Two major universities – the University of Notre Dame and the University of Pennsylvania – recently decided not to divest from fossil fuels even after being pressured by organizations and students who vocally pushed for this action. This significant decision reflects a positive trend within university and pension board members who are realizing the hidden consequences of divestment, including the potential harm the social whim can inflict upon the return on investment for the funds. These developments are also another setback for critics who erroneously believe that divestment will some will somehow fulfill a university endowment’s fiduciary responsibility.
In this recent example, both universities announced that their decision to not participate in removing assets from fossil fuels is based on the economic constraints that would be inflicted upon the endowment afterwards. In fact, multiple studies have suggested that divesting from safe and secure stock options results in a loss for the portfolio. A 2015 study by University of Chicago Law Professor Daniel Fischel concluded that divestment of energy equities produced a rate of return of 0.7 percent points lower than the previous year – a significant loss for schools who rely on the endowments for scholarships, academic research funding, and school operations.
In their decision, the University of Pennsylvania’s board members also pointed out that the university’s guidelines specifically say that “divestment must be from a specific company or companies rather than an industry and have broad support from the Penn community over time.” The board also believed that there was a lack of ‘moral evil’ in the argument for energy divestment, interpreting moral evil as “an activity on par with apartheid or genocide.”
Both universities agree with the need to practice responsible environmental stewardship and are committed to “including campus sustainability and research regarding climate change and energy” “and the centrality of [their] work as educators and researchers.” Without a well-financed university endowment, the university would not be able to afford the research necessary to investment in these environmentally sound practices.
In the decision process, the board members also recognized their fiduciary responsibility to their institutions. As with pensions, university board members have an obligation to the beneficiaries of the endowment and must recognize that their decisions need to reflect what is best for the benefactors’ future. For academic institutions, that responsibility means being able to provide well-resourced educational opportunities for all present and future students.
These recent decisions by well-respected institutions underline the reality of divestment. It’s not an action to be taken lightly and has resulting consequences that will impact all beneficiaries of the portfolio. Fortunately, these universities understand this reality and the responsibility they have towards their respective universities.