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Examining shortfalls of the divestment
campaign and other investment solutions
Forward The intended purpose of the following report is to be informational and discussion-provoking,
but in should no way be used as investment advice. This report is divided into three sections
and will cover some basics in investment, investment portfolio problems that the divestment
campaign does not address, and solutions to make college and university endowments more
resilient in a low-carbon economy. In regard to the divestment campaign, I appreciate all of
the efforts of everyone that has made the campaign a success. I support the motivations be-
hind the campaign, but I do not believe that divestment will be a successful strategy in fortify-
ing a portfolio against the effects of climate change.
Table of Contents
1. Introduction 1
2. Back to the Basics
What is an Endowment? 2
Asset Classes 3
Passive vs. Active Management 4
3. Problems With Divestment
Who Controls the Money? 5
Beyond the Top 200 6
Impacts on Asset Classes 7
4. Beyond Divestment
SRI and ESG Investment Strategies 8
Sustainable Managers 9
Sustainable Funds 10
Sustainability Indices 11
Hedging Our Bets 12
Shareholder Engagement 13
5. Conclusion 14
6. References 15
Hopefully your campaign is well informed about the threats of unburnable carbon, and research
done by the Carbon Tracker Initiative. Regardless, here is a quick background:
Unburnable carbon has recently become a hotly debated topic because fossil fuel companies
own enough fossil fuel reserves to raise the global average temperature by 4–6°C, which would
be devastating to the planet.1 However, international governments agreed in 2009 at the UN-
FCCC climate talks to limit global average temperatures to 2°C.2 This warming constraint will
have significant implications for fossil fuel companies and their investors—banks, endowments,
pension funds, and insurance companies.
The problem is pretty obvious, and the solution seems obvious as well—divestment. However,
it is my opinion that divestment may actually not be the most successful approach to protecting
an investment portfolio from the effects of climate change. The Fossil Free divestment cam-
paign has neglected to demonstrate to students how investment works, because they don’t
think it’s necessary to the campaign. I disagree. Understanding a little bit about investment is
the key to protecting your assets, countering your administration’s arguments, and demonstrat-
ing your ability to work with the administration instead of against it. Without the proper under-
standing of how an endowment portfolio works, students cannot research viable options for re-
investment, transfer of management and engagement strategies, again demonstrating to your
administration that you have the best intensions for your school, as well as the planet. Hopeful-
ly this report will serve as a guide to help you restructure your campaign strategy.
Want to know more? Check out more research on carbon regulation, financial regula-
tion, fossil fuel devaluation, banks, and more at:
1. Introduction 1
An endowment is essentially gifts of money, real estate, and other investments, donated to col-
leges and universities from friends of the college or alumni. Money that is donated to the col-
lege or university is invested, and with the proper management, it gains value over time. Most
colleges and universities only spend about 5% of their endowment per year. The endowment is
supposed to insure that monetarily the college or university can exist forever. Colleges and uni-
versities invest in an amalgam of investments, ranging from stocks and bonds (both domestic
and international) to infrastructure, commodities, hedge funds, real estate, and private equity.
The sum of all investments is called a portfolio.
An endowment consists of an assortment of investments to diversify its portfolio. Financial
markets are extremely volatile, because they’re subject to changes in supply and demand, gov-
ernment policy, financial regulation, and other market factors. However, diversifying across
different types of investments (called asset classes) and sectors within financial markets helps to
hedge against this volatility. Understanding a little bit about asset classes can strengthen your
divestment argument and help your campaign become more specific about your campaign re-
It’s also important to consider what the endowment funds in terms of what could be lost due to
bad or risky investments.
Allow for a smaller student to faculty ratio, which influences college rankings
Increased diversity of knowledge throughout college
Provides funding to students through merit, or need-based scholarships
Need-based scholarship can increase the diversity of the campus from a socioeconomic
Merit-based offers a greater range of opportunities to students individually selected for
Supports specific departments or programs:
Allows for more specialized departments, funded through the endowment
What is an Endowment?
2. Back to the Basics 2
Cash investments are cash, which has little to no risk.
