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Sustainable Investing and the Preservation of Intergenerational Equity

Sustainable Investing and the Preservation of Intergenerational Equity

According to the 2013 NACUBO-Commonfund Study of Endowments, 7 percent of the 835 participants apply some form of environmental criteria to their endowment portfolio.

While the number of campus-based movements advocating for divestment from fossil-fuel companies or in favor of other environmentally sustainable investment practices continues to grow (350.org reports over 300 active campaigns at U.S. colleges and universities), relatively few institutions have changed their endowment management practices. Boards commonly cite a number of interrelated arguments against the application of social criteria to endowment portfolios:

  1. Our mission is education, not environmental protection.
  2. We have a fiduciary obligation to maximize the return on our investments and sustain the purchasing power of our endowment to support our programs, faculty, and students.
  3. Divesting from fossil-fuel companies will increase the cost of managing our endowment and divert the time of the staff and investment committee.
  4. A decision to avoid investments in fossil-fuel companies will exclude us from potentially lucrative investment opportunities and limit our choices of funds and managers.
  5. We don’t simply invest in companies. We invest with managers who employ complex alternative strategies or invest in funds of funds that don’t disclose specific holdings.
  6. We’re making long-term decisions about a fund intended to sustain the institution in perpetuity; we can’t respond to political or social movements that change each decade.
  7. Our past donors would object to our using their contribution to advance an agenda not related to their philanthropic purpose.
  8. The issue of climate change is politically divisive. A decision to divest might alienate potential donors.
  9. Divestment doesn’t work as a means of effecting change; if we don’t invest in a given company, someone else will.
  10. We could more effectively influence companies working in the fossil-fuel industries by exercising our rights as shareholders and voting proxies.

Proponents of the use of environmental, social, and governance considerations in investment decisions dispute most, if not all, of the concerns above. It may be tempting to dismiss calls for divestment from fossil fuels as the latest trend in a long history of student activism, but unlike previous divestment movements, current calls for institutions to invest in ways that advance environmental sustainability invite consideration of the larger implications of a board’s obligation to maintain intergenerational equity. Investment professionals are increasingly looking at environmental, social, and governance criteria as factors that influence the long-term value and potential riskiness of specific investments. Seen through this lens, sustainable investing could contribute to the preservation of intergenerational equity as both an endowment management objective and a cultural obligation.

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