What is Divestment?
Divestment is the practice of excluding certain companies or industries from an investment portfolio for ethical, financial, or social goals. For example, an investor may decide to screen out companies involved in tobacco, alcohol, gambling, weapons manufacturing, nuclear power, fossil fuels (coal, oil, gas, etc.), and human rights or environmental abuses.
What is the difference between divestment and negative screening?
Divestment is the act of removing investments in a particular industry for a given objective, and is usually part of a wider movement addressing some form of social inequality. Such was the case in the divestment campaign against South African Apartheid, and in the modern divestment movements from fossil fuels, prisons, and more.
Negative screening is the method used by investors to exclude industries, firms, companies, or other investments from their investment portfolio. Negative screening would be the way to implement a divestment mandate, but it is only half of the goal of the fossil fuels divestment campaign – we must also invest into sustainable initiatives, green energy, and the social economy if we are to truly combat the climate crisis!
What kind of institutions are divesting?
FAITH-BASED GROUPS: 25%
GOVERNMENTAL ORGANIZATIONS: 19%
COLLEGES, UNIVERSITIES & SCHOOLS: 13%
PENSION FUNDS: 12%
NON-GOVERNMENTAL ORGANIZATIONS: 6%
FOR-PROFIT CORPORATIONS: 2%
What is ‘fiduciary responsibility’, and does it prevent us from investing responsibly?
Fiduciary responsibility, or fiduciary duty, is a legal term meaning that the trustees must act in the best interest of the institution. At many schools, this means maximizing short-term returns at the expense of all other factors. Many administrators justify this policy by stating that any other course of action would be breaking their legal responsibility. Fortunately, this interpretation of fiduciary duty is a fallacy, as evidenced by the leaps and bounds that many schools and other institutional investors have taken to align investment and values, whether it be in low-carbon index funds, engaging in shareholder activism, community investing, or other initiatives.
There are many success stories we have seen that cross different communities, belief structures, and asset allocations, and none have violated fiduciary duty. There is no one single definition or interpretation of fiduciary responsibility (the legal responsibility of managing the school’s money), but we believe it should not mean maximizing profits at the expense of the environment, human rights, and the community’s own policies or values. The fiduciary responsibility to act in the interests of stakeholders, for example, makes little sense without a commitment to inter-generational equity – a cornerstone of sustainable investment. Our university has both the opportunity and the obligation to recognize that responsibility means looking beyond immediate, short-term, unsustainable and morally untenable ways of generating profits and returns.
Can we invest responsibly and still get competitive returns?
It’s important to recognize a few facts about responsible investment and returns to address this question:
“Responsible investment” is a broad umbrella term encompassing a huge variety of investment strategies (community investment, low-carbon index funds, investors engaged in governance, etc.) that can perform, on average, at above-market rate returns, below, or on par. To say “responsible investment loses money” is a massive oversimplification.
In addition, there is a difference between “making less in returns” and “losing money.” For example, many institutions have made investments in their community, some of which have been at market rate, some of which have been below — but they still have done them anyway — as a fulfillment of their mission and as a smart investment to benefit both the school and its surroundings. They may have made 2% instead of 4% off of these investments, but they still have acted as stewards in good faith without exposing themselves to risk, loss, or controversy. Actors in higher education should take note of the successful institutions already integrating responsible investment, from Columbia to Macalester to the University of Wisconsin, and more.
Furthermore, many socially or environmentally responsible investments address risk — a key investment concept — in a much more comprehensive way that short-term ways of thinking may not. For example, by reviewing the governance practices of their investments, many socially responsible investors recognized the failures of oil giant BP long before the 2010 oil spill, and divested. By doing so, they may have missed out on huge profits leading up to the spill — but they also dodged huge losses. Likewise, by choosing to focus on sustainable investment, environmentally conscious investors are trying to avoid the biggest risk of all — that of climate catastrophe.
The Forum for Sustainable and Responsible Investment has compiled a good amount of data on responsible investment and returns, if you would like to dig deeper.
How is my school investing its endowment now?
Concordia invests approximately $11-12 million in fossil fuels and related industries. Schools invest not in just one kind of asset (say stocks in a company) but in a variety of different assets. Within each asset class there are a variety of existing irresponsible investments, such as banking with an oil company that just forcibly expelled Indigenous peoples to make way for a toxic pipeline, or investing in a plot of land that actually belongs to someone else. So instead of envisioning a list of companies, it’s better to imagine a breakdown of different types of assets — also known as an asset allocation.
What this means is that many universities and other institutions are invested in almost all of the worst environmental and social offenders — from private equity funds that invest in private prisons, to hedge funds that invest in ‘land grabs’ in Africa, to coal and oil companies that poison front-line communities and cause climate change. You can get an asset allocation by doing some research, but little else.
If you would like to see a full breakdown of how Concordia University is investing its endowment fund, check out this report produced by Concordia professor Erik Chevier.
How can endowments
be more transparent?
A transparent endowment isn’t as simple as pulling out a list of companies in which your college invests (see “How is my school investing its endowment now?” above.) There are a number of ways we can be more transparent investors, though, such as:
Releasing information about what direct holdings the school has (whatever assets haven’t been outsourced to other money managers.) This could be information about what stocks the university is invested in, or what banks the school is putting its cash in.
Sharing with the community in a more public and transparent fashion the asset allocation of the endowment, and what each piece means.
Going public about investment policies (responsible or otherwise) the school uses to guide its decision-making.
Releasing information about the external fund managers that the school outsources much of its money management to, the nature of their investments, and what, if any, their responsible investment policies are.