Divestment: What does it really mean?

On April 8th, President Maud Mandel sent an email to the Williams community publicly announcing the Board of Trustee’s decision for the College endowment to remove investments from the fossil fuel industry. What does this mean?

In short, Williams will gradually phase out all investments in fossil fuels companies to grow the College’s endowment, a significant move, given that returns on the endowment support over half of the College’s annual budget. Although the Investment Committee had decided to do this before President Mandel’s announcement, the public commitment introduces some measure of accountability to the plan. Williams wishes to maintain the community’s trust by not breaking a promise, so the public commitment puts the College further on its path to a more sustainable investment strategy.

A quick aside: to be clear, President Mandel did not in her announcement refer to the decision as “divestment”. Nonetheless, the actions essentially amount to divestment from the industry, and some peer institutions taking similar steps officially refer to them as “divestment”. Hence, I will use the same word when describing the commitment.

As President Mandel noted in her email, Williams does not hold direct investments in fossil fuel companies (or any company’s stock). Instead, about 4% of the endowment is currently invested in real asset funds (pooled investments) that support fossil fuel projects. The public announcement commits the College to phasing out such investments by approximately 2033 and not making any new indirect investments in fossil fuels.

What are the consequences of divestment? First of all, the endowment’s growth will likely be largely unaffected by the change in the long term. Fossil fuels are increasingly an unattractive area of investment for investors as the climate crisis worsens and sustainable alternatives gain ground. Over the past 10 years, the largely fossil fuel-driven energy sector has been the worst performing index of the S&P 500, showing the least amount of growth. While oil and gas companies’ stock prices and profits have surged in recent months, it’s unclear whether those gains will last. The Securities and Exchange Commission recently announced a proposal that would require public companies to disclose their climate risk in their filings, demonstrating increased pressure for disclosure and the social image risks that come from remaining invested in the industry. Studies suggest that divestment does not hurt financial performance of investment portfolios. For example, a 2020 study published in Climate Policy concluded that “the investment performance of portfolios that exclude fossil fuel production companies does not significantly differ in terms of risk and return from unrestricted portfolios”. Rest assured, climate action will not interfere with education.

Secondly, Williams’ divestment alone will likely not have a significant financial impact on fossil fuel companies. The Williams endowment is unfathomably large to most people, but it is a mere sardine in the gargantuan sea of finance, which sends hundreds of billions of dollars to the fossil fuel industry each year. Williams on its own cannot impact the performance or decision-making of companies like Shell or ExxonMobil.

However, divestment is not a pointless endeavor. Divesting from the fossil fuel industry stigmatizes the act of investing in fossil fuel companies and encourages peers to divest, too. Admittedly, the effect of divestment in this respect is difficult to measure, but the chain reaction of elite private colleges (and other investors) committing to divestment is not difficult to see. Williams’ exit from fossil fuels alone won’t make a financial dent in the fossil fuel industry, but the investment community at large can.

Critically, the conversation regarding the endowment does not and should not end here. Phasing out investments in fossil fuels is only one component of sustainable investment. The College’s proactive investment in funds that support a low-carbon future is just as important. Furthermore, environmental, social, and corporate governance (ESG) funds can outperform the general market and tend to have lower tail risk (risk for extreme downturns), so our climate actions goals need not conflict with the College’s financial interests.

To date, Williams has allocated $30 million of the endowment  to impact investments related to climate change, especially in sustainable energy. As Chief Investment Officer Collete Chilton mentioned as a guest speaker in my Impact Investing Winter Study course, that’s more than most peer institutions have committed. The Investment Office also continuously engages with fund managers on investment opportunities advancing clean energy and diversity, equity, and inclusion (DEI) goals.

This is a good start, and we should advocate for the College to do even more. Divestment is easy to rally support for because it sounds dramatic and monumental, but supporting impact investments and other sustainable investing practices is just as, if not more, important. We must be tenacious in demanding continual progress and transparency from the College on the matter of climate, by allocating even more money to impact and prioritizing ESG criteria in investments. Beyond that, we should work to foster climate education and research, advance campus decarbonization, and support our local communities in their energy transitions, and demand as much transparency as possible in how the endowment office operates. We, the Williams College community, should take action on these issues just as much as we did for divestment.

-Tendai Coady, Zilkha Center EcoAdvisor

Tendai wrote this piece as part of an effort to educate the campus community about the nuances behind investment decisions and encourage robust in- and di- vestment practices.