Says Divestment Would Put Endowment’s Performance “At Risk”
In what’s become an almost annual event, Swarthmore College (for the fourth time!) announced it would not divest its endowment from fossil fuels. The announcement came following passage of a non-binding referendum, spearheaded by a climate activism student group, that called for the school to divest and remove a clause from its investment guidelines that requires the endowment to be managed to “yield the best long-term financial results, rather than to pursue other social objectives.”
Salem Shuchman, chair of the Swarthmore’s board of managers, wrote in a letter to students and faculty:
“Any policy change that shifts the focus from attaining the best long-term financial results would then require fundamental changes in both the asset allocation and the investment managers who serve the College, and would place that performance at risk.”
The policy requiring mangers to focus on financial returns rather than social objectives was first enacted in 1991 and reaffirmed by the board in 2013 and 2015. Shuchman noted that there are more than 100 investment firms managing the endowment and that 99 of them have comingled funds. This means that divestment would be extremely complicated and impose substantial fees and transaction costs.
According to Schuman, Swarthmore’s $2 billion endowment “dwarfs all other income sources for the College, and there is no identifiable replacement for those funds… [the Board] must consider our broader mission in determining any action that would potentially limit the performance of the endowment on which we are increasingly reliant.”
Although the modern fossil fuel divestment movement started at Swarthmore in 2011, the Board has repeatedly rejected calls to divest. The school officially rejected divestment in 2013. As a part of Swarthmore’s analysis, the Board found that divestment would cost the school $200 million over ten years.
In its rejection, the Board also noted its skepticism that divestment would be an effective means of initiating change or helping the environment:
“Divestment’s potential success as a moral response is limited-if not completely negated-so long as its advocates continue to turn on the lights, drive cars, and purchase manufactured goods, for it is these activities that constitute the true drivers of fossil fuel companies’ economic viability-their profits.”
In 2015, the school again rejected divestment citing financial concerns:
“It would be difficult, if not impossible, to replace our current investment managers with ones of similar quality, if we were only to invest in funds that were fossil fuel free. By having access to the best investment managers, the College has achieved excellent returns in a shifting landscape. If we were not able to work with these investment managers, it would cost the college between $10 and $20 million annually based on the past performance of our current managers. Our endowment is large but it is still finite. If returns were lower we would be facing difficult budget choices.”
Once again in 2017, Swarthmore President Valerie Smith and Board of Managers Chair Tom Spock reaffirmed that, despite student protests and a referendum, the school was upholding its decision not to divest:
“We appreciate the time and effort that went into developing this referendum. However, following three years of thoughtful and detailed study and analysis from 2013 to 2015, the Board stated in its Sustainability and Investment Policy that it had reached the decision ‘not to divest from fossil fuels, either on a full or partial basis.’”
Swarthmore College has been unwavering in its position over the years that divestment is a bad policy that would put vital funding at risk while doing little to improve the environment. Perhaps after four solid rejections, student activist groups will recognize it’s time to finally wave the white flag and move on from their pointless calls to divest.
For the third time in just as many years, Swarthmore College – the birthplace of the divestment movement – has has rejected this flawed, costly campaign.
In the hopes of compelling the Board to take action on the issue during its upcoming February meeting, Swarthmore College’s Mountain Justice divestment group hastily organized a non-binding student referendum earlier this week to push the Board to divest. The referendum had no bearing on the Board’s meeting agenda, yet college leadership once again took the opportunity to make clear their opposition to divestment.
From President Valerie Smith and Board of Managers Chair Tom Spock in a student-wide email:
“We appreciate the time and effort that went into developing this referendum. However, following three years of thoughtful and detailed study and analysis from 2013 to 2015, the Board stated in its Sustainability and Investment Policy that it had reached the decision ‘not to divest from fossil fuels, either on a full or partial basis.’”
The irony of this outcome is that the modern fossil fuel divestment movement actually began on Swarthmore’s campus in 2011. After student protests pressured the Board to issue a decision, the school officially rejected divestment in September 2013.
