In Divesting From Fossil Fuels, Universities Make Compromises

Fossil-fuel companies are generally considered a good place to invest your money. They earn, and they’re stable. But recently, a handful of U.S. colleges and universities – 26, including Stanford and Syracuse – have made headlines by casting fossil fuels out of their investment portfolios, seemingly placing the good of the planet over the good of their coffers.

But selling off those investments is no easy task, and not all universities divest equally.

Universities with large endowments have a harder time shedding their stakes in fossil fuels. Of the 26 schools committed to divestment, only four have endowments – donated funds that must be invested – of $1 billion or more. And of those, only Syracuse chose to divest itself of all fossil-fuel holdings; the other three limited their divestitures to coal.

By contrast, the vast majority of divesting institutions with endowments less than $1 billion – 21 out of 22 – went beyond coal to rid their financial portfolios of other fossil fuels. These schools have endowments or total investment portfolios ranging from $980,000 to about $4.5 million. The University of Maine System, which has a $271 million investment pool, was the only school to limit its divestment to coal.

Complete divestment from fossil fuels can be difficult to pull off, according to Ken Redd, director of research and policy at the National Association of College and University Business Officers. “If you tell me I can’t invest in anything related to fossil fuels, it’s very, very difficult to replace that with something that has the same return but also balances risk,” Redd said in an interview.

But what about the schools that have managed to cast off these politically – and, many argue, morally – unsavory investments?


Less money? No problem.

For small schools with small endowments, divestment is relatively simple. Less money means more highly concentrated investments, as opposed to larger endowments, whose hundreds of millions are invested across a field of holdings, each of which may or may not include fossil fuels.

“Large endowments are much more complex than smaller ones,” said Redd. “The largest endowments tend to be invested in commodities futures and other contracts that have very high surrender charges. That makes divestment from fossil fuels very expensive and difficult.”

I think it walked a really, really narrow line of how to do something that matters without doing anything that matters. – Alicia Seiger on Stanford’s decision to divest from only from coal holdings

The University of Hawaii System’s 10 campuses, which share a $66 million endowment, pledged to divest this year. The university didn’t have any direct holdings in the endowment to begin with, so the divestment applies only to holdings in mutual funds that include fossil fuel-related companies.

Daniel Meisenzahl, a spokesman for the university, said in an interview that those indirect holdings account for 6 percent of the endowment. “The goal is to maintain a portfolio that is substantially divested of fossil fuels – zero to 1 percent by 2018.”

Still, the university’s divestment applies only to the $66 million Legacy Endowment. It doesn’t apply to the system’s full financial portfolio, nor to separate endowments at individual campuses.

Likewise, Foothill De-Anza Community College Foundation in Los Altos Hills, Calif., decided in 2013 to eliminate direct investments in fossil fuels from its $33 million portfolio and minimize commingled assets that included fossil fuel companies. Robin Lyssenko, assistant director for the school’s foundation, said: “It was a small percentage, quite frankly – it was about 1 percent of our whole portfolio.”

Naropa University in Boulder, Colorado, had a portfolio of $6.25 million when it decided to divest in 2013. Less than 2 percent of its holdings were in fossil fuels. Adler University, College of the Atlantic and the University of Maine system also had minimal investments, between 2 percent and 3 percent. For Brevard College in North Carolina and Unity College in Maine, the decision to divest affected less than 5 percent of their endowments, which were both less than $30 million at the time. Pitzer College in Claremont, Calif., divested only from companies listed in the Carbon Underground 200, a move that affected less than 6 percent of its endowment.


More money, more problems

Just as less money makes divestment easier, more money makes it harder. As Redd explained, endowments exceeding $1 billion are invested broadly and deeply. “So, for a school of a large endowment to say they would completely divest, it would be really hard for them to do given the structure of their portfolios,” he said.

The sophistication of financial portfolios at wealthier institutions helps explain why most of those schools don’t choose to divest in the first place. Take, for example, the 14 schools in the Big Ten, a dozen of which have endowments in excess of $1 billion. None have committed to any form of divestment, although most of the schools have student-led divestment campaigns.

Investment complexity helps explain why three of the four schools with the largest endowments among those committed to divestment –, the University of Washington , Georgetown University and Stanford – pledged to divest only from coal, the worst polluter among fossil fuels.

