There are moral dimensions of every situation that have value in and of themselves, and students often end up on the right side of history because they are the ones who drive the future. For these reasons, this is not a moral or political article—it’s a technocratic one, and the technical details of divestment have powerful implications. Let’s examine them together.
The conventional wisdom is that divestment led to the end of apartheid in South Africa and that student protests in 2016 drove decarbonization through divestment. Here’s why the conventional wisdom is wrong.
Campuses first across the United States and then across the world have erupted with protests that call for their universities’ endowments to disclose and divest their exposure to Israel. I have witnessed this firsthand on multiple campuses, including at Columbia University, where I teach impact investing at the climate and business schools.
While my heart breaks for those who are in conflict zones in the Middle East and those who have lost loved ones, the focus of this article is universities in the U.S and around the world. Navigating the intricacies of institutional investing and dispelling misconceptions about divestment can help students more effectively channel their convictions and passions.
Negative Screens Are A Less Effective Way to Have Impact
First, research by Julian Kolbel, Florian Heeb, Falko Paetzold, and Timo Busch shows that strategic engagement is the most reliable form of responsible investing for investors seeking impact, in the sense that it has been clearly demonstrated empirically. Said differently, university endowments should be able to drive more impact by asking the asset managers or companies in their portfolio about human rights and geopolitical risk of specific exposures in their portfolios. Negative screening is a less effective way to have impact. Negative screening spans from not making additional purchases, or exclusions, to selling existing holdings in activities, industries or geographies deemed unacceptable or controversial—or divestment. Divestment may not directly impact the investees in the near term, as other investors may buy the divested investments, and, in selling their shares, divestors forfeit the right to influence companies through strategic engagement. Indeed, recent research from Jing Tie, Bob Eccles, and Shiva Rajgopal finds that negative screening does not hurt valuation, cost of new equity, or the likelihood of initial public offerings.
Second, university endowments operate within the parameters set by their investment policy statements, which dictate the percentage of their portfolios that can be exposed to different asset classes and the benchmarks used to measure performance of those asset classes. The most common public equities benchmarks are MSCI All Country World Index (ACWI
iShares MSCI ACWI ETF
SPDR MSCI ACWI ex-US ETF
Third, university endowments invest primarily by allocating to external asset managers. Most of these allocations to external managers are investments in funds that commingle the assets of different clients. These external asset managers are generally not obligated to follow clients’ negative screens in commingled funds that include assets from other clients without those screens. In instances where university endowments have exposure to Israel through a commingled fund that did not want to divest that exposure, the endowment’s only option would be to redeem its entire investment in the commingled fund. Higher returning alternative investments, which abound in the portfolios of university endowment, tend to be locked up for 10 or more years, preventing university endowments from redeeming from their funds.
Fourth, divestment can also hurt investment returns by constraining investment portfolios. The excess of university price inflation over general price inflation imposes pressure on university endowments to generate substantial reliable distributions to support operations and also maintain purchasing power of the endowment. For many university endowments, serving the university’s spending needs is the mission rather than any broader objectives, and even those who wish to address this crisis must balance that with stewarding resources for future generations of students and future crises.
Fifth, even those universities that agree to address this crisis may find the impact of their Israel exclusions or divestment watered down by multidimensional complexities. For example, negative screens range from applying only to direct exposure through separately managed accounts on one end of the spectrum to applying to indirect exposure through commingled funds on the other. Some institutions have negative screens coupled with sin budgets that allow a low percentage of total assets under management to be out of compliance with their negative screens. Other institutions review what percentage of external manager assets are out of compliance with their negative screens and engage only once the percentage of excluded external manager assets crosses a certain threshold. Students should take note of the constraints that these complexities impose on their potential impact. This may make other interventions, like writing to Congresspeople, more productive. Two schools that have agreed to divest are Trinity College Dublin and Evergreen State College.
Divestment Is Only Effective If Conditions Are Right
In the wake of myriad student arrests on campus, next semester I will adjust how I teach negative screens and divestment in my courses. Going forward I will emphasize, for the students’ sake, that divestment is only effective if the conditions are right.
South Africa. The blend of unrest and civil disobedience, corporate activism through the Sullivan Principles, boycotts, and divestment over twenty years led to the end of apartheid. U.S. investors were able to pressure U.S. multinational corporations with the threat of divestment to engage in activism that risked only the small percentage of their business in South Africa. It follows that divesting from Israeli companies would not be sufficient to end the conflict.
Fossil fuels. Research by Ellen Quigley, Emily Budgen, and Anthony Odgers on fossil fuel divestment suggests that negative screening by high profile institutions can be seen as a material contribution to socializing and normalizing wider societal attitudes against the activity being screened out. In addition, a report by Atif Ansar, Ben Caldecott, and James Tilbury indicates that negative screening and can affect the long-term value of companies by stigmatizing the activity being screened out, creating regulatory uncertainty, which reduces investors’ expectations of future cash flows. By contrast, divesting from Israel may not affect political support for the conflict because the public is already deeply divided in entrenched positions.
What They Plan To Do With Their One Wild And Precious Life
College years for many are a time of idealism. A public discussion of the complexities of divestment could help students make more rational decisions. Their energy and idealism should be channeled instead of dissipated or even destroyed. If empowered by their administrations, university investment offices can drive this discussion, as can sustainable and impact faculty. With more specific information, students could be better equipped to answer Pulitzer Prize-winning poet Mary Oliver’s quintessential graduation question that my alma matter asks each year: “Tell me, what is it that you plan to do with your one wild and precious life?”
It is a difficult year to graduate from university and naturally a more difficult year to live in the Middle East. We can and must do better as institutional investors and investment faculty to dispel harmful misconceptions among the next generation of leaders.
Read the full article here
