Bloomberg BNA — Divesting university endowment holdings from fossil fuel companies may be technically and financially difficult, and schools considering doing so in response to student campaigns may want to consider alternatives, investment professionals say.
Colleges and universities that have started divesting from fossil fuel companies say despite the difficulties, it is possible and that doing so is consistent with their schools' values even if the action does not directly affect large electric, oil, and gas companies.
Five colleges in the United States — Green Mountain College, College of the Atlantic, Hampshire College, Sterling College, and Unity College — have agreed to divest from 200 fossil fuel companies identified by 350.org, the organization behind student-led campaigns to divest from carbon-intensive holdings that started in earnest last fall. Currently, 308 U.S. colleges and universities have fossil fuel divestment campaigns, according to Daniel Kessler, a spokesman for 350.org.
Some of the challenges faced by schools that choose to divest from carbon-intensive holdings include school investments in commingled funds that make it difficult to remove fossil fuel companies from portfolios, the possibility of higher costs due to changing account management or replacing investment managers, and a potential lack of impact due to the fact that college and university endowments represent only a fraction of total global invested assets, investment professionals say.
Fraction of Investment Assets
Cary Krosinsky, executive director of the Network for Sustainable Financial Markets, said college and university endowments and foundations represent only $1 trillion of $150 trillion total invested assets worldwide. “That dampens the potential effect that a divestment strategy can have,” he said.
Krosinsky was speaking on a May 21 webinar on climate change-related risks in endowment portfolios, hosted by the Association of Climate Change Officers. University endowment funds account for approximately $400 billion in combined assets, representing well under 1 percent of total assets under management, Krosinsky said.
Adding to the fact that endowments represent a small proportion of invested assets, selling stocks in fossil fuel companies will likely not drive stock prices down for those companies because buyers are waiting to purchase those stocks, said Chris Davis, director of investor programs at Ceres, also speaking on the webinar.
Stock returns for electric, oil, and gas companies have been good lately, Davis said, so selling them may not send a message to fossil fuel companies because there are ready buyers.
Kevin Coburn, a spokesman for Green Mountain College, in Poultney, Vt., told BNA that the school does not expect its divestment decision to significantly affect the stock price of fossil fuel companies.
“Green Mountain College does not presume that its independent actions will have a significant effect on the energy economy, but we do believe we have the moral obligation to align our stated values with our actions,” he said. And because other colleges and universities are also considering divestment, “Collectively we may be able to change the way the public thinks about their investments,” which could have a more significant impact, he said.
Andy Griffiths, administrative dean at the College of the Atlantic, in Bar Harbor, Maine, agreed with Coburn, saying if the fossil fuel divestment campaign gains notoriety as a national movement, “that's where the power is going to be; it's not going to affect the board of Exxon or any of these other companies because of the stock price.”
Students Seeking Advice
Christian Feuerstein, a spokeswoman for Sterling College, in Craftsbury Common, Vt., which was the third U.S. school to divest, told BNA that many student groups are seeking advice from Sterling College on how to run a successful divestment campaign. The school's board voted unanimously in February to divest from fossil fuel holdings with broad support from the student body and community.
“We've been giving [student organizations] quite a bit of hope,” Feuerstein said. It is always hard for the first few schools to divest holdings, and it becomes easier as more schools decide to divest, Feuerstein said, citing student campaigns in the 1980s for divestment from companies tied to South Africa to protest apartheid. The 350.org campaign is modeled on the anti-apartheid campaigns of the 1980s.
Another challenge to fossil fuel divestment is that energy companies form a large portion of the global investment market, investment professionals said. The energy sector constitutes 10 percent of global equity market capitalization, so excluding the sector may significantly reduce investment opportunities, said Tom Mitchell, managing director of mission-related investing at Cambridge Associates, speaking on the webinar.
Debbie Cronin, vice president of finance and administration at Unity College, in Unity, Maine, told BNA that it is not necessary to exit the energy sector altogether when excluding the 200 fossil fuel companies.
The college's board asked its endowment manager in 2008 to decrease its exposure to large energy companies, and the manager began shifting the school's investments, which include fixed-income bonds, out of large fossil fuel companies, according to Cronin. By the time the college announced that it was fully divesting in November 2012, the first college to do so, it had reduced its exposure to large fossil fuel companies from 10 percent of its endowment in 2008 to 3 percent, Cronin said.
School Not Negatively Affected
Shifting investment away from large fossil fuel companies has not negatively affected investment returns for the school, Cronin said. The portfolio has met or exceeded benchmarks over the past five years, she said. Additionally, “it is anticipated that investment earnings will meet long-term market performance benchmarks,” she said.
