April 14, 2013

SKORTON: Divestment: A Complicated Issue for Universities

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Just over a week ago, I informed the Student Assembly that, although Cornell increasingly evaluates social and environmental factors along with financial considerations when making investment decisions regarding the endowment, we have no plans in the foreseeable future to divest from direct holdings or commingled funds in the fossil fuels industry, as proposed by the SA’s “Resolution 32: Toward a Responsible Endowment.”

Two broad issues have come to the forefront in discussions of Resolution 32:

1. The University’s proper role in advocating for or against political or social issues, specifically when — and whether — we should use our financial clout to advance agendas that fall outside our primary missions.

2. The practical consequences of divestment — namely, its effect on the Cornell endowment and, thus, on the University’s operating budget.

I believe that it is appropriate for the University to endorse socially-responsible investing that falls within our established parameters concerning risk and return. This could, in very specific and unusual circumstances, include selective divestment. There have been cases in the past where the risks to the endowment were manageable and where we thought our action would help accomplish a socially-responsible goal. A few years ago, for example, I recommended  — and our Board of Trustees agreed — that we divest from oil companies doing business in the Sudan as a way to put pressure on the Sudanese government to end humanitarian abuses there.

With respect to fossil fuels, we currently consider portfolio managers for the endowment who participate in investments related to renewable energy, technological advances in the area of climate change and remediation and appropriate husbanding of natural resources. The Investment Office actively seeks investments in alternative energy strategies, as evidenced by our current $60 million allocation in renewable and alternative energy, sustainable forestry and environmental credit investments. We remain committed to identifying managers with alternative energy investment strategies that meet our endowment’s return and risk parameters, and Chief Investment Officer A.J. Edwards has been instructed to intensify his efforts to identify such investment opportunities.

Yet it is not always clear which actions will be most effective in achieving desired results or whether the benefits of certain actions are worth the cost. A generation ago, in the era of apartheid in South Africa, there was a strong movement on college campuses, including Cornell, to divest from companies doing business there. Some argued, convincingly, that divestment would put pressure on the South African government to institute reforms, while others argued, with equal conviction, that companies operating in South Africa were more likely to bring about change from within. Divestment forces eventually won out when their efforts helped lead to federal legislation that curbed new investments in South Africa and imposed a variety of other sanctions designed to pressure the South African government to end apartheid.

The issue of fossil fuel investments is also controversial and complex, and reasonable people can and do disagree about it. The publicly-traded energy companies in our portfolio, for example, collectively have large research and development budgets committed to alternative energy strategies. The top five energy companies have more than $20 billion committed to alternative and sustainable energy research and development. Divesting from these companies would give us no ability as shareholders to influence the decisions that these companies make concerning a revised energy future.

Adding complexity to investment decisions is the need for organizations to grapple with potentially conflicting goals. When it comes to Cornell’s endowment, our foremost priority is its growth and stability so that the earnings can continue to strengthen the University’s core missions of teaching, discovery and engagement.

The endowment is not a cash reserve that Cornell can draw upon at will. Rather, it is the sum of the University’s permanent invested capital that generates funds each year to support the operation of the University. Returns on the endowment provide roughly 11 percent of Cornell’s operating revenues, which support critical programs across the University, including financial aid.

Because of the endowment income’s importance to our operating budget, we invest in asset classes that we believe will earn returns robust enough to keep up with both our annual withdrawals and with inflation. Energy is expected to be one of highest returning asset classes going forward and is a good hedge against inflation.

In addition, a substantial portion of Cornell’s current energy investments are held in private partnerships that require assets to be locked up for a dozen or more years. Divestment would mean selling these assets at a discount, resulting in a loss for Cornell.

Also significant is that Cornell uses third-party investment managers with the latitude to invest across all sectors of the economy. Excluding a sector as significant as energy could preclude the University’s ability to partner with top-tier investment firms.

In the aftermath of the recession, we spent four difficult years working toward a balanced budget, including deep budget cuts and staff workforce reductions. Our budget is now balanced, but divesting a large and successful portion of our endowment portfolio could jeopardize the delicate balance we have achieved. I am unwilling to recommend that we put our University at risk in this way.

There is no doubt that our energy future is an important national issue, and I appreciate the many perspectives of those who have a stake in such a decision: that includes all Cornell faculty, staff and students. In fact, even as it pushed for acceptance of Resolution 32, the Student Assembly recognized Cornell’s own campus-wide efforts regarding sustainability, energy conservation and environmental responsibility, as exemplified by our Climate Action Plan’s commitment to reach carbon neutrality by 2050.

Going forward we will continue to evaluate our investment options with an eye to the social consequences of our choices within an overall investment strategy that enables us to advance our primary missions of teaching, research and engagement. And we will continue to meet with interested students to keep the dialogue alive.

David J. Skorton is president of Cornell University. He may be reached at david.skorton@cornell.edu. From David appears bi-monthly this semester.

Original Author: David J. Skorton

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