The decision by the Stanford University endowment to divest from coal stocks might produce some positive PR, but from an investment perspective it’s only making them worse off, says Andrew Ang, professor of finance at Columbia University, who says the move prompts the bigger question of what the purpose of a university endowment actually is.
The latest investor case study for student discussion and examination by Andrew Ang and Bruce Usher at Columbia Business School examines the case of Stanford’s endowment divesting from coal stocks.
While not expressed in the case, which instead presents the facts for students to discuss, Ang’s view is that divestment of this kind is narrow and has no effect on the stocks or activities of the companies invested in. Further, he argues, that such a move makes investors worse off by narrowing their investment universe.
“You can’t subtract from a company by selling a share, it’s already committed capital, it’s just changing the ownership not the amount of capital. By definition you can’t have direct aggregate impact by divesting,” he says.
While he says best practice is different for different institutions, for institutions like Stanford they would have more impact by allocating to technology research than they would by a narrow divestment.
“You can only do worse by imposing constraints on your investment process, the question is how much,” he says. “Constraints can make you worse off so the question is how much it costs you. In Stanford’s case it is a narrow divestment so the cost is not that great.”
Ang says climate change is very important but it is best addressed through international agreements and treaties like a price on carbon or a tax.
“There is a role for asset owners to voice their support there, but one institution divesting won’t have much impact,” he says.
In the case of Stanford, and other university endowments in the US, divestment of carbon and carbon-related stocks has been driven by students.
“Students have been increasingly vocal, they are clearly an important constituent of the university but they are not the only one. Stanford and others wouldn’t have done anything if not for the student movement.”
But the prime question, Ang says, is whether the role of the endowment is financial or do to the right thing.
“There may be some benefit in symbolism, and it is not that costly for them to divest because it was very narrow sector, only coal stocks. It is a narrow decision, and might send a symbolic message but it doesn’t do anything in broad societal change,” he says.
“There are future students and faculty that are not represented at the table, and if one purpose is to fund the future, then by divesting they have made the future worse off.”
But importantly, Ang says this case reflects deeper issues.
“Universities have large amounts of money but it is not clear what the actual mission for the endowment actually is.
They have more than sufficient funds to meet certain aid, for example it is peanuts to meet student aid requirements, and student populations haven’t increased from a generation ago. Do we need to spend so much on non-educational activities like fancy dorms, athletics and if the amounts paid to professors?”
Ang says it is unclear what the purpose of these large amounts of money is, and describes endowments as “aspirational without limit, and accumulation without end”.
There is also a keeping up with the Joneses effect, with endowments competing with each other on performance rankings and investment staff remuneration based on their relative performance.
The student case study, Stanford Dumps Coal can be accessed here.
