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Making Green by Going Green

December 16, 2011

Hampshire College is betting that companies that scorch the Earth and mistreat employees aren't going to make it in the long run.

After releasing a draft of new investing guidelines Tuesday, the college is poised to join a small list of colleges and universities pursuing "environmental, social and corporate governance investing" -- a proactive stance on investing that favors companies that pursue socially responsible practices -- rather than focusing solely on financial return.

Advocates for such a proactive form of investing, including Hampshire, say they are consistent with colleges’ missions of fostering social good. They also argue that investing in socially responsible and sustainable companies, while it may not appear to be the optimum financial move at any given time, is a safer investment in the long run, since those companies also have an eye on the future.

“Business practices that include safe and supportive work environments, products that build economic strength, and activities that benefit the disadvantaged, including charitable giving, enhance the financial security and long-term sustainability of companies in which the college invests,” Hampshire said in a press release.

Socially conscious investments are not new to higher education. Colleges have engaged in socially responsible investing in the past, perhaps most notably during the apartheid era, when numerous colleges pulled investments from companies with business operations in South Africa. In recent years, students have called for colleges and universities to cease investments in Sudan and Israel, accusing those countries of human rights abuses. (Many colleges have dropped investments with ties to Sudan, but most have rejected proposals to treat Israel the same way.) And many religious institutions have also adopted policies that weigh social factors. Earlham College, a Quaker institution, prohibits its money managers from investing in companies “whose earnings or sales derive predominately from the production, distribution or sale of instruments of war and armaments,” according to the college’s policy.

Hampshire itself has been on the forefront of socially responsible investment policies for decades, and was one of the first colleges to divest from South Africa in 1977.

But new policies like the one Hampshire officials are proposing differ from the previous wave of sustainable investments, commonly called “socially responsible investing,” which took a more reactive stance to investing, screening out investments that engaged in negative behaviors. Hampshire’s guidelines, and others like them, not only avoid particular investments, but actively favor other types of companies that engage in what the college views as good practices.

Under the proposed guidelines, Hampshire will favor investments in businesses that maintain fair labor practices, demonstrate innovation in relation to environmental protection, “use their power to enhance the quality of life for the underserved segments of our society,” and have a record of support for higher education, among others.

The college will avoid investments in businesses that make nuclear, biological, or conventional weapons; have significant operations in countries with serious human rights violations; have inferior occupational health and safety records, and demonstrate harmful environmental practices, among others.

Officials believe that the new guidelines will not limit the college's options to an unmanageable level. Social good will not be the only criterion on which the college bases its investment decisions, as it is still faces a fiduciary obligation to grow the endowment’s size to support the college in perpetuity. The guidelines simply add other components for investment officers to consider.

Hampshire had an endowment of about $25 million in 2010, according to the National Association of College and University Business Officers and Commonfund’s annual survey of college endowments. That is relatively small in the world of higher education, where the largest endowments exceed $1 billion. The college uses an investment consultant to determine where it should place its money. It is currently working with Prime Buchholz.

In the last survey NACUBO/Commonfund survey of endowments, only about 15 percent of colleges and universities engaged in some sort of socially responsible investing screening, and most of those focus on avoiding businesses they consider to be in some way unethical. Most management companies and foundations tied to universities are charged with seeking the highest return on investment possible, and the social, environmental, and cultural effects of the investments they make are secondary factors or not considered at all. Placing other considerations on the table could reduce the potential overall returns, they argue.

But many who are advocating for an increased focus on socially responsible investing say that practices that focus solely on financial returns don’t necessarily guarantee higher returns in the long run. During the 2008-09 financial crisis, those colleges that were the riskiest with their investments saw the biggest losses.

“A Massey Energy might turn you a profit for a period of time by externalizing the costs of environmental impacts, and short-term investors can trade out of the way before the negative impacts are felt,” said Jon Lukomnik, executive director of the Investor Responsibility Research Center Institute. “For a long-term investor, that’s practically impossible to do. And if you’re one of those, you probably want to integrate some sustainability analysis into your investing.”

The FTSE KLD 400, the longest-running socially responsible investment index, has shown returns of 9.51 percent from inception through Dec. 31, 2009. Over the same time period, the S&P 500 showed returns of 8.66 percent. The Forum for Sustainable and Responsible Investment also maintains a performance chart where investors can measure the performance of socially responsible mutual funds compared to other performance metrics.

In addition to focusing on social good, the college's proposed guidelines also call for it to take a more active stance in the governance of the companies it invests in. Since the college mostly invests in mutual funds, it lays out guidelines for how the college's proxy voters should vote.

Individuals have until Dec. 20 to provide feedback on the proposal to the college's Board of Trustees, which will vote on the guidelines after that feedback is weighed. Even if the college adopts the guidelines, several hurdles would likely prevent the college from investing only in companies that promote social good. Investments such as mutual and hedge funds, which pool assets and are rarely transparent about what they are investing in, often complicate an institution’s ability to engage in socially responsible investing.

“In exercising a fiduciary obligation to safeguard resources, many institutions protect against downside market risk and seek diversification not correlated to the broad market by investing in one or more hedge funds,” Hampshire wrote in its policy draft. “The investment consultant selected by Hampshire College may recommend investment in such funds. The college understands that inherent in the nature of hedge funds or other hedging strategies is diminished transparency of ultimate investments, and accepts as reasonable and necessary that in such cases it may not be able to monitor the application of its screens to the certainty that it might desire.”

There are several mutual funds currently in the marketplace that follow criteria similar to what Hampshire has laid out, and go through rigorous examination of not only a potential investment’s financial position, but also its environmental, social, and governance track record.

Mark Orlowski, founder and executive director of the Sustainable Endowments Institute, said it is good that Hampshire is taking up such policies, and conversations about how investment policies conform to institutional missions should take place on more campuses. “The role of a college or university -- the nonprofit ones -- includes some component of enhancing the public welfare,” he said. “With taxpayer subsidies and endowment gains not being taxes, they are benefiting tremendously from the public.”

 

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