As a part of Swarthmore’s analysis, the Board found that divestment would cost the school $200 million over ten years. Because Swarthmore relies on comingled funds for its investment strategy, over 60 percent of the endowment would be impacted by divestment, imposing substantial fees and transaction costs. But what’s the trade-off for these steep costs?
In their rejection, the Board noted its skepticism that divestment would be an effective means of initiating change or helping the environment. From the report:
“Divestment’s potential success as a moral response is limited-if not completely negated-so long as its advocates continue to turn on the lights, drive cars, and purchase manufactured goods, for it is these activities that constitute the true drivers of fossil fuel companies’ economic viability-their profits.” (Emphasis added)
Nevertheless, students continued to push for divestment, again forcing the Board to issue a new statement in 2015. The school again rejected the effort, citing financial concerns:
“It would be difficult, if not impossible, to replace our current investment managers with ones of similar quality, if we were only to invest in funds that were fossil fuel free. By having access to the best investment managers, the College has achieved excellent returns in a shifting landscape. If we were not able to work with these investment managers, it would cost the college between $10 and $20 million annually based on the past performance of our current managers. Our endowment is large but it is still finite. If returns were lower we would be facing difficult budget choices.” (Emphasis added)
Unsurprisingly, the Board’s view on divestment has not changed over the past year. The endowment plays a critical part in supporting the college, contributing about 50 percent of the College’s annual expenses and an average of $40,000 per student per year to over half of its students, who receive aid. Divestment would put this funding at risk, while accomplishing nothing from an environmental standpoint.
Hopefully for Swarthmore, third time’s the charm when it comes to divestment.
This Thursday, as the University of Denver (DU) Divestment Task Force holds its sixth hearing on fossil fuel divestment, we have to believe the presentation from divestment supporters will go far better than it did last time.
In the process of trying to explain the merits of fossil fuel divestment to the task force at the last hearing two weeks ago, a divestment activist demolished her own campaign’s rationale and talking points in real time. Without even realizing it, “Political Liaison and Narrative Strategy Consultant for Divestment Student Network” and 350 Action organizer Michaela Mujica-Steiner demonstrated just how political and pointless the divestment campaign really is, and how, at the end of the day, it amounts to nothing more than symbolic nonsense.
Are Fossil Fuel Investments Risky? 350.org Says Yes and No.
From the very beginning, 350.org has argued that its divestment campaign is a moral initiative that also makes financial sense. Fossil fuel companies are “very risky investments,” 350.org has explained, as “energy markets [are] particularly volatile, and therefore risky.” One of the slides in Mujica-Steiner’s presentation is titled, “The Fossil Fuel Industry is a Risky Business.” Because of this riskiness, “[d]ivestment can make good financial sense for your portfolio,” and “[d]ivestment now could protect your assets in the future,” argues Green America, a group that works with 350.org on divestment.
But when given the opportunity to explain how the fossil fuel industry was riskier and more cyclical than other industries – and therefore warranted divestment while other sectors did not – Mujica-Steiner just couldn’t. In fact, she said the fossil fuel industry was just like other sectors, and perhaps the entire economy: In her words, the fossil fuel industry “might be,” and “probably is,” marked by the “same cycle” when compared to other resources and other markets, and “maybe it’s almost the nature of our economy to be a boom and bust cycle”:
“It may not be that different from some other industries and I’ll admit I don’t know as much about other industries so I can’t really speak as much to how other industries function in cycles. … So it might be the same cycle in terms of other resources. I would imagine and speculate that it probably is. And maybe it’s almost the nature of our economy to be a boom and bust cycle. I’m not, I’m not sure because it seems like that would probably happen in other markets as well, but I would say that especially when you’re considering, you’re taking renewables into consideration and taking these other factors with the market and the policy regulations, you may see maybe the boom and bust cycle more … highlighted.”
There goes 350.org’s financial rationale for divestment. But this kind of fumbling financial illiteracy is only to be expected, given that 350.org activists have admitted on their Frequently Asked Questions page that they didn’t really know much about the subject matter, aside from “a few tips” from financial experts:
“Divestment sounds complicated. Do I have to be an expert to start a divestment campaign? Nope — none of us at 350.org are experts on financial markets, but we’ve talked to a lot of divestment experts and they’ve given us a few tips.”
