University Endowments – Fidicuiary Duties – Whose Money is it — What Are “Societal” Responsibilities?
Posted on November 24, 2014 by Hank Boerner – Chair & Chief Strategist#Alice M. Chaney #Apartheid #Ben Geman #Beth Dorsey #climate change #Divest Harvard #Divest-Invest #Drew Faust #Exxon #ExxonMobil #Fossil Fuel Divestment #Fossil Fuels #Global Warming #Harvard Climate Justice Coalition #Harvard Law School #Harvard Management Company #Harvard University #John D. Rockefeller #Ken Cohen #Neva Rockefeller Goodwin #Norway Pension Fund #Norway Sovereign Wealth Fund #Peter O'Neil #Rockefeller Brothers Fund #South Africa #Standard Oil Company #Stephen B. Heintz #Stranded Assets #Sudan #The Guardian #The Wall Street Journal #Wallace Global Fund #World Council of Churches
by Hank Boerner – Chairman, G&A Institute
Many of our nation’s colleges and universities — which are “Social Institutions” — have long had established endowments. Some are truly wealthy — these are pools of assets designed to serve future generations. Other types of various types of social institutions” are similarly wealthy. Endowment assets are managed in-house or by outside professional money managers. Over the years, the college and university endowments have been in focus for sustainable & responsible investors (SRI advocates) — as they are right now.
For example, Harvard University has an endowment fund reported to have US$36 billion in Assets Under Management (AUM) — the largest of these “funds-for-the-future” of the higher education community in the USA.
The students and other stakeholders would like to see “more responsible” investing by the Harvard endowment, such taking the decision to divestment shares of traditional fossil fuel companies in the portfolio. (think: “ExxonMobil“). Among the arguments, gaining ground. including beyond the university endowments discussion, is that these public companies have “reserves” (such as coal, oil, natural gas) that are important parts of their capital markets valuation, and with climate change and the development of renewable fuel sources and other factors, the reserves on the balance sheet will over time become “stranded assets” – thus, devaluating the business enterprise. That is, the coal or crude oil in the gorund will not be harvested and sold…they will be stranded and of little or no value. And therefore, as fiduciaries, responsible for the fund in the future, a collision course is set up: the fund needs in 2050 will be diminished as the value of the corporate holdings moves downward.
And so, students of the Harvard Law School have filed a lawsuit seeking to compel the endowment fiduciaries (the trustees) to divest holdings in fossil fuel enterprises. Interesting: their case is based on 17th Century transactions (back when whale oil and wood were the primary energy sources). In 1640, Harvard College was established as a seminary and documents were filed with the Massachusetts Bay Colony. Under those documents, the 21st Century students argued that they had standing (to bring the action) under “special interest” provisions.
The endowment leadership responded: “The endowment is a resource, not and instrument to compel social and political change…” (The New York Times). Harvard President Drew Gilpin Faust has spoken on fossil fuel divestment. In October 2013, a statement to the Harvard community said in part: “[I] and members of the Corporate Committee on Shareholder Responsibility have benefitted from conversations [with students] who advocated divestment…while I share their belief in the importance of addressing climate change, I do not believe, nor do my colleagues on the Corporation, that university divestment from the fossil fuel industry is warranted or wise…”
The president also said that “…especially given our long-term investment horizon, we are naturally concerned about ESG factors that may affect the performance of our investments now and in the future…” Harvard policy is engagement and collaboration, rather than “ostracizing” companies based on their product (such as fossil fuels). The Harvard Management Company brought on a VP for sustainable investing. (You should read the full statement here: http://www.harvard.edu/president/fossil-fuels to understand the university’s official position on these issues).
Alice M. Chaney, who with six other Harvard students filed the lawsuit to compel Harvard Corporation (the governing body of the university) to divest fossil fuel companies, said the following: “We allege that Harvard’s investment in those companies violate its duties as a public charitable institution by harming students and future generations.” (Cheney is a law school student and member of the Harvard Climate Justice Coalition.)
The students — organized as “Divest Harvard” — have been campaigning on the issue. The first step was a survey of students in 2012 — 72% at the college and 67% at the law school voted in favor of divestment. Since then 200 faculty members, 1,000+ alumni, and 63,000 community members have signed divestment petitions, the group says.