A bond, commonly known as fixed income, is a loan for a set period of time. A bond is paid back
with interest, so that the investor gets a return on the money s/he lent. Bonds are one of the saf-
est investment options, but generally generate lower returns. A bond can issued by govern-
ments, corporations, or banks. Often bonds are issued through banks in a form called under-
writing. The bank facilitates the transaction by finding willing investors to buy bonds enacted
Stock, also called equity, is a part of the company. As a stockholder, or shareholder, an investor
owns a percentage of the company. Each year, shareholders receive a dividend, or a portion of
the profit made by the company that year. Stocks are also higher risk than most bonds, but
stand to make a better return. Owning stock is sometimes preferred to owning bonds because
shareholders, as part owners of the company, have the right to take part in company decisions.
Shareholders can engage in what is known as proxy voting, and raise initiatives known as share-
holder resolutions, that they think is important for the company to consider in its business
strategy going forward.
Real assets are assets like real estate, commodities, and timberlands. Real assets generally are
higher risk than bonds, but lower risk than stocks.
Absolute return is a term used to describe unconventional investing strategies. Generally these
strategies seek to outperform the market and seek a positive return on investments regardless of
the market. Examples of absolute return investments are hedge funds, forwards, futures, op-
tions, and other derivatives.
Private equity is a type of stock. Private equity, is the opposite of public equity, meaning it can-
not be traded on a public exchange. Normally private equity stocks are those of relatively new
companies that have not gone public. Private equity is a high risk investment because it cannot
be bought or sold on a public exchange.
2. Back to the Basics 3
Passive vs. Active Management
Most asset owners, such as an endowment, use a mixture of passive and active investing strate-
gies. Passive investors will follow a benchmark like the S&P 500 or the FTSE 100, and invest in
all sectors across the market. Passive investors seek to match the market performance, as op-
posed to active investors who aim to outperform the market. Active investors are more selective
than passive investors, and don’t invest across the market. They select stocks (though still a
wide range) that they believe will perform better than the market, and neglect others that are
underperforming. Because active investors are more involved in actually choosing stocks, active
fund managers are generally more expensive than passive fund managers.
If an endowment is concerned about the future returns of fossil fuel companies and invested
with active fund managers, divestment would be relatively easy, because active managers are
already selective. However, divestment is much more challenging for asset owners that are in-
vested passively. Asset owners that manage large amounts of money often describe themselves
as universal owners, meaning that they are invested in everything. Frequently they follow multi-
ple indices beyond the popular American indices and are invested in international indices. In-
vesting across multiple indices allows large asset owners to diversify their investments and
hedge against the natural volatility of the markets. However, it is almost impossible to imagine
divesting as a passive investor, because it violates the universal nature of passive investing.
2. Back to the Basics 4
Most colleges and universities doesn’t manage their own endowments, but hire an asset (also
called fund or investment) manager to manage their portfolio. Colleges and universities use an
investment committee to review investments and develop an investment strategy. The invest-
ment committee is normally made up of members from the board of trustees, as well as others.
The investment committee selects an investment officer who hires fund managers to invest the
endowment. Depending on how large the university is, the institution could have many fund
managers, who manage many different funds, possibly thousands. The fund managers are nor-
mally selected for their past performance, and this one of the problems that endowments look-
ing to invest more sustainability could face. The fact that most endowments are not managed
internally, but externally, also poses challenges for the divestment campaign. The investment
committee usually doesn't know what it is invested in, but who it is invested with, and the ex-
pected risk and returns from those investments.
Who Controls the Money?
Fund Manager 3
Fund Manager 2
Fund Manager 1
3. Problems With Divestment
The obvious target of the divestment campaign is the fossil fuel sector. However, this has left
other industries and sectors unaccounted for. Utility companies, the chemical industry, cement
industry, smelting companies, transportation companies, mining companies, and the finance
sector should also be considered. Power Stations, mines, and smelters are capital intensive in-
vestments that have an economic life of 25-40 years, and also risk impacts from climate change
as well as stranded assets.3
Transportation companies are reliant on fossil fuels, and substitutes
for oil and liquified natural gas cannot meet current demand standards. Private banks in the fi-
nancial sector are also notoriously invested in and lending to fossil fuel companies. These banks
could also face risks from stranded assets and climate change impacts. There are other sectors,
industries, and companies that risk devaluations from stranded assets or are high emitters of
greenhouse gases, and could face the same risks as fossil fuel companies.
