On May 6 Stanford University announced its decision to divest from coal companies. Student
advocates rejoiced, and investors took notice. As the deputy
director of the Stanford Steyer-Taylor Center for Energy Policy
and Finance, my inbox quickly filled with commentary. Although
the reactions ranged from euphoric to critical, there were two
consistent threads: misinformation and misunderstanding.
Knowing what Stanford did and why it did it will help inform
what should come next, not only for Stanford but also for other
large endowments and asset owners.
Stanfords Board of Trustees (BOT) passed a resolution
mandating that the endowment divest all directly held
investments in any publicly listed company whose principal
business is the mining of coal for use in energy generation.
Stanford will also send letters to its investment managers
recommending that they also divest their directly held
investments in these companies. And Stanford will vote its
proxies in support of this resolution.
Although the definition of principal business
has yet to be specified in financial terms, the resolution will
not apply to companies whose main activity is the mining of
coal for steel production.
The BOT doesnt manage the endowment. Thats the
job of the Stanford Management Co. (SMC). SMC manages the
universitys endowment and other financial and real estate
assets, which together are referred to as the merged pool and
amounted to approximately $21.9 billion as of June 30, 2013.
The BOT appoints the Board of Directors that governs SMC. So in
effect, SMC serves at the pleasure of the BOT.
SMC will apply the BOTs resolution by screening public
equities of eligible companies that are held in separately
managed accounts, funds in which SMC has the ability to direct
a manager to exclude specific public equities. The resolution
does not apply to commingled funds, the vehicles through which
much of public equity exposure is obtained for many investors
like Stanford. The resolution also does not cover SMCs
ownership of private equities. As of June 30, 2013, the
strategic target for public equities in the merged pool was 25
percent which includes both separately management
accounts and commingled funds with the remaining 75
percent held in private equity, absolute return strategies,
natural resources, real estate and fixed income.
So why did Stanford divest from coal?
To answer this question, its helpful to look back at
Stanfords history with regard to investment
responsibility. In 1971, in response to civil rights and
antiVietnam War demonstrations, Stanfords BOT
became the first major academic institutional governing body to create a mandate, structure and process
for addressing allegations of what has been dubbed corporate
substantial social injury. This structure evolved into what is
now known as the Advisory Panel on Investment Responsibility
and Licensing, or APIRL, a 12-member body of Stanford students,
faculty, alumni and senior administrators. The APIRL receives
requests from the Stanford community, then accordingly reviews,
researches and drafts recommendations to the Special Committee
on Investment Responsibility, a subcommittee of the BOT that
reviews, edits and votes on recommendations to present to the
No other major university that has made public statements
against student-led divestment movements has this structure. It
is also worth noting that whereas SMC responds to requests for
information from the APIRL, SMC does not make determinations on
investment responsibility requests.
The call for divestment originated with the students,
through their Fossil Free Stanford campaign, and ended with the
BOT. The APIRL and the Special Committee reviewed the
students original demand of divestment of 200 oil, gas
and coal stocks and, based on their research, made an modified
recommendation to the BOT, which voted to approve the
The president and the BOT wanted to find a way to say yes.
Divesting from coal companies would have no material impact on
SMCs returns coal companies make up less than 1
percent of major public market indexes and havent been
performing well lately and doing so would not obviously
violate the universitys investment responsibility policy.
So the BOT agreed to forsake coal.
It was a symbolic gesture, and as with any compromise, it was imperfect. Wiping coal from the
financial engine that keeps the campus going raises questions
about the priority of carbon capture and sequestration research
at Stanford and, as many have noted, divestment wont have
any direct impact on reducing carbon emissions. If Stanford is
serious about addressing climate change, what comes next?
By giving the
Fossil Free Stanford movement a victory, the university
demonstrated the significance of climate change as an
existential threat. The move also demonstrates the limitations of divestment for changing
corporate behavior or shifting investment in fossil fuels to
lower-carbon sources of energy at scale. If our goal is a
rapid, dramatic and cost-effective transition to a
low-emissions economy, we need to do more than find high moral
ground and stigmatize fossil fuel companies.
