Board of Trustees rejected 2014 committee report recommending fossil fuel divestment

On the evening of October 13, I was anonymously sent a copy of a 2013 report authored by the Advisory Committee on Socially Responsible Investing (ACSRI) as a recommendation to the Finance and Investment Committee of the AU Board of Trustees. The report isn’t listed on any sect of the AU website, but a quick Google search of the exact content verbatim showed that it is online, albeit buried in obscurity—the ACSRI report is not accessible through the ACSRI homepage, the Finance and Investment Committee homepage, or the Board of Trustees homepage, nor is it accessible through a wide database search. The report was simply a media upload without any tags. It’s a public document, but it’s difficult to locate.

The ACSRI’s report, first submitted to the Board of Trustees in April of 2014, several months before the Board's November meeting, recommended that divestment of fossil fuel companies from the university’s then-$506 million endowment was not only economically feasible, but that it was also potentially in line with the university’s duties surrounding “fiduciary responsibility,” a term used to describe the prudence that comes with managing the university's endowment funds in terms of investment. What led to the the report's ultimate rejection, however, was the exact opposite: the possibility that divestment would hurt future endowment returns and to turn away crucial donors, and thereby violating the university’s fiduciary duties.

In 2013, 4.1 percent of the university’s endowment was invested in fossil fuel companies. Today, AU’s exposure to fossil fuel companies is comprised of a total of $18.8 million of a $703 million investment pool, or approximately 2.7 percent of the $647 million endowment, according to data provided to Fossil Free AU by AU Chief Financial Officer Douglas Kudravetz.

Over the course of a little over a month, I talked to a number of individuals who were either directly or indirectly involved with the ACSRI report, as well as the push for divestment spearheaded by Fossil Free AU’s organizing which culminated in a vote in November of 2014.

The ACSRI report starts with an introduction of its recommendation and a general rundown of its conclusions. Next came two clearly defined and recurring thematic tones: a financial argument affirming the importance of fiduciary responsibility, and a compelling social argument built on re-affirming the responsibility that comes with investing.

I went to Professor Jeff Harris, co-chair of the ACSRI and the current chair of the Finance Department in the Kogod School of Business, who was consulted in crafting the financial framework. After Prof. Harris, I went to Professor Paul Wapner, another co-chair of the ACSRI who authored much of the text in the 2014 report and is currently an Environmental Policy Professor in the School of International Service. Prof. Wapner crafted much of the social framework of the divestment recommendation.

The Great and Expensive Disentangling

AU’s investment portfolio is not available to the public in any capacity, and for an understandable reason: you don’t want other investors knowing what you’re invested in. (You don’t want other parties knowing who’s at your party.) Every member of the ACSRI I talked to told me they had signed non-disclosure agreements with the university, most stringently on the specific funds and companies that AU was invested in.

Prof. Wapner told me that in 2013 and 2014, when the Board was considering divestment, the ACSRI was given considerable access to the university’s books with the sole purpose of conducting research and writing a recommendation on the proposed divestment measure. The committee’s report is competent, it’s considerate, and it takes into account most, if not all, of the Board’s concerns surrounding the issue.

[I wrote a surface-level article about divestment last year covering this; read it here.]

The far smaller portion of the university investments that aren’t commingled make up the university’s private equity. Professor Jeff Harris estimates that 5 percent of the university’s investments are in private equity—direct, private investments to companies or mutual funds that aren’t listed on public exchanges. “In private equity investments, you commit capital, and you let a portfolio manager decide where to put that money,” Prof. Harris explained. “When an opportunity comes up and some private equity money hasn’t been dispersed, the portfolio manager might invest in it.” When I asked him whether or not the university or its advisors have more deciding power with respect to managing the portfolio, Prof. Harris replied, “A combination of the two. Our Treasury Office works with the managers, so they interview, vet, and choose managers, and Cambridge [Associates] is one of the advisors.”

Outside of commingled and private assets, but overlapping with both of them, is Real Assets, which is its own collection of certain industrial assets—real estate, oil, etc. Prof. Harris specifically told me that AU has zero direct investments in oil and gas, which means that there are no Carbon Underground 200 companies in the university’s private equity portfolio—which brings me to the university’s commingled investments. (To clarify, private equity is direct investment and commingled assets are indirect and broad investments.) The university’s indirect exposure to fossil fuel companies comes solely from its commingled assets, made up of a number of public, indirect mutual funds, index funds in particular.