The legal arguments: the Harvard Corporation’s public charitable obligations include managing its endowment so as to protect the ability of Harvard students to learn and thrive. The Corporation also has a responsibility not to act in ways that threaten the health and welfare of future generations. (You can read her statement at: http://billmoyers.com/2014/11/22/suing-harvard/)
The pressure on universities to divest holdings in companies based on ESG issues is a long-time tradition. American university interests were deciding factors, I believe, in the American and global campaigns to abolish Apartheid practices in South Africa in the 1980s and the aid to combatants in the civil war in Darfur more recently. (The drive was to get investors out of the stock of US companies “supporting” the Sudan government which was making war on its own populations.)
Beth Dorsey, CEO of Wallace Global Fund and leader of the Divest-Invest Movement, commented on the Harvard University leadership’s opposition to divestment: “In the last great divestment campaign, Harvard said ‘no’ before it said ‘yes’ and I think if just a matter of time. Unlike the anti-apartheid movement, this is not just an ethical issue. There is a powerful financial reason as well…”
As the lawsuit in the Commonwealth of Massachusetts / Suffolk County courts winds on, and the Divest Harvard protests continue, half a world away, the world’s largest Sovereign Wealth Fund – the US$800+ billion AUM Norway Government Pension Fund — just announced it will divest holdings in coal mining companies. the list of companies will be made public on December 1. The SWF will not divest oil and gas companies. (Consider: the wealth of the wealth fund is primarily based on taxes on the country’s North Sea fossil fuels.)
While you think about that last tidbit, consider that the descendants of John D. Rockefeller — the 19th Century Titan of Industry who assembled the giant Standard Oil Company — have decided to divest their fossil fuel investments (in September 2013)! Great and great-great grandchildren Peter O’Neil, Neva Rockefeller Goodwin and Stephen B. Heintz are in the lead for the Rockefeller Brothers Fund, which has $860 million AUM.
Said Stephen Heintz: “John D. Rockefeller, founder of Standard Oil, moved American out of whale oil and into petroleum. We are quite convinced that if he were alive today, as an astute business man looking out to the future, he would be moving out of fossil fuels and investing in clean, renewable energy…” (More about this in The Guardian coverage of the announcement at: http://www.theguardian.com/environment/2014/sep/22/rockefeller-heirs-divest-fossil-fuels-climate-change)
The Rockefeller family announcement was an important part of a “momentum moment” for fossil fuel divestment proponents. The influential World Council of Churches joined the divestment movement. American cities are adopting similar policies (as many did in the anti-Apartheid movement). Advocates are working under the umbrella of the Divest-Invest Movement. To date some 800 institutional investors have pledged to withdraw more than $50 billion in fossil fuel investment over the coming 5 years.
ExxonMobil’s position? In October The Wall Street Journal headline read: “Exxon Blasts Movement to Divest From Fossil Fuels…the oil giant seeks to counter the campaign…” The article by Ben Geman said that the company published a “lengthy attack about the divestment movement, positioning the argument that [the movement] is at odds with the need for poor nations to gain better access to energy, as well as the need for fossil fuels to meet global energy demand for decades to come…” The author is Ken Cohen, VP for Public and Government Affairs (writing in the company’s blog.)
“Almost every place on the planet where there is grinding poverty,” he wrote, “there is energy poverty. Wherever there is subsistence living, it is usually because there is little or no access to modern, reliable forms of energy.”
And so, the battle lines are formed — advocates vs. university, asset owners (and managers) vs big fossil fuel companies, institutions and fiduciaries (in Exxon’s view) vs. the people of poor nations.
The positions (and actions) of two important institutional investors could create a tipping point: Harvard University (with considerable wealth, influence, prestige, powerful alumni, world-class faculty, a powerful publishing arm and on and on) and the Norwegian Sovereign Fund, which invests in literally thousands of public companies…and soon will have $1 trillion in AUM to leverage in pursuit of its social / societal issues policies and investment actions.
Stay Tuned to the Fossil Fuel Divestment Movement…and the push back by giants of the fossil fuel industry and their allies in the US Congress and other power centers.