March 27, 2013

Chief Investment Officer: Divestment May Hurt Cornell’s Endowment

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In response to students fighting for Cornell to divest — or remove its investments — from the fossil fuel industry, Cornell’s Chief Investment Officer said pulling the University’s investments out of the industry may negatively impact its endowment returns.

CIO  A.J. Edwards said that although divestment may seem to be “a clear and straightforward objective … the reality is far more complex.”

“If the University decided to exclude [energy sector] investments from its endowment, this decision would have a material impact on the return of the endowment and its contribution to the operating budget of the University,” Edwards said.

According to Edwards, the expected rate of return on investments in the energy sector is one of the highest of all of the asset classes the University invests in. In contrast, to date, investments in alternative energy strategies in general have rarely produced returns that meet Cornell’s risk and return requirements, Edwards said.

As a way to pressure the University to divest, the Student Assembly passed a resolution in early February, calling for the “divestment of all fossil fuel related investments by theUniversity” by 2020 and reinvestment in local and sustainable energy companies by 2030.

Currently, $60 million of the LTI is invested in renewable and alternative energy, sustainable forestry and environmental credit investments.

Becca Maccies ’14, co-author of the resolution and a member of Kyoto Now!, said she and other campus supporters of divestment believe investment in sustainable energy companies, instead of fossil fuel companies, would generate greater returns to the endowment in the long run.

“A significant portion of fossil fuel resources are based on speculated amounts of oil — assumed success, rather than actual success. The value of these investments will decrease as the value of speculated reserves are not realized,” Maccies said.

Edwards, however, said that ultimately, the purpose of Cornell’s long term investments — where most of the University’s $5 billion endowment funds are located — is to “provide essential funding for and to strengthen the University’s core academic mission of teaching, discovery and engagement.”

To meet this goal, the University must balance social and environmental considerations with “[maintaining] real purchasing power over time,” Edwards said.

“The investment committee and the investment office have long sought to be mindful of the issues surrounding sustainability and climate,” Edwards said.

In addition, divestment could add risk by decreasing the diversity of Cornell’s investment portfolio, according to Edwards. Despite the findings of a recent study by the Aperio Group — an investment management firm — which argue that divestment would not increase financial risk, Edwards said these findings are not applicable to Cornell’s LTI investment strategy.

“By excluding an entire economic sector, we would by definition decrease the diversification of the LTI as a whole,” Edwards said.  “[Because] the Aperio report only incorporated publicly traded stocks into its methodology … the findings are not relevant to Cornell, due to the high proportion of private partnerships present in our portfolio.”

Currently, only three American colleges — Unity College, Hampshire College and Sterling College — have divested from fossil fuel companies, according to Kyoto Now! Vice President Aubree Keurajian ’15.

In a recent Unity College webinar, Unity College Sustainability Coordinator Jessie Pyles said that divestment over the past five years has had “no noticeable impact on returns.”

“Simply by moving out of this big energy portion of our portfolio, we’ve seen no impact on returns on investment. In fact, our portfolio over these past five years has exceeded market benchmarks,” Pyles said in the webinar.

Supporters of the S.A.’s Resolution 32 have said that it is important that Cornell aligns its investment strategy with its commitment to sustainability and alternative energy development, evidenced through its Climate Action Plan.

“Though we care very much about a responsible transition, we’re not basing our decision on profit margins alone; that’s not what this movement is about. We’re asking the University to put people above profits, or at least on the same level,” said Anna-Lisa Castle ’13, who co-authored Resolution 32. “There are experts in the field, as well as global banking firms, that are pointing to divestment as a feasible and crucial movement as we find our way toward a just and sustainable future.”

Original Author: Carolyn Krupski