Those moves turned out to be costly. They reduced portfolio returns by as much as $3 billion from 2001 to 2014, according to an analysis from Wilshire Associates Inc., the fund’s consultant. Tobacco stocks pay high dividends, and they’ve continued to perform well, says Vivien Azer, an analyst with Cowen & Co. who follows the industry. “You have a large consumer base, and it’s very hard to quit smoking,” she says. “They are willing to pay higher prices, and those higher prices drive profit growth.” In 2016, CalPERS expanded the prohibition to outside managers, removing their discretion to make out-of-benchmark tobacco-related purchases. MSU has a bit of history with divestment. To protest apartheid, trustees voted in 1978 to get rid of investments in companies that did business in South Africa, becoming the first large U.S. university to do so. Over the next few years, the school sold about $7 million of holdings in about a dozen stocks, including IBM, Exxon, Xerox, and Michigan-based Ford, Dow Chemical, and General Motors, according to archives of Michigan State and the American Committee on Africa. The divested stocks made up more than 20 percent of the endowment. MSU’s high concentration in U.S. equities at the time was typical of the way endowments invested then. Today, portfolios are more complicated.
The largest endowments nowadays often have half their assets in alternatives such as hedge funds and private equity. As limited partners, they typically don’t control what companies the funds buy. What’s more, money can be locked up for years—adding another complication to divestment efforts. A handful of smaller college funds has moved to shed investments related to fossil fuels.
Barnard College in New York, with $327 million in assets, has agreed to divest from companies that thwart efforts to address the effects of climate change. “We can’t move the market because we’re small,” says Robert Goldberg, Barnard’s chief operating officer. “But if other institutions like us are attracted to this approach, it begins to build a coalition where companies will have to pay attention.”
Lewis & Clark College in Portland, Ore., with $231 million, plans to sell investments that contribute to global warming. Lewis & Clark won’t purchase any new securities with fossil fuel exposure, because of the fiduciary responsibility, not because it’s a social issue, says CIO Carl Vance, who oversees the endowment. “There is a $100 trillion carbon bubble,” he says. “By selling these assets now, we won’t have that exposure when the reckoning time arrives.” For both Barnard and Lewis & Clark, private equity investments will remain until the funds are cashed out, which could take a decade.
Still, endowments have largely resisted the pressure to divest from energy. Almost three dozen endowments invest in funds run by EnCap Investments LP, according to data compiled by Bloomberg. The private equity firm has holdings in oil and gas and energy infrastructure that in some funds have produced returns as high as 50 percent, according to Bloomberg data.
Demand is so high that some endowments can’t get into Houston-based EnCap or want bigger pieces. St. Olaf College, Old Dominion University, and the University of California system have put money in multiple funds, according to Bloomberg data. So has Pomona College, one of the richest liberal arts schools in the U.S. with an endowment of $2.2 billion for its almost 1,700 students.
Pomona, outside of Los Angeles, invested in at least two EnCap funds, according to its public tax filings. Students at Pomona asked the administration to divest from fossil fuel companies in 2013, in response to the threats that global warming poses. The school declined, citing data from its investment consultant that showed its endowment could decrease by almost $500 million over a decade. “The loss of growth in the total endowment, caused mainly by the need to withdraw from the best actively managed commingled funds, would result in an estimated $6.6 million loss in annual spendable income for such things as financial aid, faculty and staff salaries, and program support,” according to a school letter announcing the decision.
Wellesley College also found that divestment isn’t a good option for its $2 billion endowment. After a push for divestment from students, school administrators said they didn’t support using the endowment as a lever for social change. “Although the economic impact on fossil fuel companies would be inconsequential, the potential cost of divesting from all fossil fuel holdings, directly and indirectly held, could be so high that it would seriously compromise Wellesley’s ability to serve its educational mission,” the Massachusetts-based school said in a statement. For Michigan State’s part, the risk of underperforming because of divestment isn’t something to take lightly, Zecher says. The Renaissance Institutional Equity Fund is one of the lowest-fee investments in the school’s portfolio and a good performer. Dropping it would have met only one of Zecher’s criteria—a defined target—he says.
Apartheid, four decades ago, was different. It would have satisfied all four tests Zecher set out, had his criteria existed then. “We’re being consistent with our past behavior,” he says.
This article was provided by Bloomberg News.