For the past three years, many environmentally conscious Bowdoin students and faculty members, led by Bowdoin Climate Action (BCA), have been demanding that the College divest the endowment’s holdings from large publicly traded fossil fuel companies to mitigate climate change.
Allegedly, more than 1,000 students have signed a petition to support this campaign. While the exact number of supporters is questionable, there is no doubt that I figure among that number. During my freshman year, a nice girl in David Saul Smith Union told me that if I supported the environment and thought climate change was an important issue, I should sign her petition. Without knowing what divestment was, I signed my name. I have since educated myself on the issue.
To make an informed decision on this matter, we need to first understand how our endowment works. The bulk of Bowdoin’s endowment comes from alumni donations and to grow the endowment, these donations are invested into financial assets such as equities and bonds. Bowdoin’s endowment has been one of the best-performing endowments in the nation over the past decade and covers around 40 percent of Bowdoin’s annual operating costs.
The market value of the endowment exceeded $1.2 billion last year and, according to President Barry Mills, “A strong and growing endowment is the single most important factor in our ability to provide access and opportunity through financial aid, and to fund the outstanding academic and residential life programs that set Bowdoin apart.”
Divestment supporters demand that Bowdoin eliminate its fossil fuel holdings, which amount to 1.4 percent of the total endowment portfolio.
Even though that is a small percentage of the portfolio, committing to divest it would choke the future growth of the endowment.
As is typical, Bowdoin’s endowment is not directly invested in stocks. Instead, the College’s Investment Office is responsible for selecting fund managers, each of whom manages a portion of the endowment. The endowment’s continued success proves that Bowdoin has hired some of the best money managers in the world. It is their independent investment decisions that led to 1.4 percent of Bowdoin’s endowment being invested in the fossil fuel industry. In order to divest this tiny percentage of its portfolio, Bowdoin would have to withdraw 100 percent of funds from each manager who invests in fossil fuel equities at all, and completely terminate its investment relationships with those managers.
Reinvestment of the withdrawn capital would be limited to very restricted alternatives because most top-tier capital management firms view the fossil fuel sector as instrumental to portfolio returns and diversification. What’s more, Bowdoin would lose the option to utilize most of commonly used investment tools such as the S&P 500, which includes fossil fuel companies.
This would severely compromise the endowment’s profitability. Ultimately, the loss of substantial portfolio income would force the College to either cut costs by abandoning its low faculty-student ratio or give up its need-blind admissions policy and seek more income from tuition, sacrificing the socioeconomic diversity of the College.
It is true that a handful of colleges and universities around the world have decided to pursue divestment. However, we must analyze this information critically. Far more schools have decided not to divest despite pressure from student and faculty members. And the endowments at Unity College, Pitzer College and the University of Glasgow—three schools BCA has called out as examples—play drastically different roles in supporting school operations than Bowdoin’s endowment does.
To start, the combined size of the endowments at these schools is only $300 million, less than a quarter of Bowdoin’s endowment.
In addition, drawing analogies to schools like Stanford, which committed to divest its $18.7 billion endowment from direct coal holdings in May, is impertinent. Stanford is one of the few schools that directly invests part of its portfolio in companies, and thus divesting its direct holdings in coal will not have any impact on the rest of its portfolio. What’s more, coal does a lot more environmental harm than other fossil fuels like natural gas.
Members of BCA continue to say that they do not support divestment at the cost of financial aid. They make unsupported claims that there are alternative fossil-free investment strategies that Bowdoin could easily pursue without hurting the endowment’s returns. However, this utopian belief ignores the basic economics of investment.
Senior Vice President for Investments Paula Volent has indicated that divestment “would have reduced investment returns by five percent a year over the preceding decade, costing the school more than $100 million.” Bowdoin alumni contribute to the endowment with the expectation that their gifts will be prudently managed. The extraordinary return of the endowment over the past decade is a confirmation of that expectation and restricting the endowment’s potential profitability could very well discourage future giving to the College.
With such an expensive price tag, what are the benefits of divestment? Some proponents believe that the selloff of fossil fuel stocks would drive share prices down, forcing these “environmentally insensitive” companies to suffer. This belief is simply misguided. Investing in the stocks of fossil fuel companies does not fund their operations; it grants stockholders a fraction of the future profits of a business. Trading a stock transfers that right to claim these future profits and in the long term, the share prices of fossil fuel companies will not change because some investors decide to transfer their ownership of the stocks.
In the past, the endowment’s success has contributed to Bowdoin’s capability to meaningfully reduce its carbon footprint by allowing the College to install solar panels and implement of other green initiatives that it would not have otherwise been able to afford.Indeed, BCA has recently tacitly acknowledged that the impact of divestment would only be symbolic. BCA’s Allyson Gross writes, “The goal of divestment is to catalyze bold political action addressing climate change, and to publicly stigmatize the fossil fuel industry.”
It is worth noting that this argument is based on the assumptions that destroying the fossil fuel industry would reverse or mitigate climate change. It may be myopic to suggest that fossil fuel companies cannot be part of the solution. In fact, large fossil fuel coporations like ExxonMobil are among the largest investors in research and development in carbon capture technology and sustainable alternative energy.
Bowdoin could better address climate change by implementing green initiatives on campus and supporting faculty and student research that might lead to solutions to the problem. The endowment is the vehicle to fund such endeavors. It is not, however, an appropriate tool by which to shape public debate on energy policy and climate change.
The insurmountable gap between the potential benefits and costs of divestment should be readily apparent to any reasonable observer. Three years after I signed BCA’s petition, I still think the environment and climate change are extremely important issues but I feel the divestment campaign is misguided and that it is time for BCA leaders to take alternative approaches to addressing climate change.
Kuangji Chen is a member of the Class of 2015.
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