A mutual fund uses a pool of capital to invest in a diversified catalog of assets. An index fund, as its name suggests, is a nonindependent type of mutual fund whose baskets of publicly traded components are linked to some sort of publicly listed financial index. What makes both of these so financially juicy is that they’re an avenue through which broad market exposure can be acquired by an investor at lower cost and with lower risk. In other words, these types of commingled funds are a cheap, safe, and reliable way to acquire equity in a number of top-performing companies and ensure returns. If you’re an institution with hundreds of millions of dollars to invest and you want to invest broadly in the stock market, then the mutual fund (more specifically, the index fund) is where you would start. Or, if you have sensitive responsibilities that compel your financial sustainability—let’s say you’re an education provider—the index fund or the mutual fund is where you would likely remain, because of the financial longevity that comes with both.

I asked Prof. Harris specifically if AU was invested in any independent, private mutual funds—or worse, hedge funds, which is unlikely due to the high-risk, short-term style of investing involved, engaged in by universities like Yale. (The components of an independently-managed mutual fund are private, not linked to financial indexes, or both.) As far as he knew, Prof. Harris told me, AU was invested in neither.

Regardless of the financial longevity of the index fund, however, there are two caveats to buying these types of bundled portfolios. Firstly, when you buy into an index fund, you buy into all its components—which very frequently include socially irresponsible companies. Secondly, if you want to disentangle those socially irresponsible companies from the index fund—a.k.a. if you want to divest from those companies—it would be quite complex, and therefore expensive, to do so.

The ACSRI report lists a number of potential routes the university could take in rerouting money that was indirectly invested in fossil fuel companies. “Let’s say you buy the S&P 500 index,” Prof. Harris explained. “ExxonMobil is gonna be about two percent of that portfolio.” The first method suggested that the university simply work with its financial advisors to remove fossil fuel companies specifically from its index portfolios. Prof. Harris explained why it was the weakest option. “One of the problems with entangling from an index fund, which is a very cheap way to invest in a broad range of securities, is that it’s more expensive [to withdraw].”

“There’s a couple ways you can approach this,” Prof. Harris continued, speaking of a number of avenues the university could take with the specific goal of minimizing the cost of divestment. “One of them is to immunize the portfolio and take out the effects of fossil fuels. Another one is to shift all those investments into assets that didn’t have fossil fuels, so—sell off the index fund and buy another one.”

The report outlines one particular negative-screen recommendation for the university to “instruct managers with separately managed accounts to remove investments in the top publicly traded fossil fuel companies as identified by Cambridge Associates, the university’s major financial advisor, MSCI [a financial service provider] or the Carbon Tracker Initiative and continue to screen future investments accordingly,” which meant to just sell off the index funds that included fossil fuel companies and explore fossil-free portfolios.

“Instead of investing in these indexes and shorting out, [the administration] could go into socially responsible funds that just didn’t take the index,” Prof. Harris explained. However, he also concedes that that is the weakest footing for a divestment recommendation, and therefore the suggestion that the Board would have crossed off first. “The point on that, however, was that it would be a lot more expensive,” he said. “If you want to try to immunize, or try to take out the effects of oil and gas firms—Chevron, ExxonMobil, whatever it might be—from the index itself, you could theoretically do that, but you’re sort of in a long position and you’d have to sell short or sell off from the index, when you don’t really own the shares. And when you sell short, you’d have to pay interest. And if somebody wants the shares back, you’d have to buy them back. So, there are quite a few transaction costs involved.”

The expenses required for a change as ambitious as full, complete divestment, all at once—including consulting and management fees, among many untrackable others that permeate the world of big-boy investing—would amount to approximately $1.1 million a year, according to the most recent estimate provided by the administration. If you factor in potential risk-adjusted losses on returns and the interest accrued over the longevity of shorting off fossil fuel shares from the commingled portfolio, it would cost the university over approximately $5 million a year to compensate—but only if the effects of divestment were to be as bad as they could possibly be.

Understanding the university and the Board’s rebuttals on the divest-reinvest point, the ACSRI report goes on to suggest that the Treasurer’s Office work with financial consultants to continuously “monitor the market for new fossil-free investment opportunities” and to “actively seek replacements for each asset class as they became available in the marketplace.”