However, the Fossil Fuel campaign doesn’t include companies that risk devaluation or are fossil-
fuel intensive industries on its target top 200 list. Most endowment investment portfolios would
have to divest about 5% of their portfolios to be fossil fuel company free, but the Asset Owners
Disclosure Project (AODP), a non-profit working to increase transparency to investors, has esti-
mated that 55% of the average investment portfolio is exposed to climate change impacts.4
Simply put divestment isn’t enough. The divestment campaign is only considering investment
impacts from stranded assets such as coal, oil, and gas, but the reality is that climate change will
affect a lot more than just fossil fuel companies. Asset owners, like endowments, cannot just di-
vest from fossil fuel companies, they have to reconsider the structure of their whole portfolio. In
the future portfolios could be impacted by water shortages, food shortages, national and inter-
national carbon budgets, corporate reporting standards, and a number of other risks originating
from climate change mitigation strategies and climate change itself. In the end divestment just
doesn’t cut it, so the next question is, how do we move beyond divestment?
Beyond the Top 200
3. Problems With Divestment 6
Because stocks and bonds have been the focus of the fossil fuel campaign, impacts on other as-
sets have often fallen by the wayside. Mercer, an investment consulting agency, found that pri-
vate equity, infrastructure, real estate, and commodities such as timberland and agricultural
land, are the most sensitive assets to physical impacts from climate change.5 However, when
divestment is discussed, it is only from fossil fuel company stocks.
Asset classes will see physical impacts from climate change, but also from future climate policies
and changing technology. Policy could encourage increased spending to create renewable infra-
structure and technologies. Future climate policies such as a carbon tax, or cap-and-trade emis-
sions system could also negatively effect assets with high carbon emissions, involvement with
the fossil fuel industry. Infrastructure such as coal ports and rails, part of the real asset class,
could become impaired or stranded, like fossil fuels, prior to the end of their useful economic
lives. It is necessary not just to consider stranded assets, but the impact of climate change as a
whole on an investment portfolio.
The table below shows a few sample endowments from countries across the United States. In-
vestment committees manage their endowments very differently and will feel the impacts of cli-
mate change differently as well. An endowment similar to Ohio State University could suffer
from stranded assets because it has a high percentage of equities in it’s portfolio. An endow-
ment similar to Yale’s probably wouldn’t feel as much impact from stranded assets, but could be
more at risk from physical impacts from climate change because of their high concentration of
Impacts on Asset Classes
3. Problems With Divestment
YALE2012 STANFORD2011 ARIZONA STATE
2014 OHIO STATE
Cash Investments 2.7% — — —
Fixed Interest 3.9% 10% 10% 25%
Equities 13.6% 37% 40% 47%
Real Assets 30% 23% 15% 14%
Absolute Return 14.5% 18% 15% —
Private Equity 35.3% 12% 20% 14%
Arizona State University8
Ohio State University9
Over the past few decades, several new investment strategies called SRI (social responsible in-
vesting) and ESG (environmental, social, and corporate governance) have appeared. Managers
using SRI and ESG strategies go beyond the traditional technique of analysing risk and return.
SRI and ESG managers incorporate companies that comply with a range of criteria into their
funds. Companies that have policies towards mitigating negative ecological impacts, clean ener-
gy production, pollution mitigation and management, community development, diversity in the
workplace, equal opportunity practices, employee health and safety policies, and retirement
benefits, are often included in ESG or SRI managed funds. ESG and SRI managers may also run
positive and negative screens. They may exclude companies involved in the manufacture, pro-
duction, and retail of weapons, alcohol, gambling, and fossil fuel companies. The Forum for Sus-
tainable and Responsible Investment (USSIF) estimates that in the US, only 11% of investments
under professional management use social responsible investing (SRI) techniques.10
Although SRI and ESG managers are considered more sustainable from an environmental per-
spective, they don’t necessarily exclude what the divestment campaign is after—fossil fuels.
