It’s Only Getting Hotter

After winning over boards of some small colleges, movement to divest endowments from fossil fuel companies gains momentum. But while pressure is likely to increase, wealthy institutions worry about financial cost.

April 18, 2013

If college and university administrators feel like someone’s turning up the heat, they’re probably right.

After winning over administrators at a few private colleges with small endowments and receiving some national press, the movement to get colleges and universities to divest their endowments from fossil fuel companies is starting to ramp up pressure on wealthy universities. Groups recently generated headlines at institutions such as Cornell University and Brown University, which had endowments of $4.9 billion and $2.4 billion, respectively, as of June 2012.

Colleges that Agreed to Some Form of Fossil Fuel Divestment:

Unity College

Hampshire College

Sterling College

Santa Fe Art Institute

College of the Atlantic

Brown announced earlier this month that, in May, President Christina Paxson would present to the university's governing board a campus committee’s recommendation that “the university publicly divest from the 15 coal companies that have contributed most egregiously to the social and environmental harms associated with the coal industry.” The board previously adopted recommendations from the committee to divest from HEI Hotels, tobacco companies and companies profiting from Darfur.

If Brown’s board adopts the recommendation to divest from coal companies, it would become the wealthiest institution by far to do so and an outlier among peers. The endowment of Hampshire College, the only divested college to list its endowment in an annual survey, was valued at only $31 million in June. Paxson's peers at other wealthy institutions have argued publicly that maximizing investment returns to promote educational goals is their top priority. The potential costs of divestment, they say, outweigh what they see as questionable benefits.

“When it comes to Cornell’s endowment, our foremost priority is its growth and stability so that the earnings can continue to strengthen the university’s core missions of teaching, discovery and engagement,” Cornell President David Skorton recently wrote in a column in the student newspaper in response to student calls for his university to divest.

At Harvard University, where students last week rallied and delivered a petition to administrators asking the institution to divest from fossil fuels, governing board members have reiterated that they do not want to use divestment as a political tool. The university divested from some companies doing business in Sudan in 2005, but considered that situation an "extraordinary combination of circumstances."

But statements like Skorton's are not deterring advocates, who say the fossil fuel divestment movement is more widespread, has broader support among students and faculty members and is less likely to be made moot by shifts in government policy than have previous efforts. It also builds on years of sustainability efforts at higher education institutions, often led by administrators. Because of such factors, they say, the current push is different from other recent calls on some campuses to divest in companies doing business in Israel, calls that have been ignored by college administrators.

"This is a continuing freight train," said Stephen Mulkey, president of Unity College, a small environment-focused private college in Maine that was one of the first institutions to consider fossil fuel extraction in its investment decisions. "This issue is not going to go away. It’s well in motion on more than 300 campuses across the U.S. It’s a continuing movement, and there is going to continue to be a demand for action among students.”

Proponents of divestment say that rejection in the near term will not derail the efforts. They say college and university presidents at institutions of all sizes are likely to face increased pressure to divest from companies involved in fossil-fuel extraction in coming months and years.

Slowly Building

Divestment efforts have a mixed record. In the 1980s, many colleges and universities divested from companies doing business in South Africa to pressure the South African government to end apartheid. By 1988, 155 educational institutions had divested from South Africa, according to one analysis.

Most academic literature says the economic impact of South Africa divestment was minimal. But those reports note that higher education divestment inspired broader action by state and federal governments that ended up changing policy.

“Despite the prominence and publicity of the boycott and the multitude of divesting companies, the financial markets’ valuations of targeted companies or even the South African financial markets themselves were not easily visibly affected,” wrote Siew Hong Teoh, Ivo Welch and C. Paul Wazzan in a 1999 paper looking at the divestment movement. “The sanctions may have been effective in raising the public moral standards or public awareness of South African repression, but it appears that financial markets managed to avoid the brunt of the sanctions.”

Divestment efforts since then focused on tobacco companies, companies doing business in the Darfur region of Sudan, companies doing business in Israel and companies that violate fair labor standards.

Fossil Fuel Companies advocates that colleges divest from the top 200 companies that profit off of fossil fuel burning or extraction. These include:

Exxon Mobil Corp.

Lukoil Holdings


Royal Dutch Shell PLC

Mitsubishi Corp.

Alcoa Inc.

The current effort against fossil fuel investments is organized by a handful of national groups such as the Sierra Club, which has been pushing colleges and universities to reduce coal use and divest in coal companies since 2010, and, a group formed by Middlebury professor and environmentalist William McKibben.