Buying into index funds are low-risk and low-cost—but only if you were buying the portfolio and committing capital, not if you were planning on immunizing something from the portfolio or considering a shuffle of financial priorities; that would require a full re-evaluation, which Prof. Harris explained earlier would carry a hefty price tag, and would therefore never receive approval from the Board of Trustees. Therefore, the ACSRI had to consider other possible routes that perhaps couldn’t hit the divestment issue as poignantly as faculty and student activists had hoped it would. More on this in the next section.

Arguments made against divestment are often based on the supposition that AU wouldn’t be doing any damage to the pocketbooks of fossil fuel companies by divesting, nor would it effect any real impact on climate change. One former student argued in The Eagle in 2013—the height of the divestment movement in university history—framed the issue of fossil fuel divestment with respect to the South African apartheid divestment movement throughout the late 1900s, writing that support of university endowments as social actors ended at the fact that “divestment has no empirically measurable impact.” To that point, the ACSRI clarifies one of its central objectives in recommending a prudent divestment strategy. “The proposed divestment policy aims not to bankrupt fossil fuel companies,” it reads. “Rather, it seeks to alter the balance of legitimacy regarding carbon-based fuels and spur innovation in green technologies.” The report suggests that for smaller, more sustainable energy companies, a reinvestment strategy would not only constitute a dissociation from environmental malpractice, but also a reaffirmation of fiduciary responsibility—as well as a challenge to lead by example.

“There was always talk about having a positive screen where instead of just avoiding fossil fuels, we would point the endowment toward solar power or toward wind energy, which would be more proactive,” Prof. Harris said. “Instead of avoiding oil and gas and investing in other stocks, we would continue avoiding oil and gas and maybe direct investments toward [renewable] energy sources.”

“While large fossil fuel companies may be insulated from minor shifts in investments, small sustainable energy companies are particularly in need of greater capital,” the report continues. “Altering AU’s portfolio in ways that lead to greater investment in wind, solar, hydroelectric, and other renewable sources of energy would help advance the green technological revolution.”

I asked Prof. Harris if he believed the ACSRI report, through the proposed green investment fund, refutes the idea that the university can’t afford to divest. “No, I think the report is written in that context,” he replied. “To provide options for the university to go one way or the other. I think when push came to shove on divestment—we don’t have that much exposure, so we’re not providing much capital toward [fossil fuel companies] anyway—there was talk about what the objective was: someone has given us their money to steward in higher education and so that’s where this separate fund might’ve caught the Board’s attention.”

Prof. Harris speaks of an avenue spotlighted by the report, which suggested to the Board that a fossil-free investment fund be created and available for alumni to choose more proactively where their money is going—or more fittingly, where it isn’t going. “The recommendation that was followed up on by the Trustees was to offer that objective to our alumni,” he explained. “Anybody who was donating to AU could choose to put their donations into something that was immunized from fossil fuels.” The suggestion, Prof. Harris thinks, represents an attempt to define the core objective of divestment.

The ACSRI’s proposed design looked something like this: if a pro-divestment alumnus wanted to make a monetary contribution to the AU endowment, they could place a tag on their donation and their money would be placed in a separate fund managed accordingly by the university, the accruement of which would be set aside for investments in fossil-free portfolios. Fossil Free AU today is conducting a similar action through the Responsible Endowment Fund, which—according to one of its senior members, Gracie Brett—is tasked with rallying alumni support for the same purpose, through a similar concept. “In the past, alumni haven’t made a huge push to get us out of fossil fuels,” Prof. Harris told me. “But that doesn’t mean we shouldn’t.”

Approving of the creation of the fossil-free investment fund strategy offered by the ACSRI, Jeffrey Sine’s memorandum following the November 2014 vote on divestment stated that “AU's investment advisors will help review and evaluate managers with input from ACSRI, an appropriate fund will be chosen, and the University will make it available for donors who specifically choose a green fund.” With respect to the “something” to Prof. Harris referenced earlier to alternative fossil-free investment solutions, “partial divestment,” as the ACSRI and a number of administrators call it, has become and remains central to the discourse over climate justice on college campuses today.