There are relatively few funds that do exclude investment from the top 200 fossil fuel companies
as identified by the Carbon Tracker Initiative. Although funds may not exclude the top 200 coal,
oil, and gas companies, do consider a wider range of environmental impacts, and could be a
more appropriate choice to protect an investment portfolio from impacts from climate change.
However every fund differs on its SRI and ESG policies, so it’s important to understand the
methodology behind each ESG or SRI fund.
SRI and ESG Investment
Rights Alcohol Defense Tobacco
Fund 1 X X S S S R R R S
Fund 2 S S R R R X X X S
Fund 3 — — — — S X X X S
Fund 4 — — R R R — — — R
X: Does Not Invest
R: Restricted Investment
S: Screens Investment
—: No Screens in this Area
Sample Funds Demonstrating the Variability of ESG and SRI Policies:
4. Beyond Divestment 8
In October 2013, 70 asset owners and managers, managing more than $3 trillion in assets asked
45 of the world’s largest fossil fuel and power companies to disclose how they were responding
to financial risks posed by climate change and the systemic risk of unburnable carbon.11 These
are the types of asset managers that universities and colleges should have managing their en-
dowments. These asset managers, though they may not have fossil fuel free funds, are consider-
ing the systemic risks that climate change poses to investors.
Active Sustainable Fund Managers:
Boston Common Asset Management, LLC
Boston Trust & Investment Management Company
Breckinridge Capital Advisors
Calvert Asset Management Company, Inc.
Clean Yield Asset Management
Generation Investment Management
Impax Asset Management (based in Europe)
Hemes Investment Holding, INC.
Kleinwort Benson Investors (based in Ireland)
New Alternative Fund
Pax World Management Corporation
Rockefeller & Co.
Sarasin & Partners LLP (based in UK)
Trillium Asset Management
Veris Wealth Partners
Walden Asset Management
Zevin Asset Management, LLC
4. Beyond Divestment 9
Although there are more limited choices when it comes to fund managers that incorporate SRI
and ESG techniques into their overall investment strategy, many fund managers offer individual
funds that are more sustainable. Also the more pressure fund managers feel from asset owners,
the more likely they are to start providing carbon-tilted, carbon-free, or ESG and SRI influenced
funds. The USSIF estimated that the number of investments adhering to SRI practices grew by
22% from 2010-2012.12
If the demand for sustainable funds increases, supply will follow.
Mutual funds that exclude the top 200 oil, gas, and coal giants, as identified by the Car-
bon Tracker Initiative:
RBC Global Asset Management: Access Capital Community Investment Fund
Community Capital Management: CRA Qualified Investment Fund
Green Century Funds: Green Century Balanced
Pax World Management Corporation: Pax World Global Environmental Markets Fund
Portfolio 21: Portfolio 21 Institutional
Generation Investment Management: Multiple Funds
North Sky Clean Tech Fund
SFJ Ventures Fund III
Mutual funds that seek investments with positive impacts on the climate, pollution,
and other environmental factors:
Appleseed/Pekin Singer Strauss Asset Management: Appleseed Fund
Ardsley Partners: Ardsley Partners Renewable Energy Fund
Calvert Investment: Many Funds
Gabelli Funds: Gabelli SRI Green Fund
Legg Mason Investment Counsel: Legg Mason Investment Counsel Social Awareness Fund
Parnassus Investments: Many Funds
Pax World: Many Funds
Shelton Capital Management: Shelton Green Alpha Fund
TIAA-CREF Asset Management: TIAA-CREF Social Choice Equity Institutional
Walden Asset Management: Walden Small/SMID Cap Innovations Fund
4. Beyond Divestment 10
As climate change and other environmental issues has increasingly entered the political, finan-
cial, and economic agendas, several sustainability indices have appeared. An index is a collec-
tion of stocks that passive investors follow like the S&P500 or Russel 3000. The FTSE4Good,
Dow Jones Sustainability Index (DJSI), and MSCI are among the first to produce sustainability
indices that assess how companies are integrating ESG and SRI techniques into their business
strategies. These indices often only include companies that are considered ‘best in sector’ or
have environmental policies in place.