Even then, only the University of Washington pledged to divest from all coal holdings. Georgetown pledged to divest only from the 100 coal companies identified by Fossil Free Indexes and offered up by student group GU Fossil Free as having the largest environmental impact.

A spokesman for Georgetown said it does not disclose individual investments in its portfolio, nor does it disclose their value; listed among the Fossil Free 100 are American coal producers such as Alliance Coal and Alpha Natural Resources.

According to GU Fossil Free, only 2 percent of the university’s endowment is invested in fossil fuels, which include coal, oil and gas. In a statement, Fossil Free said the university’s decision was “not a victory.”

Stanford, according to a university statement, will not directly invest in publicly traded coal companies. When asked how much of the university’s $20-plus billion endowment was invested in coal, spokesman Brad Hayward said Stanford does not disclose its holdings, nor does it discuss its investment strategy – though he said the university’s coal holdings were “small.”

Divesting from coal is simple compared to disentangling fossil fuels from large portfolios, said Redd. “You know how many companies have direct or indirect ties with gas?” Redd said. “Lots. Exxon, to small oil explorers, to Schlumberger…That gets extraordinarily difficult. So that’s why it’s so much easier to divest from a single thing like coal.” That’s true regardless of the size of a school’s endowment, he said, but the complexity of large endowments just compounds the difficulty of divesting.

Coal divestment can also be pragmatic, ridding institutions of an increasingly risky holding. Alicia Seiger, deputy director of the Stanford Steyer-Taylor Center for Energy Policy and Finance, said as much in a May 2014 piece she wrote for Institutional Investor: “Coal companies make up less than 1 percent of major public market indexes and haven’t been performing well lately.” (Oil and gas, meanwhile, continue to be rugged investments).

In an interview, Seiger added that divesting from coal alone allows schools like Stanford to make powerful political statements without jeopardizing their portfolios. “I think it walked a really, really narrow line of how to do something that matters without doing anything that matters,” she said.

Coal meets the criteria for divestment set out by Stanford’s policy of socially responsible investing, Seiger said. If the university is to divest from a company or asset class, it must be considered to cause undue social harm, and reasonable investment alternatives must exist.

Coal checks both of those boxes, she said. Other fossil fuels like oil and gas do not.

“There’s not a leg to stand on to say that we can be entirely free of fossil-fuel usage today on a direct basis, let alone a supply chain. Does that mean you divest of all airline stocks? There aren’t the clean lines that there are for coal,” Seiger said.

Syracuse is the only U.S. university with an endowment exceeding $1 billion that has pledged to divest from more than just coal. Earlier this year the university committed to divest from its all direct holdings in fossil fuels.

Kevin Quinn, the university’s senior vice president for public affairs, would not provide details on how the endowment was managing to divest from more than just coal, or how much the university had invested in fossils. In an email statement, he said: “The University recently reached a position in which our endowment does not have any direct investments in publicly traded companies whose primary business is extraction of fossil fuels. The announcement made in March formalizes that commitment moving forward.”
Seiger, for one, cut to the chase on Stanford’s eschewing of full divestment. Even though non-coal fossil holdings may be proportionally small, it’s still stable money, meaning: “A full-sale divestment is hard to argue [for] with anything other than a moral decision.”

Besides, she said, there are more nuanced and effective ways of investing in a forward-thinking, environmentally focused way. “There are sort of leaders and laggards within the industry, and that’s a smart investment decision to be sorting through and identifying those, and calculating certain risks, and understanding climate risk in your portfolio.”

As Redd put it, for universities and colleges, investment is about “balancing your moral obligations with your financial fiduciary responsibilities. And usually the financial fiduciary responsibilities win.”

Redd said this doesn’t mean, as many student organizations and divestment campaigns argue, that institutions that fail to divest are morally bankrupt.

“It’s that the school and their endowment managers have fiduciary responsibility not to divest,” he said. “If they think divesting would hurt endowment performance, it’s their legal responsibility to say no. It’s not really a choice.”

The endowments of other colleges committed to divestment – Prescott College in Arizona and Peralta Community College in central California, as well as Brevard College and the San Francisco State University Foundation – could not be confirmed.

Morning Consult