“One of the things that overlays on the endowment [in the context of divestment] is that the endowment is also used as a source of funds for the university’s operations,” Prof. Harris continued, commenting on the administration's tendency to oppose divestment out of fears of financial insecurity—something I wrote about in late August regarding the AU budget for the fiscal year 2019. “I think the Treasurer is worried that we’re taking some percentage of that endowment and giving scholarships and faculty—funding for some our green efforts on campus come from the endowment,” he continued. “So, $5 million a year of management fees, transaction fees, or short-selling fees and all the things you need to do to provide for the financial arrangements [aren’t helping that].”

Between 2012 and 2015

The last time divestment was given serious consideration was approximately five years ago when the Board of Trustees voted against the action in November of 2014. Fossil Free AU, a relatively new club at the time made up of around five to ten undergraduates, had run a two-year campaign beginning in the fall of 2012. “We met with administrators, with President Kerwin and Gale Hanson, who was the Vice President for Campus Life at the time. We also met with a couple of Trustees,” Kate Brunette, a founding member of Fossil Free AU and a co-chair of the ACSRI from 2013 to 2014, told me. What the ACSRI found during those meetings was a granular understanding of how the university invests (which I covered earlier in this article), including the levels of exposure to fossil fuel companies between investment categories—mutual funds, index funds, Real Assets, as it were—as well as the reasons why the administration and the Board of Trustees would ultimately feel itselves to be too financially insecure to approve of divestment in the future.

Brunette was a co-chair of the ACSRI, which was created by the Board of Trustees in mid-November of 2013, and held a substantial role in writing the report that was ultimately brushed aside by the Board—the report that was sent to me. “Over the six months after the committee was put together, we met with the Budget Office, we gave presentations to Cambridge [Associates], and we also used personal research,” Brunette explained of the process.

“When we were given the data sheets and signed non-disclosure agreements, we found that the university isn’t all that invested in fossil fuel companies,” she admitted. According to the ACSRI report, around $20,531,984—about 4.1 percent of the AU’s then-$506 million endowment—was invested in fossil fuels as of September of 2013. During the time period, that exposure level was relatively average compared to some of AU’s peer universities, like Syracuse University and New York University. “The important thing to keep in mind for us,” Brunette noted, “was that [the low exposure level] meant the cost was small enough to be justified morally.”

I talked to a total of five former students involved in the 2014 push for divestment, and most of them knew that the ACSRI report wasn’t a central talking point during the campaign. “The report was walky, for lack of a better word,” Thomas Meyer, another founding member of Fossil Free AU and a close colleague of Brunette’s, told me. “Certainly, for our campaign, we wanted to make it a big deal, but it was just a concurrent thing that was happening.”

Instead, Fossil Free AU’s priority starting in early 2013, Brunette told me, was building a strong base of student support, and the ACSRI report was a way to get them there. When the Fall 2013 semester arrived, Brunette told me, “We realized we had an opportunity to develop an inside-outside strategy influencing the [ACSRI] to prepare a pressure campaign.” From the remainder of 2013 into the beginning of 2014, Fossil Free AU mobilized to apply pressure to the administration around the committee’s recommendation. “We also had a lot of support from student government,” Brunette added. Meyer recalled, “I remember at the time, we also had a student body president and student trustee and student body treasurer who were all pretty broadly supportive of it. That was the one of the first big campaign pushes, to get an official nod from student government on divestment.”

Fossil Free AU’s efforts were especially focused on running a referendum to identify the level of support the campus was lending to the divestment movement. The Eagle quotes Brunette in an article published in late January of 2013, “The campaign hopes to get 600 signatures from students to make a fossil fuels referendum through Student Government.” After the Undergraduate Senate approved the motion in March, a student referendum was scheduled on April 2nd and 3rd. It passed, with 79 percent of the student body voting in favor of fossil fuel divestment.

The ACSRI report was sent to the Board of Trustees on April 24, 2014. “We had hoped the [Board of Trustees’] vote would happen in May 2014,” Brunette told me. It didn’t. It was scheduled, instead, for the second of two Board meetings happening in the Fall of 2014. “For that final meeting in May [2014], we had planned and executed an action, we did a sit-in outside the Board meeting in front of Kay [Spiritual Center],” Brunette said. “I didn’t know they had scheduled a vote in May. Otherwise, we wouldn’t have done that action.”

