May 13, 2016
As fiduciaries, boards of trustees are required to make strategic policy choices that require careful evaluation of multiple and potentially conflicting priorities. This is the case for Puget Sound’s board of trustees as it has taken steps to inform a responsible decision regarding whether to divest from fossil fuel holdings in the university’s endowment. This work has been done in the broader context of the board’s Investment Subcommittee monitoring, together with the university’s outsourced chief investment officer (OCIO) Perella Weinberg Partners, increasing numbers of environmental, social and governance (ESG) investment alternatives and the potential investment merit of these alternatives. In addition, trustees have met several times over the past 16 months with student leaders of ASUPS’ Environmental Campus Outreach (ECO) club and The Coalition for the Divestment of the University of Puget Sound. Through this dialogue, trustees have gained a deeper understanding of student views on divestment and grave concerns about climate change, and students have deepened their understanding of the complexities surrounding the management of the endowment and how this relates to their call for divestment.
Puget Sound has long demonstrated its commitment to principles of sustainability through the curriculum, faculty and student research, campus operations, and community collaborations. These efforts earned Puget Sound a gold rating in the Sustainability Tracking, Assessment, & Rating System (STARS) developed by the Association for the Advancement of Sustainability in Higher Education. The Divest UPS Campaign urges the university to take an additional step by abstaining from new investments in the Filthy 15, Carbon Underground 200, and other hydrocarbon energy and utility companies, and divesting of existing holdings within five years.
The board has examined a number of key questions regarding divestment that has included consideration of core mission, fiduciary responsibility to prudently manage the endowment, the benefits of scale and diversification provided in its commingled investment strategy, economic impact of divestment to the university and students, donor expectations regarding gifted endowment funds, availability of high quality fossil fuel-free funds with proven track records, the extent to which divestment might reduce consumption of fossil fuels and curb greenhouse gases, and the most effective way Puget Sound can be a leader in addressing climate change. These issues are discussed in the attached appendix.
The issue of climate change is unique among concerns in our society in its nature and scale—it is global in reach and existential in its threat. Other issues of political and social justice require attention from the university as well, but through education rather than in the board’s role as fiduciaries supporting that education. In considering the scale of our endowment (and its limited exposure to hydrocarbon investments) relative to the global phenomenon of climate change, any action on divestment by the board is likely to be entirely symbolic. Accordingly, many institutions that have engaged the question—indeed most of them—have decided not to act, but to continue with business as usual, or have taken divestment positions that have limited practical impact on how their endowment can be managed.
After careful deliberation across two years, however, the Puget Sound board has chosen to take constructive action emerging from a perspective of learning and evolving that is consistent with both our mission and values as a university and the board's responsibility as fiduciaries. These deliberations led the board to this key question: Though Puget Sound will have its greatest impact in addressing climate change through its core mission of education, given the global scale and significance of changing climate on human societies and ecosystems, might we find ways to reduce investments in hydrocarbon over time without adverse impact on investment returns that fund student financial aid and university operations, and to provide donors to the endowment with a fossil-free alternative for new gifts?
To this end the board of trustees will not fully divest the portfolio of fossil fuel investments, but will:
The board will continue to learn about and evaluate the viability of fossil-free investment options over time and will annually measure the portion of the endowment invested in hydrocarbon energy and carbon-consuming utility companies, as well as the portion of the endowment invested in companies making positive ESG contributions.
 The Filthy 15 includes 15 of the largest publicly traded coal utility and extraction companies. Puget Sound’s exposure to the Filthy 15 is through commingled investment funds over which it does not have control and approximates 0.2% of the endowment portfolio.
 The Carbon Underground 200 includes the top 100 public coal companies globally and the top 100 public oil and gas companies globally, ranked by the potential carbon emissions content of their reported reserves. Puget Sound’s exposure to the Carbon Underground 200 is through commingled investment funds over which it does not have control and approximates 1.8% of the endowment portfolio.
 Commingled investment funds consist of assets from several investors that are combined together under a common investment management strategy to enable investors to benefit from economies of scale, which allows for lower trading costs per dollar of investment, greater diversification, and wider selection of professional investment managers.