McKibben conducted a nationwide tour that started in November, speaking at dozens of college campuses. More than 300 colleges -- from Minneapolis Community and Technical College to Harvard University -- now have chapters of the campaign.

McKibben said in an interview that he's cognizant of the fact that the movement likely won't generate the type of economic impact that would force change. But he said that like in the case of South Africa, the symbolism of leading educational institutions putting their money behind the ideas is likely to inspire policy change.

“The fight is almost as important as the victory," McKibben said. "The best-case scenario is that Brown decides to divest, and that’s terrific. If they say, ‘Nope. Not going to do it,’ I’m confident that when students come back in the fall, these great student leaders are going to figure out how to press the case more aggressively and dramatically.”

McKibben and others said there are characteristics of the current push that make it different from previous efforts. And he said those factors make it almost inevitable that colleges and universities will eventually capitulate.

“There are two reasons why it’s going to be difficult to ignore this,” he said. “The first is that this is the place where we learned about this problem. These research labs are filled with people, scientists of every discipline, who have been spelling out the danger we face.

“The second, and in some ways the most pointed, is that all these places have spent a lot of time boasting about how green they are getting. You can’t go on a university website without hearing about the latest LEED-certified buildings. That’s great, but students have already figured out the logic. If you’re greening everything else, why aren’t you greening the portfolio?”

A Cost-Benefit Analysis

The current call for divestment presents a more complicated calculation for higher education institutions than previous efforts, higher education officials say, because it would require a larger divestment and could come at significant cost. When most colleges pledged to divest from Darfur, only a few companies were affected, and most colleges did not invest in them. Other efforts have targeted individual companies.

The energy sector -- particularly the 200 companies targeted by -- accounts for a much larger chunk of the U.S. and global economy and is predicted to have high growth over the next few years.

The institutions likely to generate the most attention by divesting are also the institutions that rely the most on endowment returns to fund their operations. A loss in endowment revenues could mean a reduction in services or higher tuition. Those factors mean that despite the forces McKibben laid out, colleges might be more resistant.

Skorton expressed this sentiment in his column. “Because of the endowment income’s importance to our operating budget, we invest in asset classes that we believe will earn returns robust enough to keep up with both our annual withdrawals and with inflation,” he wrote. “Energy is expected to be one of highest returning asset classes going forward and is a good hedge against inflation.”

Studies show that “socially responsible” investing -- basing investments off more than just returns, a category under which divestment falls -- has real costs for investors, since it inherently means forgoing higher-performing investments. A paper by two executives at Windham Capital Management tried to estimate these costs.

McKibben and others argue that policy changes will eventually cause the stock price of fossil fuel companies to crash and that they will prove to be a bad investment in the long term. “We’d be doing them a favor getting them out ahead of bubble,” he said.

Skorton and others have also laid out other objections. For example, he wrote, many of the companies involved in fossil fuel extraction are also companies that are making large investments in alternative energy.

Unity College was one of the first institutions to divest from fossil fuels. Its administrators decided three years ago that they wanted to lower the representation of fossil fuel companies in the college's portfolio, dropping from 10 percent three years ago to 3 percent this fall. This fall the college announced that within the next five years it would divest completely from a list of 200 fossil fuel companies.

The college's endowment is valued at about $13.5 million.

Debbie Cronin, Unity’s vice president for finance and administration, said that over the past three years Unity’s portfolio outperformed a benchmark portfolio with the same composition of investment types (57 percent equity, 35 percent bonds and 8 percent "other"). It should be noted, however, that the past three years were unusual for higher education endowment returns.

Administrators at Unity admitted that it is probably easier for small colleges to divest than for large institutions to do the same. Unity, like most small colleges, has the bulk of its investments tied up in domestic equities and fixed-income investments like bonds. Those investments tend to produce stable but low returns.

Wealthier institutions have greater access and invest more of their portfolio in “alternative strategies” such as hedge funds, which might invest in a variety of sources and lock in investments for multiple years. According to this year’s annual survey of endowments by the National Association of College and University Business Officers and Commonfund, institutions with endowments greater than $1 billion invested 61 percent of their portfolios in alternative strategies, compared with 11 percent for institutions with endowments valued at less than $25 million. 

Mulkey said that even if it is difficult and costly for higher educational institutions to divest from fossil fuels, it is worth it. "A lot of presidents have been relatively quiet on this," he said. "And the silence is deafening. We have an ethical obligation to lead on this issue."

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Kevin Kiley

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