As the saying goes, a camel is a horse designed by a committee. Under environmental and student activist pressure to take action, University of California president Janet Napolitano on June 16 announced a new Task Force on Sustainable Investing, charged with exploring issues related to the Universitys investment in fossil fuels. At the time of the groups formation, student activists and others, including University of California faculty members, were hopeful that the task force would support their efforts to have the system divest oil and gas investments from its $91 billion portfolio.
But the proposal that came this month before the University of California Board of Regents, the 28-member committee that governs the UC system, was quite different. Rather than tackle head on the question of climate risk, the recommendations of the task force, which the UC Regents approved during their two-day board meeting held September 17 and 18, focused on the establishment and implementation of a framework on sustainable investment with the goal of completion by the end of the current fiscal year. Conspicuous by its absence was any tangible commitment to divestment.
What activists perceive as a lack of teeth in the recommendations raises the question of whether the UC system will take a leadership role in environmental, social and governance (ESG) investing particularly on issues such as climate change. Is the adoption of this new policy a way to dodge larger questions over continuing to invest in the carbon economy? (See The Ethics of Climate Change and the Divestiture Movement.)
As Institutional Investor noted in its April feature Climate Change and the Fossil Fuel Divestiture Movement, the effort to persuade universities to divest fossil fuel investments began in 2010 when a handful of environmental activists came together to strategize on how best to mobilize student interest. The movement picked up momentum in 2012, particularly after the publication of journalist-turned-activist Bill McKibbens July 2012 article in Rolling Stone highlighting the faulty economics behind the business models of large coal and energy companies. By early 2014 students at more than 400 colleges and universities across the U.S. were calling on their administrations to sell off the 200 largest publicly traded energy companies in their portfolios.
Many higher education administrators have resisted pressure to divest at least so far. But a growing group of financial experts and industry leaders in investment management have started to raise alarms about climate risk. The carbon divestment movement got a big boost on May 6, when Stanford University announced that its $18.7 billion endowment will no longer make direct investments in publicly traded coal-mining companies. Napolitano announced the formation of her task force a few weeks later.
Getting the UC to where it is today on climate has been a difficult process. Napolitano, who became the president of the University of California system last year after serving as the Obama administrations secretary of Homeland Security, has pledged to make the ten-campus California university carbon neutral by 2025. But calls for fossil fuel divestment came just as the UC system was changing its money management guard, by hiring both a new chief financial officer and chief investment officer, and facing criticism on a number of fronts, including rising tuition costs.
Im extremely disappointed that the task force process did not take the issue of divestment seriously enough, says Victoria Fernandez, one of two UC students who participated on the task force. In addition to the two students, other members of the task force include UC CIO Jagdeep Singh Bachher; David Crane, a lecturer in public policy at Stanford University and former UC regent; and Charles Martin, CEO of Newport Beach, Californiabased wealth advisory firm Mont Pelerin Capital. Crane and Martin are also members of UCs Committee on Investments.
This is one of the most important issues of our generation, and I absolutely share this universitys belief that we must do something to contribute to solutions to tackle climate change, Bachher said, introducing the recommendation to the board. Bachher complimented the students who campaigned for divestment, telling them, during the public session, We heard you. We really heard you.
But, said Bachher, fossil fuel divestment would amount to selling $10 billion of UCs $91 billion portfolio, something that is not an option. Even just selling coal companies would involve a $500,000 divestment. Although Bachher did not take divestment off the table, he said the task force emphasized solution-oriented investments to tackling climate change, such as a $1 billion investment in renewable power, energy efficiency and sustainable food and agriculture.
Bachher replaced Marie Berggren, who retired in July 2013. He had previously served as executive vice president for venture and innovation for the $70 billion Alberta Investment Management Corp. His appointment heralds a new era for the investment office, which appears open to considering a sustainable approach to investing, including tackling climate change.
The divestment advocates were able to get language stricken from the recommendation that explicitly spoke against eliminating fossil fuel companies from the portfolio. At the last minute, a passage that read, The majority of the task force conceded that divestment in and of itself would not meaningfully impact climate change, was removed, as was the suggestion that the task forces approach stood in opposition to the inflexibility and permanence of divestment.
The task force also recommended that the UC become a signatory to the United Nations Principles for Responsible Investment. Established in 2006, the PRI has become a means for money managers and asset owners to signal their ESG bona fides. Following Harvard and Stanford, the UC system plans to hire a sustainability officer to oversee its new investment approach. Whereas the system may never mollify divestment activists, it could still emerge as a leader in the growing field of sustainable investing.
Follow Imogen Rose-Smith on Twitter at @imogennyc.
Get more on endowments and foundations.