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Background information on Swarthmore College’s investment policies

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Swarthmore students involved in the Sunrise Movement are sponsoring a referendum next week to ask the Board of Managers to reconsider its longstanding policy regarding the weighing of social objectives within its investment policy.  I believe that the change in policy is unnecessary, particularly in light of the regular due diligence that our Investment Office and Investment Committee perform to manage the Swarthmore College endowment. The following paragraphs provide an overview of our management practices as well as our efforts to mitigate the effects of climate change within our investment portfolio.

The College’s endowment represents a principled contract with past donors, a source of present strength, and a promise of our continued educational leadership in the future. Because of the generosity of prior generations of donors,  Swarthmore is able to provide generous need-based financial aid, support faculty research and instruction through endowed faculty positions, support programs and activities of the College, and maintain our physical plant and grounds. Spending from the endowment provides funding for over half of the College’s operating budget on an annual basis.

The Board of Managers reviews and approves the College’s investment policy and guidelines, and the Investment Committee of the Board of Managers carries out those objectives with assistance from the College’s Investment Office.  As a matter of policy, the Investment Committee manages the endowment to achieve the best long-term financial results, rather than to pursue social objectives. This policy was established in 1991 and following extensive deliberation and research, was reaffirmed by the Board of Managers twice in recent years, in 2013 and 2015.

In order to achieve its investment objectives, the Investment Committee seeks to maintain a careful balance among the following three areas: High real returns (so spending can grow at or above inflation); low volatility (so spending can be largely insulated from market variability), and; adequate liquidity (so we have access to cash when we need it)

Like most of our peer educational institutions, the College does not hold stocks or bonds of individual companies, but instead retains external investment managers to manage its endowment portfolio.  The external fund managers work within various asset classes within the approved asset allocation for the endowment. The College performs extensive due diligence prior to engaging external investment managers, and monitors their performance to assure that they are adhering to their strategies and meeting our overall investment objectives.

As part of our due diligence process for investment manager selection, the College looks closely at the firm’s historical performance, adherence to its investment strategy, management philosophy, corporate governance, and approach to risk management.  Once an external manager has been retained, the College monitors the firm’s performance relative to standard benchmarks and our investment objectives.

As part of this ongoing due diligence of existing managers, and recognizing the global impact of climate change on the environment, in 2014 the Investment Office issued a survey to each of its external investment managers regarding how they approach these issues in making investment decisions.  Specifically, we asked the following questions: One, how does the manager assess the carbon footprint when making investments? Two, how does the manager evaluate the direct costs of climate change on future returns? Three, how does the manager consider the cost of government and regulatory policies aimed at reducing greenhouse gas emissions on future returns?

This initial survey provided a baseline for our due diligence on this topic.  In February 2017, the Investment Office again asked our external investment managers to provide an update on their practices and/or policies regarding how they assess climate change in the investment process.  Through these routine surveys we have been able to determine that these investment firms have dedicated significant resources to defining, measuring, analyzing and improving on their sustainable initiatives for their investment portfolios.

The College’s investment policy takes into account broader concerns, such as climate change or changes in an investment manager’s stated strategy, when they might materially affect the financial performance of the endowment upon which we rely to support our core mission and goals. Changing the investment policy to make a moral statement with no tangible effect could have the effect of diminishing performance and reducing funding available for critical mission-centric initiatives such as financial aid and academic programs, which is why the Board believes our current policy is the right one for the College.

Swarthmore has a deep and longstanding commitment to sustainability.  As evidenced by our internal carbon tax and our “putting a price on carbon” campaign, we are leaders in meaningful efforts to raise awareness of sustainability and reducing our own impact on the environment.  We are also working diligently and successfully to reduce our consumption of fossil fuels, and are making considerable strides to change our waste stream to minimize the amount of trash that is sent to Chester for incineration.  These are just a few ways that we are working to make tangible improvements in our community and in the broader environment.

Managing the College’s endowment requires constant vigilance and the ability to anticipate and react to changes in global and local markets. I am also committed to sharing information about the College’s endowment and its relationship to the College’s budget.  If you would like to learn more about the College’s finances and the endowment, I encourage you to sign up for the fourth annual cycle of our Budget Essentials program in the Fall of 2018.

Divest, with care

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Sunrise has recently been advocating for a referendum on Swarthmore’s investment policy. The group has called for a vote on whether or not the college’s board should revoke the ban on investing ethically, put in place immediately after the school divested from South African associated funds in 1990. More power to them; students should advocate for the direction they want the college to take. But for the referendum to be in any way meaningful, it has to be representative, and the application of any investment decision has to be extremely limited.

There is nothing wrong in principle with ethical investing, obviously. I don’t think anyone serious believed that divesting from the Apartheid state was a bad idea. The morality of fossil fuel consumption is more blurry than Apartheid South Africa; owning or working on an oil rig is indisputably different from using political and violent means to deny basic human rights to an entire class of human beings, based on a vicious racial ideology. To try and create a clear line between right and wrong in this is a fool’s errand. Developing countries are going to have to balance the economic merits of fossil fuels with environmental questions, and to say the choice between long-term risk and certain short-term poverty is clear is wrongheaded. Even though these considerations are less of an issue in America, pretending that we don’t have to make constant compromises about our use of energy is extremely misleading. I mean, I’m writing this piece on a computer powered by fossil fuel energy. And no one is advocating for pulling a Wendell Berry and preferring a typewriter to a computer because of environmental concerns.

But, the danger of climate change is anything but blurry. Divestment is of limited value, as I’ve written in an earlier column, but there is something to it. It’s certainly better than getting medical doctors to inform their patients about the dangers of climate change, which was oddly suggested in my Biology lecture. Fairly moderate in its costs and its impact, divestment also has few direct effects on the college. If a legitimate majority of students supported it, Swarthmore should choose to divest. A community has the right to balance the ability to determine its own direction with its ability to decide what issues are up for debate. But this referendum is not forcing every professor to drive a hybrid to work, or demanding every student vote for politicians who focus on climate issues. It’s a limited step toward solving an agreed-upon issue.

I do worry about the larger implications of “banning the ban,” as Sunrise likes to put it. In the current political climate nationally and on campus, the danger is for the school to be constantly embattled about who exactly to divest from. You could easily envision a slippery slope going from companies that are irresponsible in the use of fossil fuels to… well, hummus. Taking a limited action to attack a limited and very specific problem is what divesting from fossil fuels would be. Broadly condemning an entire society and anyone who supports that society, on an issue that is much more debatable than the threat of climate change, is extremely problematic. Activists should be very careful in what issues they choose to address with school divestment.

Another concern is that a referendum would not be representative of the whole student body. The vote could potentially suffer from extreme selection bias, with only students who care or even know about the referendum attending. Of course, Sunrise cannot compel people to vote, but they could take other precautions. Setting a target number for participation and reholding the referendum if it is not met would be one good idea. Or, holding it over a fairly long period of time like several weeks could help increase participation levels.

And of course, putting the college’s investments up for debate means that they should be up for debate. An attempt to make Swarthmore yet another monolithic institution would be disappointing. Making moral stands should also mean being open to the possibility that you are wrong, and that other people can be right or possess part of the truth. That’s the point of the liberal arts: to be truly liberal in education and life, to work across disciplines and ways of seeing the world. But if “ban the ban” opens a floodgate that leads to the campus community taking increasingly doctrinaire and moralizing stands on each and every political issue, giving no quarter or compromise on any grounds, then Swarthmore could slowly shift into the progressive version of a fundamentalist college. The conclusions are already reached and our only job is to learn how to get to them.


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