Divestment Enters the Mainstream?

by Eric Ellman

It would appear that the divestment debate has reached a new phase when an investment firm offers a $10,000 prize to the business school team with the best strategy for lowering the carbon intensity of a university’s stock portfolio.

“Eighteen months ago, it was just activists talking about divestment,” says Yonatan Landau, an MBA candidate at the Yale School of Management. “But thought leaders in the investment world talking about divestment is an indicator that the conversation is entering the mainstream.”

Whether divestment has really entered the mainstream, or the definition has evolved to include more nuanced alternatives may be a moot point.  On Nov. 14, the Yale School of Management will host the nation’s first low-carbon, institutional investing portfolio case competition.  Bob Litterman, former head of risk management for Goldman Sachs, will serve as the lead judge when student teams from 10 of the top U.S. business schools, and one team from Mexico, present road maps for how a fictional university meets that challenge.

Case competitions invite business school students to respond to cases on specific topics, competing to present the best solution to a unique business challenge before a panel of experts. For students, a case competition is an opportunity to practice a pitch he or she might make to a client on behalf of an employer.  For business professionals, the competitions serve as a potential source of innovative ideas.

Money managers need new ideas for responding to growing requests to create roadmaps for reducing the carbon intensity of their portfolios, says Logan Yonavjak, a joint MBA/FES student working with Landau to organize the event.  According to Arabella Advisors, in the three years since Hampshire College became the first university to divest its fossil fuel holdings, 15 universities and over 167 foundations, municipalities and other institutions representing over $50 billion dollars in combined market capitalization have sold their stakes in fossil-fuel companies.  In the process, the idea of “divestment” has evolved from meaning entirely purging one’s portfolio of all fossil-fuel holdings to selectively selling off the worst contributors to climate change, and investing in low-carbon alternatives.  So how does a portfolio manager respond when the board of directors of one of his clients instructs him to reduce the carbon intensity of their portfolio?

Right now institutional investors have to hire outside help.  “These are very nuanced, complicated questions and the asset managers and judges who are participating in the competition tell us they’re paying consultants a range of fees to analyze what should be done,” says Landau.

Deciding how to invest when considering climate change is just another form of exposure investors must account for, says Ken Gillingham, an assistant professor of economics with joint appointments at the Yale School of Forestry and Environmental Studies, the School of Management and Yale’s Department of Economics. 

Gillingham cites the insurance industry as one that has addressed climate change more than most.  “But other than in a hodge-podge fashion,” he says, “energy industries haven’t been systematically taking this risk into consideration.”  Many investors are not yet accounting for those risks either, he says, adding, “So, if you’re a forerunner and you’re right, whether it’s on the damage side or on the mitigation side, you can do very well.”

The sponsor of the competition— Commonfund, which specializes in managing the endowments of private universities and non-profit organizations — represents a larger market of socially responsible investment (SRI) that includes “impact investing” in positively impactful social or environmental ventures, “weighted funds” that employ Environmental Social and Governance (ESG) scores, and “screening funds” that prohibit investing in alcohol, tobacco, gambling and arms manufacture.  Todd Cort, a lecturer in sustainability at the Yale School of Management, and co-director of the Center for Business and the Environment at Yale (CBEY), which is co-sponsoring the event, says that traditionally, screened funds did not necessarily exclude fossil fuel holdings.  Nor should they, necessarily, he adds.

“Not all coal companies are created equal,” says Cort.  “And if you’ve got a coal company that’s taking strides to reduce its emissions, versus another that isn’t, you might want to maintain your holdings in order to encourage that behavior.” This is known as shareholder engagement — where shareholders in a company use their equity stake to encourage companies to make more positively impactful decisions.  Rapid growth in the number of funds committed to SRI suggests a lot of potential for positive impact. According to U.S. SIF, a non-profit that tracks sustainable investment, the SRI market represented $3.74 trillion dollars in 2012.

Landau suggests that reducing stakes in fossil-fuel holdings is fundamentally different from strategies traditionally employed with weighted funds and screening funds.  Because climate change impacts everything, he says, “it’s really systemic risk. You can’t just use traditional investment approaches to diversify your way out of it.”


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