Although the sustainability indices are a good start for passive investors looking to invest more
responsibly, they’re still pretty new and pose a few problems for responsible investors. One of
the biggest is the large concentration of commercial banks present in the sustainability indices.
Commercial banks are notoriously involved with the fossil fuel industry through lending and
underwriting, and could pose significant risk to investors because of their risky lending strate-
gies. For example, the DJSI North America Index has high concentrations of JP Morgan Chase,
Bank of America Corp, and Citigroup Inc.13
All three of these banks are top financiers of coal-
fired power and coal mining. The top 10 companies included in the FTSE4GOOD’s Environmen-
tal Leaders Europe 40 Index included banks HSBC and BNP Paribas, two other large funders of
Although the sustainability indices have limitations, companies must show more than a
large market capitalization to be included in the index. The MCSI indices also appear to have
better screens than the FTSE4Good or DJSI, and have excluded more of the large commercial
banks and energy companies that the FTSE4GOOD and the DJSI included. MCSI also has the
option of creating custom indices, which could be an interesting option for passive investors to
Although the MCSI indices could be a good solution for passive investors, it’s important to con-
sider a range of factors. The first and most obvious are risk and return. Are the risks and returns
similar to indices your endowment previously benchmarked against? It’s also important to con-
sider the methodology used to create the different sustainability indices. Do they include ‘best
in sector’ companies? Do they consider finance companies as high risk, as well as energy com-
panies? How do they assess companies on their ESG and SRI practices? Are they benchmarked
against a specific stock exchange? Stock exchanges vary tremendously in fossil fuel exposure.
The London Stock Exchange is far more exposed to fossil fuels, specifically coal, than the New
York Stock Exchange which is more diversified. So benchmarks like the FTSE that follow the
LSE, are far more at risk than the DJSI or MSCI, which track the NYSE. Emerging market stock
exchanges are also likely to be impacted more from climate change. They have a greater con-
centration of energy companies than developed markets, and developing countries are likely to
feel climate change impacts more than developed countries.
4. Beyond Divestment 11
Investors interested in diversifying their portfolios should engage in strategic asset allocation
(SAA). Mercer, an investment consulting agency, found that SAA is attributable to over 90% of
the fluctuations in a portfolio over time.15 Traditionally investors have diversified across main
asset classes like equity, fixed income, cash investments, real assets, and their different sub-
groups. But Mercer found that it is necessary to diversify across sources of risk to protect asset
against risks from climate change.16
Diversifying across sources of risk implies underweighting sectors exposed to high carbon emis-
sions, such as utilities, cement, and fossil fuel sectors. Investors can also hedge against fossil fuel
investments through investment in industries that will succeed in a low-carbon economy. Low-
carbon bonds, companies specializing in energy efficiency, and renewable energy are examples
of investments that would likely succeed in a low-carbon world.
Investors can tilt their portfolio away from carbon intensive sectors, but they can also tilt their
portfolio away from certain companies. Pure coal and oil sands companies are higher risk than
more diversified mining companies or oil & gas enterprises. Utilities, miners, and some financial
companies could also face risks from climate change. Investors can choose to only invest in less
risky fossil fuel companies, or can overweight less risky companies to hedge against the riskier
Hedging Our Bets
4. Beyond Divestment 12
4. Beyond Divestment
Investors and fund members should engage with their fund managers about risks from climate
change. The more pressure that asset owners and fund managers feel from fund members and
investors, the more likely they will be to engage with companies likely to feel impacts from cli-
mate change and climate change mitigation strategies.