Divesting from coal is a one-off event for SMC. So too will
be any future divestitures or investment mandates. SMC will
continue to make its investment decisions based on the same
information it had before. And its bright and capable employees
with job titles including the words investment
responsibility will still be confined to proxy voting and
damage control. Stanford cant navigate climate risk by
relying on the APIRL to tell SMC what to sell or buy. SMC's
investment professionals need relevant data on which they can
make investment decisions. And they need to be proactive.
So how can SMC further demonstrate leadership on climate to
other endowments and long-term investors?
It can employ sophisticated climate risk analysis across its
entire portfolio. The BOT should require SMC to adopt a
framework for quantifying carbon exposure in the endowment and
to report that exposure annually. Harvard, perhaps in response
to the bad press it got for scoffing at divestment, announced
it would become a signatory of the United
Nationssupported Principles for Responsible Investing
and the Carbon Disclosure Project, each internationally
recognized as a leader in best-practice guidelines and
disclosure. Other leading organizations on climate risk, data
and disclosure include Ceres (via its Investor Network on
Climate Risk), the Carbon Tracker Initiative, Risky Business
and the Sustainable Accounting Standards Board (SASB).
Bloomberg is incorporating these kinds of data in its
terminals. But the organizations working to better measure and
manage climate risk have a ways to go before investors have
timely access to high-quality sustainability data on which they
can make investment decisions across all asset classes. Their
work will progress faster if investors demand and pay for
SMC can dedicate staffing resources to identifying
low-carbon investment opportunities whose risk-adjusted return
profile meets or exceeds comparable investment alternatives.
Included in Harvards April 7 Confronting
Climate Change announcement was the call for a $20
million Climate Change Solutions Fund. Increasing research
budgets for clean energy innovation is critical, and Stanford
is doing similar things and arguably more (see the Precourt
Institute for Energy, the Global
Climate & Energy Project and the TomKat
Center for Sustainable Energy). But what Im talking
about is confronting climate change inside the endowment
corpus. SMC should equip its investment professionals with
knowledge to identify low-carbon opportunities within their
asset classes and establish incentives to prioritize those
investments, provided they meet or exceed comparable
Climate change mitigation and adaptation present investment
opportunities in many different forms and across all asset
classes. The International Energy Agency estimates that an
additional $36 trillion in clean energy investment is needed
through 2050 an average of $500 billion per year by
2020, ramping up to $1 trillion per year by 2030. This
so-called clean trillion target has helped bring the power of
finance to clean energy and energy-efficiency solutions.
Investors are putting money to work in new financial
instruments like green bonds and yieldcos. Policymakers are
also responding to the opportunity for climate finance. The
Internal Revenue Service just proposed a change to income tax
regulations to allow certain solar projects to be financed as
real estate investment trusts. The MLP Parity Act, which would
give clean energy access to master limited partnerships, a
corporate structure with tax advantages presently only
available to fossil industry projects, has bipartisan support
Low-carbon investment opportunities dont have to
require a concession on returns, but for now at least they may
require higher transaction costs in the form of acquiring new
expertise and embedding that expertise across asset classes;
they also require a long-term investment horizon. SMC and other
large endowments and asset owners can afford all three.
Natural resources isnt just an asset class. Its
a driver of risk and opportunity that touches nearly every
investment across our portfolio. McKinsey & Co.
sustainability practice veterans Matt Rogers and Stefan Heck,
who is now a research fellow at the Steyer-Taylor Center, make
a clear and compelling case for this suite of investment
opportunities in their recently published book Resource Revolution. Stanford football
fans like to taunt opponents with the chant fear the
tree, a nod to the universitys mascot. If Stanford
takes these steps, other universities should do more than fear
the tree. They should follow it.
Alicia Seiger is the deputy director of Steyer-Taylor
Center for Energy Policy and Finance at Stanford
University in Palo Alto, California.
For more on the college and university movement to
divest from fossil fuels, see IIs video
The Ethics of Climate Change and the Divestiture