Practically Divesting

Pitzer College won lots of green praise last week when it announced -- complete with a press conference featuring Robert Redford -- that it was getting rid of its fossil fuel holdings and embracing a more environmentally sound investing policy.

Before Pitzer decided to get rid of over 80 percent of its fossil fuel investments by the end of the year, its trustees concluded the selloff wouldn’t make much financial difference in the long run, but they didn't need to feel obligated to make decisions about investment policies with the sole goal of maximizing the size of the college’s endowment fund.

Pitzer, which is set to become the college with the largest endowment to try to divest itself of traditional energy stocks, is charting a course that is sure to inspire activists. Divestment advocates are urging colleges across the country to dump holdings in oil, gas and coal companies that sell climate-changing commodities.

All but a handful of colleges -- generally those with small endowments -- have waved off divestment efforts, citing their obligation to diversify their portfolios, reduce risk and to best serve students and faculty by attempting the greatest possible growth. College officials also talk about the headaches of removing money from index funds that include fossil fuel companies and having to wrestle with questions about where to draw the between companies it’s O.K. to invest in and those it’s not.

Pitzer’s plan does not include full divestment in the immediate future, however.

At Pitzer, the Board of Trustees settled on a different approach than other boards, said Donald Gould, the head of the board’s investment committee. Gould, whose day job is running a $400 million asset management company, said the trustees came to two conclusions that made them comfortable enough to unload most – but not all – of their energy stocks by the end of the year.

First, he said they figured the ups and downs of energy stocks will not make much difference for the college in the long run. He cites a report that found a broadly diversified but carbon-free portfolio could perform about the same as a portfolio that included fossil fuel companies – although other studies have come to other conclusions.

“The difference was very minimal, and there’s nothing to say we won’t reinvest our assets in something that does better than energy stocks – that will clearly be our goal,” Gould said.

Second, Gould said Pitzer’s trustees do not believe their mission is to grow the endowment to the exclusion of other concerns.

“Nowhere is it written – everyone asserts it – that the fiduciary duty of trustees is purely to maximize the endowment return,” Gould said. “And we could come up with all kinds of extreme examples of where it wouldn’t make sense.”

He said it would not make sense for a lung cancer institute to invest in tobacco companies and, so, it would not make sense for a college concerned about climate change to invest in fossil fuel companies.

This particular point could prove controversial.

Bill Jarvis, the managing director of the Commonfund Institute, which advises nonprofit investors and manages endowments, said the task of a fiduciary trustee is to maintain the purchasing power of donations over time. That would be hampered if an institution avoided certain investments for non-financial reasons.

“I don’t doubt his sincerity,” Jarvis said of Gould, “but the money is not his: the money is his in trust for the donor.”

Gould said a college like Pitzer, which prizes environmental sustainability, has a compelling interest to divest from companies that hurt the environment. He said a mining college might not be able to make the same case, but Pitzer can.

“When you wrap yourself in a fiduciary flag, it’s a bit like wrapping yourself in an American flag – it becomes un-American to object or challenge the assumption,” he said.

In California, where Pitzer is based, the law requires a nonprofit endowment fund to diversify its investment, unless it “reasonably determines that, because of special circumstances, the purposes of the fund are better served without diversification.”

Pitzer, whose board includes filmmaker and liberal activist Redford, has received a good deal of ink for its divestment decision, which sets it apart from most of its peers.

At Middlebury College, which is holding an ongoing series of campus forums about divestment, President Ronald Liebowitz said last fall there are too many unanswered questions about the implications of divestment. He also worried about the hit the college would take by totaling withdrawing from some of its investment funds, which are managed by an outside manager.

“Given its fiduciary responsibilities, the board cannot look past the lack of proven alternative investment models, the difficulty and material cost of withdrawing from a complex portfolio of investments, and the uncertainties and risks that divestment would create,” he said in an August letter to the campus.

At Pitzer, officials are sidestepping some of the complexities by gradually and not completely divesting their fossil fuel holdings.

Currently, about $5.4 million of investments in Pitzer’s $125 million endowment are in fossil fuel companies that will need to be sold off. About $4.4 million would be sold by the end of the year, meaning the college will be 99.2 percent free of fossil fuel assets, according to a college spokesman. But that’s still about $1 million invested in carbon industries. Gould said the college didn't want to dump large index funds or other investment pools just to get rid of the small part of them that include fossil fuel assets.

Another way of looking it at is that Pitzer is divesting roughly 80 percent of its current holdings in fossil fuels and planning to get rid of the rest when it’s practical to do so. That could take some time, Gould said.

Gould said it was better to do something than nothing and said “an absolutist form of divestment usually would be very disruptive to the portfolio.”

Even colleges that have chosen not to divest may only have a relatively small portion of their portfolio in fossil fuels. At Middlebury, the college’s fossil fuel holdings were roughly 4 percent of its portfolio, about where Pitzer is now.