Fossil fuel companies are aware that under a 2° scenario 60-80% of their reserves cannot be
combusted, but they will continue to spend CAPEX on exploration and development until the
world’s demand for fossil fuels decreases. As long as there is a profitable market, fossil fuels will
be supplied. But by pressuring many industries, sectors, and companies to answer questions
about mitigating run-away global warming, and the implementation of carbon risk in to their
long-term strategy, they may start to change, as some already have.
Another part of engagement is being present in company decisions. Shareholders do hold pow-
er, but have the right to exercise this power through proxy voting at company annual general
meetings (AGM). At BHP Billiton’s last AGM, held in October 2013, the first four questions
posed by shareholders were about climate change and BHP’s strategy.17 At the AGM sharehold-
ers tried to elect Ian Dunlop, who was previous head of Australian Coal Association and em-
ployee of Royal Dutch Shell, but now works as an environmental activist. Although Dunlop only
received 4% of the vote in London, and 3.5% of the vote in Perth, this is a primary example of
investors are starting to engage with fossil fuel companies.18
To engage in proxy voting shareholders must own at least $2000 in company stock. Divestment
would be limiting because it leaves investors unable to participate in proxy voting or raise
shareholder resolutions. Although this does protect part of the divestee’s portfolio, it doesn’t
address the overarching problem of climate change that could be raised through shareholder
Many asset owners have already taken action to address risks from climate change, yet there
hasn’t been much action from university and college endowments. Most college and university
endowments cannot have the same influence in the investment world as other asset owners, be-
cause of the amount of money they control. However, other asset owners, with the exception of
foundations, are invested to make a profit, and pay out dividends to shareholders. Endowments
are also invested to make a profit, but are invested to sustain their mission as leaders of innova-
tion and solutions, not to pay lucky shareholders. It is this difference that gives colleges and
universities a distinct voice in the investment world, should they choose to lead.
It is my opinion that divestment from fossil fuels is not the best approach to address risks from
climate change. Divestment will only protect part of the portfolio in the event of a carbon bub-
ble forming, but the problem is much more overarching. Although I have included a list of more
sustainably focused managers, funds, and indices, I believe the change must come from the
shareholders and fund members.
Alone, each university and college owns a very small portion of many companies, but together is
where shareholders have the opportunity to see change. University and college endowments
need to come together, like 70 asset owners and managers did in 2013, and ask fossil fuel compa-
nies, utilities, financial institutions, smelting companies, and mining companies to disclose
their strategies in a low-carbon economy.
As leaders of higher learning, colleges and universities have a opportunity to unify and lead as-
set owners towards more sustainable and reliable portfolios.
5. Conclusion 14
1 (2013.) Unburnable Carbon 2013: Wasted Capital and Stranded Assets. Carbon Tracker Initiative
& The Grantham Research Institute, LSE.
3 (2012). Managing Climate Change Risks. Asset Owners Disclosure Project.
4 (2014). Global Climate Index 2013-14. Asset Owners Disclosure Project.
5 (2011). Climate Change Scenarios—Implications for Strategic Asset Allocation. Mercer LLC.
6 (2012). The Yale Endowment. Yale University
7 John F. Powers. (2011). Report From the Stanford Management Company. Stanford Management
8 Endowment Investment Strategy Asset Allocation Principles. Arizona State University Founda-
9 (December 31, 2013). Asset Allocation. The Ohio State University.
10 (2014). SRI Basics. USSIF.
11 (October 2013). Investors Ask Fossil Fuel Companies to Asses How Business Plans Fare in a Low-
Carbon Future. Carbon Tracker Initiative.
12 (2014). SRI Basics. USSIF.
13 (January 2014). Dow Jones Sustainability North America Diversified Index. Dow Jones Sustaina-
14 (January 31, 2014). FTSE4Good Environmental Leaders Europe 40 Index. FTSE.
15 (2011). Climate Change Scenarios—Implications for Strategic Asset Allocation. Mercer LLC.
17 Georgia. (November 28, 2013). BHP AGM. 350 Australia.
18 Sue Lannin and Pat McGrath. (November 21, 2013). Climate Change Activist Ian Dunlop Ap-
pears to Have Failed to Gain a Seat on BHP Billiton’s Board. ABC News.
15 6. References