Fossil fuel divestment leads to lose-lose scenario for VC

At its most recent meeting, VSA Council voted to table a resolution endorsing the Fossil Fuel Divestment Campaign, Vassar’s iteration of a movement to divest institutional endowments from fossil fuel companies. We would like to support the VSA Council’s decision to postpone a vote so the document can undergo further review, while simultaneously taking the opportunity to discuss why divestment is an ineffective tool to combat climate change.

The largest issue that we take with this movement is that it is purely symbolic; its relation to the change it would like to effect—which, we assume, is the promotion of activities specifically salubrious to our ailing environment—is so tenuous that it is not worth the risk it will pose to the College’s finances. Here our peers who support the movement meet us midway: They themselves acknowledge that the economic impact of divestment is nonexistent and in no way will blight the financial health of the companies they so despise.

But for the sake of readers, let us emphasize why this is the case. When Vassar or any institution divests, say, from ExxonMobil, it is selling its equity share in that company off to another investor. Each time one body divests, another one invests, such that we are playing a zero-sum game.

Those acquainted with introductory economics will argue that, should there be a sell-off, the price of the stock will start to fall. They are right, but there’s the rub: Companies like ExxonMobil (XOM) do not make money from selling stocks, and their financial health is not tied in a one-to-one relation with the price of their stock. The change of shares from one XOM investor to another—especially on a scale as small as collegiate endowments—would barely be detectable for a company whose market capitalization is $400 bn, or 470 times Vassar’s entire endowment.

Is the symbolism worth it? We believe that Vassar’s endowment must not be subject to a capricious quest for symbolism, and neither should it be used to make political statements. Divestiture from fossil fuel stocks is both theoretically and logistically problematic when considering the role of institutional endowments and the principles guiding their management in service of these roles. Vassar has largely emulated Yale’s exemplary endowment model pioneered by David Swensen; using Swensen’s principles on the purpose and management of endowments—outlined in his landmark book Pioneering Portfolio Management: An Unconventional Approach to Institutional Investments—gives us a framework within which to evaluate the proposal for divestiture.

A strong Vassar endowment allows us to maintain independence from unpredictable shocks resulting from government policy, donor requests or market volatility; next, it allows us to maintain what Swensen calls a “margin of excellence” over peer schools that face similar if not identical operating revenues and costs.

Fiduciaries of the College must weigh the value of this symbolism against the benefits of stable endowment returns in promoting these purposes. We are of the opinion that pure symbolism is worth far less than the maintenance of fiscal independence and margins of excellence for the College, as we would be giving up stable returns for what can be described as dangerous gimmickry.

Vassar’s endowment is diversified across asset classes, wherein we hire money managers to “increase the probability of success,” to quote Swensen. A divestiture would imply the removal of close to 80 percent our absolute return and mutual fund holdings, as we cannot force our policies onto third-party managers. Given that active security selection and asset allocation play such important roles in the service of an endowment’s purposes, foregoing third-party specialists in this arena will not only forgo their returns but also the professional relationships that were not easy to initially establish.

Proponents of this movement might often be caught citing “studies” that try to estimate the effects of fossil fuel divestiture; however, these published studies are not conducted keeping the Vassar endowment in mind. They often make the assumption that divestment can be turned on as a switch; the transaction costs we mentioned above, in this case, can have the impact of hurting programs including financial aid and remuneration for our renowned faculty.

Should our finances be adversely affected by divestment, it will result in an amendment to our average rates at which we draw and spend from our endowment. If we agree with Swensen, a lowered portfolio market value will either result in a higher draw rate in order to maintain stable, expected budgetary support, which disadvantages tomorrow’s scholars, or an unchanged draw rate, which disadvantages today’s. This lose-lose scenario will pose major concerns among the College’s fiduciaries, but again, for no ostensible reason but to make a statement.

The VSA has no control over the College’s endowment—a responsibility falls to the Board of Trustees, which is informed by a variety of sources, including the Trustee Investor Responsibility Committee and the Campus Investor Responsibility Committee, which is populated by a mix of student, administrator, faculty and alumnae/i representation. Both are tasked with reviewing “issues of ‘overriding social concern’ that might cause the college to take into account that concern in the management of the college’s investments.” Consequently, even if the VSA Council were to unanimously vote in support divestment, we would still be many conversations, meetings and votes away from divestment. This does not diminish the importance of the student voice or mean the VSA should rush through any piece of legislation it can. It means just the opposite.

The VSA has a strong history of supporting green movements on campus. Divestment, however, is an incredibly complicated topic, and the VSA must approach it with due caution. If a proposal seems rushed and poorly informed, then it is unlikely to be taken seriously by trustees. Thus, if the VSA wishes to see divestment come to pass, it should settle for nothing less than the best proposal possible, no matter how many weeks, months or years it takes.

­—Aashim Usgaonkar ’13 is contributing editor at The Miscellany News. Alexander Koren ’13 is the current vice president for finance at the Vassar Student Association, who voted in favor of tabling the resolution last Sunday.

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