“[The Board] wouldn’t really ever tell us when they were going to vote,” Meyer told me. “We always tried to ramp up pressure before any Board meeting, not knowing whether they were going to vote at that meeting or not.” The Board of Trustees’ meeting agendas are still publicly inaccessible to this day.

When the November 2014 meeting came around, Brunette, Meyer, and a number of original divestment organizers had already graduated. Rebecca Wolf, a second-year student at the time and also a founding member of Fossil Free AU, however, had one more year left. The highest point of escalation between Fossil Free AU and the Board of Trustees, she told me, was on the day of the Board’s November meeting, when a fervent rally was organized outside of Kay Spiritual Center. “We staged a takeover of the mic to hold it the entire time. When the Board members were leaving, students blockaded them in,” Wolf explained. “We had built a faculty coalition, the biggest student coalition in 50 years, organized the biggest rallies on campus in 50 years, and we were the top political school in the country.” Fossil Free AU’s rally outside Kay on November 21, 2014, was covered by a number of popular media outlets, including Reuters and the Huffington Post.

When I asked Wolf how she knew the Board was planning to vote at their November meeting, she replied, “We suspected.” Essentially, they guessed. “During the rally, we, the organizers, weren’t really doing anything,” Wolf recalled. “It was very student-driven. The intensity of the campaign and the intensity of the organizing. The ACSRI report had already been out and [the Board] said no.”

I wrote in the last section that the ACSRI had to modify their divestment arguments to accommodate fiduciary duty that perhaps couldn’t hit the issue as poignantly as on-campus activists had hoped it would. I asked Wolf why the report wasn’t utilized as a main player in the campaign for divestment. “The general consensus everybody generally already knew what was in that report,” she replied. “[The Board members] were always continually bringing up and hiding behind the ‘fiduciary responsibility’ argument. Kate [Brunette] played nice with the people on the President’s Board, she played the inside game and responded to that ‘fiduciary responsibility’ argument through the ACSRI.” Fossil Free AU’s job was radical protesting, Wolf told me, because the ACSRI’s style wasn’t enough and simply wouldn’t effect change. “If we could have won by being right, we would’ve won already,” she explained. “It’s all about power. We had to do something more radical and action-based, because the mechanism we were fighting against is all about power, not logic or morals.”

Jeffrey Sine’s memorandum, published Nov. 21, the same day of the vote, cited a crucial defining aspect of the decision: the recommendation from Cambridge Associates, the consulting firm that advises AU on its investment strategy. “The committee asked the university's investment advisors, Cambridge Associates, to review how divestment from the Carbon 200 would impact risk adjusted investment returns,” the memo reads. “The Cambridge advisors could not provide assurance that divestment was unlikely to have an adverse effect.” However, on November 20, 2014, one day before the meeting, Cambridge Associates announced that fossil fuel divestment was a doable financial venture it would embrace, if the Board were to vote in that direction. The same day, Fossil Free AU sent a letter to Neil Kerwin, Doug Kudravetz, and Jeffrey Sine with Cambridge Associates’ announcement. Meyer summarized the letter and its motivations to me. “Our view on that was basically: AU is paying Cambridge to manage its investments,” he said. “Cambridge is, therefore, the university’s customer, and should follow the university on what it decides to do with its endowment.”

On November 21, 2014, the day after the letter was sent, the Board voted against divestment anyway.

I reached out to Joe Ste. Marie, who served as student trustee during the 2014-2015 academic year. In many respects, he has a grasp on how the divestment push looked like from the Trustees’ end. “The thing to understand is that this was a different way of doing business for the Board,” he told me. “This was a real challenge. People viewed fossil fuel divestment as an attesting to this idea of shared governance. There are a ton of private universities where divestment would have never even been considered. The finances were probably just where they weren’t supposed to be.”

Right before the Board voted down divestment, their disposition was “this may be viable in the future, but we can’t do this right now without hurting the endowment,” Ste. Marie told me. “The entire divestment issue revolved around wanting to balance the principles of divestment with the finances of it,” Ste. Marie explained. “The evidence the [ACSRI] brought to the Board was just as seriously considered as what the administration brought to the Board. It was extensively discussed and it mattered a lot to Jeff Sine to engage the students on this issue. But before he could do anything else, he had to observe the fiduciary duty first.”

The fiduciary duty of the university is upheld and enforced by D.C. law. If the Board of Trustees receives a proposal for divestment and the university administration