Monday, November 24, 2014

Fossil Fuels, Investments, and the Public Good

Perhaps the most significant consequence of neoliberalism’s capture of public higher education is its reduction of everything to finance and money. And much of that narrowed focus is on relatively short-term returns. This narrowing of purpose and emphasis has affected many of the functions of universities. One of the more obvious is in the category of investments.

Most universities have a growing pool of money called an endowment from which they take the interest earned to support programs of the institution. This is a good thing. But if an investor seeks only the highest possible short-term return on the investment without examining what those invested dollars are supporting in the world, they might well be undermining the society, the environment, or some other concern central to the mission of the institution.

Unfortunately, most public universities have been turning a blind eye to these investments other than to scrutinize the quarterly or annual financial report. Recently many institutional investors have come to recognize that aligning their investments with their mission can not only maintain their financial bottom line but also simultaneously support their mission to build a better world. This movement began earnestly during the Vietnam War when religious organizations wanted to make sure they were not profiting from firms manufacturing weapons. Following that we saw a global response to the harm of apartheid, with many investors divesting of stocks of firms profiting from business in South Africa. Michigan State University was the first public university to divest its holdings from firms profiting in South Africa.

In early 2005, then-UN Secretary General Kofi Annan invited a group of the world’s largest institutional investors to join a process to develop the Principles for Responsible Investment. A 20-person Investor Group drawn from institutions in 12 countries was supported by a 70-person group of experts from the investment industry, intergovernmental organizations and civil society. The Principles were launched in April 2006 at the New York Stock Exchange. To date, there are more than 1,400 institutional signatories with more than $40 trillion in assets under management. Sadly, the higher education sector is almost entirely absent.

Investments and Climate Change

There is a growing global consensus that climate change is becoming the human family’s most significant challenge, coupled with poverty and income inequality. The scientific community (International Panel on Climate Change, National Academy of Sciences, Royal Academy of Sciences, etc.) is overwhelmingly convinced that the threat is man-made and that the burning of fossil fuels is a prime cause. You might think, given this consensus, that institutions would not only be looking to reduce their own carbon footprint but also choosing to avoid profiting from an activity that is deemed detrimental to the human family. That logic is behind the recent and growing movement for divestment from fossil fuel companies. But this logic has been all but lost on those who look at investments as simply building their financial wealth. More recently the concern with fossil fuel stocks as being largely based on assets that might be stranded (unsellable) because of their harm is causing even those who look at investments through the narrow lens of financial profit to jettison some of their fossil fuel holdings. 

While I support divestment from fossil fuels for those very reasons, what is needed in higher education is not simply the phased divestment from this perilous industry but a transformation of how we think about investments and how we align our missions to those investment choices. Principles for Responsible Investment are a good starting place for all institutional investors. The six principles are quite basic:

     Principle 1: We will incorporate ESG [environmental, social, governance] issues into investment analysis and decision-making processes.

     Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

     Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

     Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

     Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

     Principle 6: We will each report on our activities and progress towards implementing the Principles.

The red herring often thrown out to the gullible and uninformed is that investing with mission or social and environmental concerns will only decrease financial returns. Often coupled with this myth is the claim that fiduciary requirement by law requires seeking only the highest financial return. These claims have frequently been revealed to be empty of facts.  Most recently, studies looking at the impact on financial return of divesting from fossil fuel stocks, for example, identify essentially no difference in risk of returns. In fact, S. Prakash Sethi, professor of finance at CUNY, makes the case that Investing in Socially Responsible Companies is a Must for Public Pension Funds – Because There is No Better Alternative.” 

As Pax World Fund’s President and CEO, Joe Keefe, noted recently,

The flimsy rebuttal we sometimes hear, that an endowment's fiduciary duty means that its only obligation is to maximize return, regardless of the consequences or externalities, is utter nonsense. There is now a substantial body of research underscoring that companies with better environmental performance also tend to enjoy better financial performance. It is ignoring these issues, rather than integrating them, which most likely constitutes a breach of fiduciary duty [emphasis added].

Reinvesting for Our Common Future

Good investment practices should not simply be limited to avoiding perilous investments (like fossil fuels) but should include positive choices. For a public university like Michigan State University, which has been built up over more than 150 years largely by the people of the state of Michigan, one should expect that enterprises and communities that are based here, that provide quality products, services and livelihoods and are good neighbors in our communities, should receive a sizable portion of such investments. This is made all the more important given that 76 percent of our students are from Michigan families whose tax support helps make all the university does possible. Investments in those communities make them stronger and more prosperous and strengthens the tax base that supports much that we count as the public good, including schools, libraries, museums, infrastructure, etc. Public state universities should commit to a minimum percentage of this endowment going towards state and local investments that help sustain the communities they are reliant on for their students and tax support.

Public universities could therefore, at a minimum, endorse and follow the Principles of Responsible Investment. They could establish a committee representing the faculty, staff, and students that oversees the investments and insures they align with the mission of the institution. This would include making recommendations on how the university, as a shareholder, should vote on shareholder resolutions. The current practice nearly always defaults uncritically to supporting the management position on these resolutions. Given the incredible increases in CEO salaries, golden parachutes, and other management acts of self aggrandizement that have become so prevalent, the management of the firms we invest in should not receive our uncritical support. We have a responsibility as shareholders to see that our dollars are being used appropriately and in accordance with our mission.

A bit different approach is using some of the endowment money to create a "Green Revolving Fund" which could be used to invest in campus energy conservation, efficiency, and renewable energy projects where the return on investment (ROI), often in saved dollars, aligns well with financial investments. The savings are then plugged back into the fund to re-invest in more energy saving, carbon reducing projects. The recent cost decreases in photovoltaics (PV) can now see ROI's of 10-15 percent per year. Those are only the financial benefits. When coupled with the benefits of carbon reduction on the environment, and potential increase in local jobs, the triple bottom line makes these kinds of investments even more attractive

In Democratic Imperatives: Innovations in Rights, Participation, and Economic Citizenship, a 2011 task force report from the American Political Science Association that looked at strengthening democratic practices, one of the key recommendations was the implementation of participatory budgeting. I believe there is an adaptive possibility of that public budgeting process to shape the investment direction for a public entity like MSU. Just today I received an email from a colleague in California announcing that several of the recommendations I have offered in this brief paper have been agreed to by the University of California system, which has an endowment of more than $90 billion. Those recommendations came from a task force created by the president that was representative of the university community. That email also included the announcement of two new sustainability investor positions with the University of California to ensure the recommendations are put effectively into place!

We can only hope that MSU and other universities will soon establish a broadly represented task force like the University of California did this year to develop their own response to climate change, sustainability and investments. Time is a-wasting.