What's in your wallet? Increasingly, endowment investments are subject to scrutiny
Photo / Tim Greenway
Spinnaker Trust's Sara Lewis, senior vice president, and Eben Jose, client adviser and portfolio manager, in their office in Portland.
If the fledgling fossil fuel divestment movement for endowments catches on, it will be in part due to the pioneering work of Unity College and investment advisers at Spinnaker Trust in Portland.
Two years ago, Unity, whose environmental studies curriculum has led to sustained enrollment growth at the college in the rural town of the same name, decided to remove all fossil fuel-related companies from its investment portfolio.
It's a move many colleges and universities, among other institutions, have resisted, in large part because of concerns that eliminating one class of companies from consideration will reduce diversification and, ultimately, compromise return on investment.
Melik Peter Khoury, executive vice president and chief financial officer at Unity, says the college was aware of the potential downside. “We made the commitment to become fossil-free, but not at the expense of the financial viability of the college,” he says.
Through the fiscal year ended June 30, Unity's endowment stood at $14.3 million. The three-year annualized return on investments in the endowment was 12.57%, compared to the benchmark of 10.83%.
Sara Lewis, senior vice president at Spinnaker, says Unity's decision to divest fossil fuel-related stocks wasn't a sudden or impetuous decision, but goes back to directives the college made as long ago as 2007.
“They've never liked 'big oil' as an investment,” she says. “The question we faced two years ago was whether we could go farther, whether it was possible to divest entirely.”
A changing portfolio
One of the challenges is that there is no standard index that excludes fossil fuel stocks. Petroleum and chemical companies are usually grouped in the energy sector, but coal, one of the largest sources of carbon dioxide emissions, usually appears under “basic materials,” which complicates the analysis.
Then there's the question of whether avoiding fossil fuel production is enough, and if there should be a preference for renewable energy-related companies, not all of which are in the business of generating wind, solar or hydroelectricity.
“If you're going to be thorough, you might want to consider an LED bulb manufacturer, or a carmaker like Tesla,” says Eben Jose, a Spinnaker client adviser who manages Unity's portfolio.
It turned out that Unity wanted to do all those things, which, considering that even relatively small endowments invest in hundreds of mutual funds and stocks, could be a daunting task.
“They gave us two years to do it,” says Lewis. “In fact, we were able to do it a lot faster than that.”
Jose says that the college provided a benchmark of no more than 1% of fossil fuel stocks would remain in its portfolio. Currently, that figure is down to just 0.12%, he says. In its initial outing, the Unity portfolio “has performed very well, exceeding our expectations,” Khoury says.
In part, that's because the past year “has not been a strong one for energy stocks,” says Jose. “They've taken a beating with declining petroleum prices.” Oil was $100 a barrel as recently as April, but has since dipped below $80, which has factored into the recent drop in gasoline prices at the pump.
But, as with all investment decisions, it's complicated. “If fossil fuel stocks are declining, that puts pressure on renewables, too,” Jose says. “That's the price they're competing against.”
Since Unity decided to divest from fossil fuel companies, Khoury says he's heard from other college financial professionals.
And other colleges have taken a similar action: College of the Atlantic in Bar Harbor; Hampshire College in Amherst, Mass.; Green Mountain College in Poultney, Vt.; and Stanford University in Palo Alto, Calif.
Khoury recalls a conversation with one endowment manager who expressed sympathy with the goal, but argued that “it just wasn't worth the time and effort it would take” to identify and track fossil fuel stocks.
“That is part of the question,” Khoury says. “If your investment advisers say it's risky or hard to do, you'll be less inclined to do it, whatever your perspective on investing.”
That hasn't been the case with Spinnaker, he says. “They were willing to put in the time, to do the research, to come up with good answers to our questions.”
Lewis says that Spinnaker's work with Unity hasn't produced any new institutional clients yet, but it has attracted considerable interest from individuals.
“We had one client who works at the University of Maine and was trying to convince them that divestment was a good idea,” Lewis says. “She wasn't successful, but then she decided 'I can do this myself for my own investments.'”
Social movement or business decision
Fossil fuel divestment is a new phenomenon in an investment community that traditionally values stability over change. Bill McKibben, founder of 350.org, the organization that both researches and advocates for solutions to climate change, refers to divestment as “the fastest growing social movement I've seen in 25 years.” But, thus far, its reach has been limited.
Some municipalities have divested from fossil fuel stocks. Seattle, San Francisco, Portland, Ore., and Oakland, Calif., have divested. In New England, communities that have divested include New London, Conn.; Providence, R.I.; and the Massachusetts communities of Cambridge, Concord, Framingham and Sudbury.
In September, the Rockefeller Brothers Fund turned a few heads when it joined a group of institutions in announcing it would divest its fossil fuel investments. The Rockefeller fortune was initially based on holdings of Standard Oil Co., which was founded by John D. Rockefeller.
Still, as Eben Jose puts it, it's a fair question whether the fossil fuel divestment movement resembles the de-funding of the apartheid regime in South Africa, which eventually ceded power, or more passing ideas such as eliminating gun manufacturers from portfolios.
Khoury says that, ultimately, the success of the movement will depend on how endowments and investment advisers view their responsibilities — and how attitudes shift over the course of the next generation.
“Ultimately, it's an ethical decision,” he says. He expects that the biggest players may not be financial professionals, but students. “If students decide to vote with their feet, to choose colleges in part based on how they make financial decisions, then change will accelerate,” he says.
A Mainer at Harvard
One Maine student made that her mission with Harvard University, the richest school in America, according to Forbes, with an endowment of $32.3 billion. A Harvard student, Chloe Maxmin, a native of Damariscotta and a graduate of Lincoln Academy, has led a grassroots organization, Harvard Community Action Community, in its efforts to convince the university to divest fossil fuel stocks from the endowment.
Harvard has resisted the call to divest, but Maxmin has nonetheless gained widespread attention for her efforts. In May, she was presented with the Samantha Smith Award by the Maine Women's Fund. Sarah Ruef-Lindquist of the Maine Women's Fund said Maxmin was cited for her “tenacious, bold actions,” which are “very inspiring to young people everywhere.”
Lewis of Spinnaker says she understands Harvard's resistance.
“With a small endowment like Unity's, it's relatively easy to work with a single manager,” she says. On the other hand, Harvard has at least 40 different managers, all of whom would have to get on board before the university could seriously consider divestment.
Khoury says that though Unity is solidly behind divestment, and is pleased by the results to date, he's concerned that the issue not become “an adversarial proceeding, because it doesn't need to be.”
The effect of divestment by a relatively small group of investors is not going to lead to the demise of large companies, he says. He offers as an example the reaction of McDonald's to the healthy-eating movement.
“People aren't going to stop going to McDonald's, but they are going to start [buying] salads and other options,” he says. As he sees it, the goal isn't to put companies out of business, but to change the nature of corporate investment.
He's also concerned that people recognize the tradeoffs and uncertainties of all forms of investing. “People talk about possibly losing money if they divest,” he says. Instead, “It might be a matter of seeing a 19% annual return, rather than 21%. If you're trying to wring every last iota of return out of your portfolio, you might reach a different conclusion than we have.”
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