What is the board’s legal fiduciary responsibility with respect to investment of the endowment?
The board is responsible for the prudent management of the endowment in a manner that achieves an appropriate risk and return profile in support of the university’s charitable purpose. It must consider a broad range of factors, including Puget Sound’s educational mission, general economic conditions, possible effects of inflation/deflation, tax consequences, diversification and the role of each investment within the portfolio, expected investment returns, and investment management costs, all in the context of the endowment portfolio and investment strategy as a whole. The board must take into consideration overall resources available to the university to execute its mission, including the reliance on endowment distributions that fund student financial aid, faculty compensation, and academic programs.
What implication would divestment have on the university’s investment strategy?
he university utilizes commingled funds rather than the more expensive strategy for its size of endowment of making direct investments in a separate account just for Puget Sound. Participating in commingled funds provides greater access to top tier managers and provides diversification and economies of scale that improve investment returns and minimize investment management costs. If the university were to adopt a no-hydrocarbon investment policy, it would have to sell and replace the vast majority its endowment investments, even though just 12% of the portfolio has exposure to energy and utility companies (and 21% of the portfolio is invested in companies that specifically consider environmental, social, and governance (ESG) criteria, and includes renewable energy, healthcare innovations, and sustainable timber). Such a move would have significant implications for the endowment, including transaction costs associated with turnover of investments, loss on premature sales of illiquid long-term investments, increase in investment management costs going forward, and risk of lower future returns that provide 10% of the university’s revenues. The availability of managers with a proven track record of performance and integration of ESG criteria is on the rise, and over time this trend is anticipated to present attractive investment opportunities while also reducing carbon exposure.
What is the estimated financial impact of divestment?
The majority of the university’s exposure to hydrocarbon is in private, long-term investments with commitments spanning as many as 10 years. If the university were to immediately and prematurely divest of these private investments, it would require they be sold on the secondary market at a discount estimated to be at least in the 5-10% range, which would result in a one-time loss of approximately $3.2 to $6.4 million depending on market conditions. In addition, and excluding the estimated one-time loss, divestment is estimated to result in increased portfolio risk and lower investment returns in the .6% to 1.8% range in comparison to current portfolio expectations. If these return amounts remained consistent, this would result over a ten year period in an endowment that is $29 to $82 million less and an annual distribution for financial aid, faculty compensation, and academic programs that is $2.5 to $8 million less than current portfolio expectations.
What are donor expectations?
There is a range of views among donors. Some expect the university to focus solely on maximizing returns to support the specific philanthropic purpose of their donation. Others have expressed interest in a carbon-free endowment.
What impact will divestment have on student access to a Puget Sound education?
Affordability and financial aid awards are significant factors in a student’s selection of a college and ability to persist successfully to graduation. Half of Puget Sound’s endowment is dedicated to funding student financial aid. Puget Sound’s endowment and financial aid packages are already lower than many of its peer and competitor institutions and Puget Sound is currently not able to meet the full financial need of all of its students. Puget Sound has been on a sustained long-term effort to seek to narrow this gap rather than let it widen. Closing this gap over time will make it financially possible for students to access a Puget Sound education and will help ensure Puget Sound’s own financial sustainability (i.e. its ability to enroll students and generate sufficient net tuition revenues to deliver on mission).
What impact would divestment have on fossil fuel consumption and climate change?
The predominant view is that divestment is a symbolic statement focused on fossil fuel suppliers and will not reduce the consumption of fossil fuels or curb greenhouse gases. Changes in national energy policies and personal behavior are required to reduce consumption and affect energy sources. Leaders of divestment campaigns see divestment as a moral campaign at its core, one they hope will draw greater attention to the urgency of climate change and promote social and public policy change for a more livable planet.
How can Puget Sound be most effective in addressing climate change?
Puget Sound will have its biggest impact through the execution of its core mission of education and the infusion of sustainability throughout its curriculum to prepare our graduates to work effectively on climate solutions that include governmental policy, technological innovation, and environmentally responsible practices. The university will also continue to seek continuous improvement in sustainable campus operating practices.