’re talking about what can be considered “sin stocks,” or stocks that are evaluated on moral rather than profit-making grounds. The difference is, that in reality it is much more difficult to exercise a similar moral judgment when it comes to oil and coal stocks.
First, these companies are much more powerful today than tobacco companies and universities know it very well. Second, as the Times wrote, “fossil fuel companies represent a significant portion of the stock market, comprising nearly 10 percent of the value of the Russell 3000, a broad index of 3,000 American companies.” Last, but not least, in terms of perception, oil and coal stocks do not have yet the label of “sin stocks” so it’s more difficult to convince a board of trustees that they actually are.
The main obstacle seems to stem from a simple cost-benefit analysis that endowments conduct, which shows them that at the moment, it’s less beneficial to divest in fossil fuel stocks. How come? Well, studies show that a values-driven investment approach (unlike the positive screening-based/profit-seeking approach) tends to underperform conventional investments. In other words, there’s a good chance endowments will pay a price in terms of lower return for divestment in fossil fuel stocks.
This is a price that almost none of the endowments are willing to pay right now, especially when – from their point of view -adopting this approach could result in a conflict with powerful oil and coal companies that might also be among their donors, not to mention that the effectiveness of this approach is questionable.
The only factor that can change this equation seems to be the students – just like they fought to make ownership of tobacco stocks unacceptable no matter how profitable they are, they can fight to make ownership of fossil fuel stocks unacceptable. After all, it seems like climate change is a bit more of a threat to the future of human society than cigarettes. If students make the cost of owning these stocks greater than the cost of not having them, endowments will have to think twice about it.
But should colleges and universities put climate change before their own financial needs? For some, this is a moral question, for others this is a question of short-term vs. long-term priorities. Yet, for a growing number of students, it’s a no brainer – the math of climate change is much more powerful and important than the math behind the endowments short-term returns.
Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons the New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.