“Divesting from fossil fuels is not a concession that means you automatically have a lower rate of return over the long run,” said Unity College President Dr. Stephen Mulkey. “We’re finding, in the early going, divestment is immaterial to returns and has actually provided substantial returns when put into practice.”
Finance officials at Unity College, which in September 2012 became the first U.S. college to divest its portfolio of
companies that produce fossil fuels, released an internal report showing its portfolio has performed ahead of expectations since the decision.“Divestment has had no negative effect on our endowment portfolio,” said Mulkey, a leader in the growing campus divestment movement.
“As with any investing philosophy, it comes down to making smart, savvy choices.”
When it voted to divest, the Unity Board of Trustees gave its investment adviser five years to craft a portfolio in which less than 1 percent of holdings was invested in the top 200 fossil fuel companies based on estimates of potential CO2 emissions of their respective reserves.
The adviser – Spinnaker Trust of Portland, Maine – achieved that objective in less than one year.
The portfolio – a mix of exchange-traded funds, cash instruments and bonds – has shown a five-year annualized return of 9 percent, according to a report released by the college. The target prior to divesting was to achieve an 8.2 percent return.
Divestment did not happen overnight. A committee of Unity trustees had asked Spinnaker to decrease its exposure to large energy companies and to move toward clean energy as far back as 2008.
At that time, Unity’s exposure to Big Energy was approximately 10 percent of its total endowment, Unity College Vice President of Finance & Administration Deborah Cronin said. When the college announced it was divesting in 2012, Unity was at 3 percent exposure. Today, it is less than 1 percent.
As with any new investment strategy, the path to achieve divestment wasn’t immediately clear.
“A big part of this exercise was determining, ‘What does fossil fuel-free mean?’” Spinnaker Senior Vice President Sara Lewis said.
Advisers reviewed the school’s
2012 holdings against a Carbon Tracker Initiative list of
200 companies with the greatest fossil fuel reserves. That mapped out a clear path to minimize portfolio exposure to fossil fuels, Lewis said: Avoid investments in those 200 companies, and shift exchange-traded funds (ETFs) where possible to non-energy sectors.
Since Unity decided to fully divest, others have followed and more than $50 billion in divestment pledges have come from organizations and 28 universities including Pitzer College of Claremont, Calif., which announced in 2014 its intention to divest its $125 million endowment from investments in fossil fuels; and Syracuse University which announced on March 31, 2015, it would divest its $1.8 billion endowment from coal mining and fossil fuel companies.
Other schools to have announced a move to fossil fuel divestiture (with the self-reported values of their overall endowments) include Hampshire College ($40 million), Sterling College ($1.1 million), College of the Atlantic ($36 million), Green Mountain College ($1 million), San Francisco State University ($51 million),
Stanford University ($21 billion), University of Dayton ($670 million), Humboldt State University ($28 million), Chico State University ($53 million), California Institute of the Arts ($115 million), the University
Of Maine System ($248 million), and the University of Hawaii ($66 million).
Part of the increased interest in fossil fuel-free portfolios can be attributed to early adopters such as Unity, Lewis said. “We now have many more clients who are interested in that, absolutely,” she said. “Additionally we get phone calls from students across the country asking how they can get their investment committees to do what Unity did.”
Part of what Lewis tells them is to resist the urge for total purity in an endowment fund. “It’s difficult to try and get a large endowment fund to be all or nothing,” she said. “What we try to do is tell them to add a Fossil Fuel Free manager to begin to build a track record and comfort level so an investment committee or a board can see what’s possible.”
Colleges that resist divestment cite obligations to diversify their portfolios, reduce risk and pursue the greatest possible growth. College officials also talk about the headaches of removing money from index funds and having to define which companies are to be divested.
And while Lewis said Spinnaker may not ever get to zero with Unity’s portfolio, “we feel confident we can be diversified while achieving the long-term goals Unity has set.”
”Unity board members were acutely aware of their fiduciary responsibilities to the institution,” Mulkey said, “and they also wanted assurances that investment practices would bring an appropriate return – divestment or not.” That divestment has been a financial success is partly due to regular market forces.
The value of coal stocks has dropped precipitously amid stiffening regulation and competition from power plants using natural gas and renewables, and prices for crude oil have plummeted more than 50 percent since mid-2014. Amid that turmoil, oil company share prices have fallen to levels that would weigh down the return of portfolios with high fossil fuel exposure. Meanwhile, the broader market in equities has been on a bull run for most of the time since divestment.
Investments in funds that represent emerging international countries have been trickier, because they cannot be moved specifically out of fossil fuels, as the emerging international sector needs some fossil fuel tolerance. Yet diversification requires that some international funds remain in Unity’s portfolio.
Critics point out that divesting institutions still use fossil fuels, but Mulkey sees an analogy to tobacco. “You can still be addicted while working on quitting,” he said. And in much the same way so-called “climate deniers” have tried to cast doubt on data that show rapidly rising global temperatures, some have questioned the significance of Unity’s divestment, given its relatively modest endowment – $13.5 million at the time, now $15 million. But given recent extremes in weather – and with the news of ever-larger institutions deciding to divest – both such arguments may be losing strength.
“Pitzer silenced critics who said that the divestment movement in higher education would collapse,” said Bill McKibben, an environmental activist and founder of 350.org – a group dedicated to fighting climate change. McKibben went on to praise activists at Harvard University for occupying the president’s office there in a bid to get that institution to pull its massive portfolio out of fossil fuels.
“While there is much uncertainty about how climate change will play out, one thing is very clear from the data,” Mulkey said. “Climate change will be the defining environmental factor of what will come to be seen as the environmental century.”
He cited recent data from the National Center for Atmospheric Research indicates that global temperatures will be 7°F higher by 2100, leaving “a planet that is not consistent with our civilization.”
Given that outlook, “I don’t know how the stakes could get any higher,” Mulkey said, praising the board for coming to a rapid and decisive vote in 2012 and exhorting other colleges to divest.
“The fact that we’ve seen more than $50 billion in divestment pledges since Unity made its decision is a clarion call to those of us interested in a sustainable future. We must demand the highest ethical standards from our universities and colleges,” Mulkey said. “It is ethically indefensible that an institution dedicated to the proposition of the renewal of civilization would simultaneously invest in its destruction. In this respect, divestment is not optional.”
At the moment, fossil fuel divestment also looks like a shrewd financial move.
“Over the past five years, the portfolio has met or exceeded market benchmarks despite the shift away from fossil fuel holdings,” Mulkey said. “Our investment performance was in no way negatively impacted by this strategy.”
Meanwhile, Mulkey said Unity’s experience with Spinnaker shows how colleges can move past purely dollars-and-cents arguments to achieve an endowment that creates a financial return without sacrificing the health of the planet.
“We know those two goals can coexist,” he said. “All it takes is leadership.”