Financial Experts, Analysts, Universities Reject Divestment
Well, actual financial experts have spoken out against the divestment campaign, arguing that divestment would contradict a school’s fiduciary responsibility to maximize the value of its portfolio in order to advance its academic mission. At the DU Divestment Task Force’s third hearing, Wendy Dominguez of Denver-based investment consultancy Innovest Porfolio Solutions explained that divestment would entail increased portfolio risk, underperformance, and a threat to endowment-funded educational programs. At the task force’s fourth hearing, Kristy LeGrande and Wendy Walker of investment advisory firm Cambridge Associates laid out the challenges of divestment from an investment perspective, including how investment strategies for most endowments involve commingled funds, that screened funds are not typically offered by the most high quality investment managers, and that the track record for the “handful” of hedge fund strategies that are explicitly “fossil fuel free” is very limited.
Economic studies commissioned by Divestment Facts, as well as internal evaluations by universities like Swarthmore College and Wellesley College, have drawn the same conclusion: Fossil fuel divestment would be extraordinarily costly. For example, a study by University of Chicago Prof. Daniel Fischel found that divestment would cost university endowments almost $3.2 billion every year. In addition, another study by Prof. Hendrik Bessembinder of Arizona State University’s Carey School of Business concluded that the transaction and management costs related to divestment could potentially rob endowment funds of as much as 12 percent of their total value over a 20-year timeframe.
It is precisely because divestment would be detrimental to a school’s education mission that universities have overwhelmingly rejected divestment, outnumbering those that have pledged full divestment by a ratio of 111:1. It’s why schools like Harvard University, 350.org co-founder Bill McKibben’s alma mater, and Middlebury College, where McKibben is a scholar in residence, have both refused to divest. Even the three schools that top Sierra Club’s list of America’s Greenest Colleges – schools that are “dedicated to greening every level of their operation” – have rejected divestment: University of California, Irvine, American University and Dickinson College.
350.org: Divestment Is About “Changing the Story” Rather Than “Material Changes”
Given the divestment campaign’s string of failures, what, if any, are its contributions? “Changing the story,” Mujica-Steiner told the DU task force, “rather than … material changes,” in order to “restrict the social license of the fossil fuel industry” and “to stigmatize the fossil fuel industry”:
“From my perspective, fossil fuel divestment, while there’s been a large amount of commitment and even that moving, the moving of investments, and divestment, really I would say the purpose is to restrict the social license of the fossil fuel industry, meaning to stigmatize the fossil fuel industry as more a part of social change rather than these material changes. And that’s actually why I didn’t, in terms of what I think are really putting fossil fuel investments at risk, I didn’t really highlight the fossil fuel divestment movement, because I don’t think it…has been detrimental to the market or detrimental to impacting demand. I think what it’s been really successful in doing has been changing the story, so around the fossil fuel industry, and brought to light…and kind of brought some of these issues more into the public policy arena. … In general its focus has been more social than materially impacting demands.”
350.org’s “changing the story” might as well mean distracting universities from pursuing solutions to energy problems in all their complexity, as DU Associate Dean for Academic Affairs Dr. Frank Laird has said:
“[Divestment] is not really ineffective, but I think it can have a negative effect on de-carbonizing the energy systems because, frankly, it’s a distraction from the large and complex task we need to face.”
To recap, 350.org activists have replaced students in what was purportedly a student-led college campaign, attempted to deprive universities of billions of dollars used for financial aid, faculty salaries and academic programs, distracted schools from advancing their education mission, and completely failed to provide a coherent case for their own campaign. What, then, is left for these activists? The moral high ground, according to 350.org operate Brett Fleishman, who has also testified before the DU task force: “[T]his is a moral campaign at its core.” But, in the words of University of Colorado Denver instructor Lisa Hamil, “is it moral or ethical to sacrifice the quality of a student’s education just to make a political statement?” The answer is an obvious no.
