At its May 2019 meeting, the Board reaffirmed its commitment to reducing fossil fuel investments and expressed its aspiration to have an endowment entirely free of fossil fuel investment.
In May 2016, after a deliberative, two-year process during which the board of trustees gathered and assessed information from multiple groups and sources to inform a responsible decision regarding calls on it to divest from fossil fuel holdings in the university’s endowment, the board adopted the following Statement on Divestment that it is actively implementing.
Statement on Divestment
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. Students have deepened their understanding of the complexities surrounding the endowment's management and how this relates to their call for divestment.
Puget Sound has long demonstrated its commitment to sustainability principles 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 several 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, the economic impact of divestment on 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.
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 and education rather than in the board’s role as fiduciaries supporting that education. 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.
However, after careful deliberation across two years, the Puget Sound's board has chosen to take constructive action emerging from learning and evolving perspective consistent with our mission and values as a university and the board's responsibility 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 fuel-free alternative for new gifts?
To this end, the board of trustees will not fully divest the portfolio of fossil fuel investments but will:
- Work with its OCIO to assess the rapidly changing environment related to fossil-fuel-free investment options and identify ways in which the university might reduce exposure to hydrocarbon companies over a period of years without harming investment returns and the programs they support. Any investment in a fossil-fuel-free strategy will be subject to the same investment criteria and rigorous due diligence process undertaken on all investment alternatives.
- Avoid any new commitments to commingled private funds whose primary strategy is to make investments focused on hydrocarbon extraction, processing, and/or transportation.
- Make no direct investments in Filthy 15 and Carbon Underground 200 publicly traded stocks within any separate internally managed endowment account (the university has none now). This does not apply to exposures to these stocks that may occur within broad market index funds or other commingled funds externally managed.
- Work with its OCIO to seek attractive investments in renewable energy that meet Puget Sound’s investment criteria.
- Ask its OCIO to assess the effects of climate change and potential regulatory requirements, such as carbon taxes, on the portfolio as a whole to understand portfolio risk better.
- Introduce a new endowment option for donors who want their gifts invested in a portfolio free of fossil fuel energy and utility companies.
The board will continue to learn about and evaluate the viability of fossil-fuel-free investment options over time. It will annually measure the portion of the endowment invested in hydrocarbon energy and carbon-consuming utility companies and 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 their reported reserves' potential carbon emissions content. 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 combined 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 a wider selection of professional investment managers.
What is the board’s legal fiduciary responsibility with respect to the investment of the endowment?
The board is responsible for the prudent management of the endowment in a manner that achieves an appropriate risk and returns 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 consider the 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?
The university utilizes commingled funds rather than the more expensive strategy for its size to make 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 of 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 in the future, 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 ESG criteria integration is on the rise. 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 compared 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 their donation's specific philanthropic purpose. 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 unable to meet all of its students' full financial need. 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. It 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 the 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 fossil fuel consumption 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. They hope to draw greater attention to climate change's urgency 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 by executing 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.