Griffiths of the College of the Atlantic said the board's investment committee determined that the potential investment loss did not outweigh the benefits of divesting from fossil fuel companies.
Griffiths, who also serves as chief financial officer for the school, said he calculated that if the school attracted or kept two students due to its fossil fuel divestment policy, “it would outweigh a very conservative estimate of what we may lose in our investments.”
Removing fossil fuel companies from an investment portfolio is also technically difficult, which is another barrier for colleges and universities considering divestment, Mitchell said. Many portfolios use commingled funds, so the institutions do not own the securities directly and do not have separate accounts that can be easily removed, he said.
Changing the portfolio construction to have separate accounts with companies increases investment management costs and could lead to losing investment managers that may be difficult to replace, Mitchell said.
Teasing Out Energy Securities
It is not easy to tease out energy securities from existing funds, Green Mountain College's Coburn said, but the college has started doing it. The college is working with its investment advisers now to adjust its $3.4 million endowment portfolio based on the board's decision to divest from fossil fuel companies, he said.
Griffiths said that most college and university endowments consist of individual stock holdings, not mutual funds, which makes it easier to sell individual stocks. “If investment committees were determined to do this, they are savvy enough [to take] 95 percent, or certainly most of the money that is involved in college endowments, [and] they could do this in a fairly easy way,” he said.
Matthew Derr, president of Sterling College, told BNA in an email statement that while developing and supporting a socially responsible investment strategy is complex, it is no more complex than other decisions boards make for their endowments.
Schools Can Make Sustainable Investments
An alternative to a broad divestment strategy is for colleges and universities to make new, proactive investments in clean energy and other climate change solutions, Mitchell said. An institution can also assess and lower its own energy use, he said.
“If an institution takes a position [on climate change], it should consider the totality of its enterprise operations and carbon footprint, not only the investment portfolio,” Mitchell said.
Krosinsky agreed, saying colleges and universities can make positive sustainable investments rather than divesting, such as choosing a sustainable investment portfolio or investing in clean technology companies like solar businesses.
Elaine Thomas, a spokeswoman for Hampshire College, in Amherst, Mass., said its decision to divest from fossil fuel companies is based on this idea of positive investing, such as seeking to invest in alternative energy companies. Davis said some options for positive investing are sustainable environmental, social, and governance (ESG) indexes; clean energy companies; green properties; renewable energy technologies; and green water infrastructure.
By selling stocks in fossil fuel companies, investors lose their shareholder leverage with the companies, Davis said. Banding together and putting pressure on companies to take action in certain areas is an effective way for investors to create change, Krosinsky said.
“Engagement is underrated as a strategy,” he said. Investors can file shareholder proposals on climate-related issues as part of an engagement strategy, Davis said.
Another way to avoid broad divestment is to target the biggest greenhouse gas emitters, such as coal and oil sands companies, Davis said. Mitchell agreed, suggesting that schools can narrow the scope of divestment to focus on the most carbon-intensive energy producers and end user industries.
No Commitments From Wealthiest Schools
No universities with endowments larger than $40 million have made commitments to divest from fossil fuel companies.
Kevin Galvin, a spokesman for Harvard University, told BNA: “The University has traditionally maintained a strong presumption against divesting stock for reasons unrelated to investment purposes. Harvard is first and foremost an academic institution, and the endowment's primary purpose is to support the research and educational activities through which institutions of higher education make their distinctive contributions to society, including ground-breaking research and education on climate change.” Harvard's endowment was valued at $30.7 billion at the end of fiscal year 2012.
Brad Hayward, a spokesman for Stanford University, told BNA: “Stanford has a long-standing and well-established process for addressing requests for divestiture. The university has a panel of students, faculty, staff, and alumni that hears Stanford community concerns related to the social and environmental impacts of Stanford's investment and trademark licensing activities.”
“Fossil Fuel Stanford has submitted a request to the panel recommending divestment of certain securities in the fossil fuel industry, and the panel has begun to work with the group,” he said.
Stanford's endowment was valued at $17 billion as of August 2012. Yale University, Emory University, and American University did not respond to a request for comment.
While few colleges and universities are divesting now, they are increasingly addressing the topic of climate change, Mitchell said. Many schools have formed committees on responsible investing comprising students, faculty, and staff, including Georgetown University, Brown University, Harvard, and Stanford, he said.
The committees consider how environmental, social, and governance issues should, or should not, be addressed in investment portfolios, Mitchell said. Many committees can advise the board of directors, and several institutions are thinking about codifying the role of the committee in making investment decisions, he said.