Recently, Swarthmore’s President and its Chairman of the Board penned an op-ed in response to accusations made by the University’s pro-divestment student group. In February the Mountain Justice group, alleged that three of the University’s trustees were “severely compromising the integrity of any board decisions on divestment” due to their personal or professional investments in the energy sector. Regardless of the decency of a student group attacking the trustees who serve them, the accusation ignores the more important fact that the decision not to divest was reached by the agreement of all thirty-seven Board members.
In their response President Smith and Chairman Spock noted that the links between the three trustees and energy companies were “tenuous” and “are not, in fact, conflicts of any kind,” characterizing the student’s assertions as “nothing more than spurious ad hominem attacks.”
The links are indeed tenuous: The so-called “smoking gun” revealed by Mountain Justice included the fact that one trustee founded Boston Consulting Group’s energy practice (a practice which has an entire division devoted to green energy and the environment), that another manages a trust that includes fossil fuel assets, and that the third had previously served on the board of an investment management firm with a stake in ExxonMobil. In short none of these trustees had ever worked directly for an industry company.
Despite this, Mountain Justice today doubled down with an op-ed in the Swarthmore Phoenix which demanded that the three trustees “recuse themselves from all future votes on divestment.” What’s more, the group is now also pushing a pledge for students who “would like to take further escalated action for divestment” to sign.
The accusations levied against Board members were not the only inflated allegations in Mountain Justice’s attack piece. For one, their claim that divestment commitments have surpassed the $3.4 trillion mark is entirely fictitious. As the activist group leading the campaign 350.org, has admitted, “the $3.4 trillion represents the total amount of assets represented by institutions, not the amount of money divested, which is difficult to track due to varying degrees of disclosure.” In other words, the actual fossil fuel holdings of each of these entities may only be a very small fraction of the $3.4 trillion total.
The erroneous nature of this number was noted in a recent Bloomberg article, which quoted Frank Wolak, the Director of Stanford’s energy and sustainable development program, as stating “These efforts are pure window dressing… And, much to my surprise, the student groups are complicit in this deception.”
Mountain Justice also claimed “that the fossil fuel industry and investments in that industry have no place in a just and sustainable future.” This runs directly contrary to the position of EPA Administrator Gina McCarthy who has noted that the United States’ increased use of natural gas has “been enormously beneficial from a clean air perspective, as well as from a climate perspective.” A fact that was further corroborated just this month in a report from the International Energy Agency (IEA), which stated “in the United States, emissions declined by 2% (in 2015), as a large switch from coal to natural gas use in electricity generation took place.”
In their op-ed, President Smith and Chairman Spock noted that Swarthmore University has taken several tangible steps in response to student’s concerns about climate change, but decided against divesting because of the financial impact it would have on the University. As President Smith wrote:
“It is the Board’s responsibility to ensure that both current and future generations of Swarthmore students have access to the financial resources required to (1) maintain our profound and historic commitment to make a Swarthmore education accessible to all qualified students, regardless of their families’ ability to pay; (2) attract and retain an outstanding faculty; and (3) sustain the support services necessary to allow students to thrive while in college.”
Like so many other University Boards around the country, Swarthmore’s Trustees—all thirty-seven of them – have made the responsible decision to prioritize the institution’s finances and its future students over an entirely symbolic, political gesture. The University’s students should be thankful.
After long and deep discussion and debate, the Board decided not to modify its investment guidelines to allow for use of the endowment to meet social objectives. This decision effectively ratifies the Board’s September 2013 decision not to divest from fossil fuels, either on a full or partial basis.
It would be difficult, if not impossible, to replace our current investment managers with ones of similar quality, if we were only to invest in funds that were fossil fuel free. By having access to the best investment managers, the College has achieved excellent returns in a shifting landscape. If we were not able to work with these investment managers, it would cost the college between $10 and $20 million annually based on the past performance of our current managers. Our endowment is large but it is still finite. If returns were lower we would be facing difficult budget choices.
All quotes featured by professors and school leaders on this website are public statements made by individuals and are not necessarily representative of the institution of which they are associated. Said schools and universities are also not affiliated with IPAA or DivestmentFacts.com.
