The Financial Implications of Divesting

By: Rohan Upadhyay

On February 16th, Dores Divest filed a legal complaint – alongside students at Stanford, Yale, MIT, and Princeton – with the Tennessee attorney general to compel Vanderbilt to divest from fossil fuel investments. The complaint invoked the Tennessee Uniform Prudent Management of Institutional Funds Act (UPMIFA), which states that nonprofit funds must invest responsibly with regard to the community’s well-being. They argue that Vanderbilt disregards this principle. 

To learn more about the motivations, arguments and goals of the complaint, I spoke with Miguel Moravec, a co-founder of Dores Divest. I also spoke with Joshua Doh, a student organizer for the group who also interned at Commonfund Capital where he gained insight on endowment investing. 

Here are some highlights from my conversations with them: 

Question: Could you tell me about the recent legal complaint? What was the motivation of it? 

Miguel: “[The complaint] alleged that Vanderbilt’s investments in fossil fuel companies violate fiduciary law [UPMIFA]. Because charities and nonprofits like Vanderbilt get tax breaks, they’re obligated to invest to the benefit of the community. The mission of Vanderbilt is an academic one… to have $500 million invested in fossil fuels, we allege, stands directly in contrast to that.”

We hope to meet with the Tennessee Attorney General office, and that they will investigate Vanderbilt’s investment practices. Harvard and Cornell both had complaints filed about their fossil fuel investments under their state’s versions of this law. And while their Attorney Generals never made inquiries, both schools did divest before the complaint was resolved. 

Q: Do you have an idea of how the Board defines “ethics”? Where do they draw the line? 

Miguel: I believe in the case of HEI hotels, there’s federal labor laws, so the Feds got involved. And they were like, “okay, if the feds are indicting a company for violating federal labor standards, that’s a pretty good sign.” 

There actually have been Attorney General’s who’ve gone to Exxon Mobil and said, “This is fraud, you’re lying to your shareholders, and we are investigating you over it.” There have been big court cases on this. So just as much as HEI Hotels, [Exxon] met this really high legal standard of violating what’s considered ethical. There’s a mountain of legal cases against fossil fuel companies saying, “hey, what you’re doing is not only wrong, but has been deceptive since the 70s. You’ve known about climate change all this time. And here’s the evidence about why you broke the law”… It often takes this legal standard to invoke change at Vanderbilt’s endowment, and we are trying to meet that with our Attorney General by filing this complaint. 

Q: The complaint addresses “financial prudence” – can you elaborate on that? 

Miguel: Exposure to the [fossil fuel] industry is a death sentence, it’s not financially prudent. There have been huge fluctuations because of the pandemic. Oil was negative $30 a barrel at one point. These companies already have demonstratively been highly volatile, the worst asset class in the S&P 500, and are just simply not where humanity is going. 

Any financially prudent investor would get out of these… to speak to that, we had the guy who helped write the law, Bevis Longstreth, cosign our legal complaint. He wrote the dang law [the federal UPMIFA]. So we’re not mincing our words. This isn’t students, you know, hugging trees. This is the former commissioner of the SEC signing a complaint saying, “yes, fossil fuel investments are imprudent for a university.” That speaks for itself. 

Question: The complaint mentions “shareholder engagement” – can you elaborate on that?

Joshua: Shareholder engagement is when shareholders pressure companies [to act a certain way], but as of what we know, Vanderbilt is not doing that because they invest through external managers. So because they invest through Blackstone or some other PE firm, they’re not the ones directly communicating with fossil fuel companies. So they’re not actually engaging with companies on the issue. 

So Vandy will invest in a PE firm like Blackstone or Apollo. And then Apollo or Blackstone will invest in fossil fuel. You see how there’s three layers? Because there’s an intermediary, Vanderbilt doesn’t talk with the fossil fuel companies, they only talk with investors. Vice Chancellor Anders Hall said that they tell investors they take climate seriously. But that doesn’t mean much [since they aren’t a direct shareholder in fossil fuel companies]. 

Question: What is the financial impact of divestment? 

Joshua: There’s comprehensive studies by firms like BlackRock and McKenna that have found that divested portfolios can outperform traditional portfolios. 

Question: What are the specific issues with the portfolio right now? 

Joshua: If you look at Vanderbilt’s financial report, they have a specific part of their portfolio called “natural resources.” They describe it as illiquid investments in oil, gas, timber, and they left off some other industries. So these are like private equity investments into specific fund managers, like let’s say, like Blackstone, who raise specific energy funds and go in buy companies with this money… 

If you take basic estimates of how much the industry in general has raised when it comes to natural resources, we can guess that around 70 to 90% of that is oil and gas. There’s one report by McKenna that shows 90% of the natural resources investments from 2015-2017 went into oil and gas. 

Question: What are you hoping to see the administration do? 

Joshua: The big thing we want is to see the administration be more thoughtful about the way they think about climate. They don’t have a defined shareholder engagement strategy. They don’t have bare minimum criteria of ethics or climate compatibility with the Paris accord. We are calling for full divestment… some divestment should happen immediately [and some could take more time]. Because it’s just good risk management. 

Ultimately, Miguel expressed cautious optimism that the administration could be compelled to act, citing that Harvard and Cornell divested 6 months after receiving similar legal complaints in their states. 

Joshua stressed that he wanted to see the administration take a more “nuanced” approach to evaluating the climate risk of investments. He clarified that not all fossil fuel investments must go immediately; investments in coal, for example, should be divested more quickly while investments in natural gas could be more gradually phased out. He also discussed that the endowment is currently invested in many PE firms – he suggested letting the endowment remain in existing PE firms’ funds until they expire and only prohibiting Vanderbilt from investing in newer funds. 

Joshua also referenced many of Vanderbilt’s fossil fuel investments being through private funds, and he argued that because private companies are less liquid than public equities, Vanderbilt’s divestment from these assets would have a greater impact on the private funds rather than the public equities, since it’s harder for a PE firm to replace an investor than for a publicly traded stock to find a new owner. Thus

As the debate continues, we’ll continue to watch it closely for updates from the administration or potentially from the Tennessee attorney general. 

By Rohan Upadhyay

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