Letter-to-the-Editor: The Cost of Divestment

Editor’s note: This article was initially published in The Daily Gazette, Swarthmore’s online, daily newspaper founded in Fall 1996. As of Fall 2018, the DG has merged with The Phoenix. See the about page to read more about the DG.

Letter from members of Swarthmore Mountain Justice

A Note on Language

In the three years of our divestment campaign, we spent plenty of time learning investment jargon in the hope of persuading the Board’s Investment Committee to divest. Not only did our jargon fail to convince the Board, but it often got in the way of us communicating effectively with the entire Swarthmore community. At this point, showing the Board that we can “talk the talk” will not convince them of anything. They already know the arguments for divestment, but choose instead to accept investment orthodoxy, the same thinking that has caused the ecological crisis of climate change, not to mention vast inequality and other suffering in the name of profit. They will only change course when students, professors, and alumni join together to demand an end to business as usual. That’s why we’re writing in language that can be understood beyond the Economics department. We define specialized terms whenever it is necessary to use them.

Structure of this Report

This is a formal response to Investment Committee Chair Christopher Niemczewski’s projected cost of divestment, which appeared in The Daily Gazette on May 9 of this year.

There are many financial arguments explaining how Niemczewski’s cost of divestment is inflated by faulty or incomplete assumptions. One example is NorthStar Asset Management’s recent report, “The Cost of Fossil Fuel Divestment Has Been Greatly Exaggerated,” which states that “Swarthmore College’s rationale to not divest has been based upon inaccurate assumptions.”

In the first section of this report, though, we do not question Niemczewski’s assumptions. We think it’s important to show that, even if his assumptions are correct, his projected “losses” occur in the context of continued prosperity for Swarthmore. “We Have More Than Enough” demonstrates that Swarthmore can divest, meet all budgetary needs, and still grow the endowment.

In second section, “The Carbon Bubble,” we give a long-term analysis of the financial prospects of the fossil fuel industry, which opponents of divestment have neglected to do. We summarize why many climate scientists and financial analysts believe that divestment is a sound, and in fact visionary, investment choice.

We Have More Than Enough

We’ll start with the basics: Swarthmore’s endowment totals $1.5 billion and counting. This amount is called the “principal.” The principal does not pay directly for any college expenses. Instead, the Investment Committee invests it in the stock market and the profits come back to us as “returns.” Every year, some of the returns are spent on college expenses, to make up for what tuition and other fees don’t cover. The rest of the returns are added to the principal for the next year, thus allowing the endowment to grow over time. Only in very down years does the college spend money from the principal.

A few numbers can tell the story from here. All of the figures are from Niemczewski’s projections or Swarthmore’s 2011-2012 financial report, the last available.

4.25%: Swarthmore aims to spend, on average, 4.25% of the total endowment amount each year. This is called the “target spending rate.” The all-time high spending rate was 5.4% in 1983. Even during the 2008 financial crisis, spending didn’t dramatically exceed the target.This spending rate has been sufficient for all college needs.

8.4%: This is Swarthmore’s average annual return over the last 10 years.

What does this mean? Swarthmore’s average return is nearly double the amount it spends. The extra money doesn’t benefit current students. It is added to the endowment, so it can make more money next year, so they can add more money to the endowment, so it can make more money next year, so they can…you get the idea. If we didn’t have this extra money, it wouldn’t actually harm the operations of the school.

Here’s a few more numbers:

5.8%: This is the average annual return of the S&P 500 Stock Index over the last 10 years. This is an “index fund” that tracks the performance of the U.S. stock market as a whole. Investors can make “passive investments” in index funds, called “passive” because, unlike “active” investments, managers do not pro-actively change the stocks.

7.2%: This is the average annual return of the MSCI All Country Excluding U.S. Index over the last 10 years. This is an index fund that tracks the international market.

0.0034%: This is the projected cost of full fossil fuel divestment from an index fund, according to a recent report by the Aperio Group. This is small enough as to be insignificant for our purposes. In other words, Swarthmore could invest in a fossil-fuel free version of either of these index funds without incurring a significant cost.

Remember, our spending target is only 4.25%. Both of these index funds are more than profitable enough to exceed the target.[1]

These numbers definitively show that Swarthmore can meet its endowment spending needs through fossil-fuel free index funds. This means financial aid, staff salaries, DJ fees and all the rest could continue as usual post-divestment

Now that we’ve dispelled that anxiety, let’s finish by returning to one more number, the one that shook the Daily Gazette commentariat and prompted this response:

$200 million: Actually, it was $264.4 million. This is Christopher Niemczewski’s projected cost of comprehensive divestment over ten years. To get this number, he assumes that we’ll switch to divested index funds (so far, so good), and then calculates how much that would cost us in the next ten years, assuming that the alternative is a continuation of business as usual, which brings in 8.4% average annual returns.

Just for fun, we calculated what the endowment would be in 2022, if those 8.4% returns and 4.25% spending rate continue. We came up with $2.25 billion. That’s the projected value of our endowment without divestment.

To get the projected value of our endowment with divestment, take $2.25 billion, subtract Niemczewski’s $264.4 million cost of divestment, and you get…

$1.98 billion: That’s our projected value of our endowment in ten years, even with full fossil fuel divestment. Even without funding climate change, mountaintop removal, and fracking, we can still pay the bills and grow the endowment by a cool $500 million. Sounds like a good deal to us. What do you think?

Of course, this is completely unacceptable if you agree with the Board of Managers’ investment philosophy. Their philosophy is grow the endowment, as much as possible, always, even if it means cutting back from current students.[2] Only under this philosophy can $500 million in growth be framed as a “loss.” It’s time for us all to decide if this is a sensible model.

The Carbon Bubble 

Interestingly, for a report on fossil fuel divestment, Niemczewski’s report doesn’t address the economic outlook of fossil fuel companies. A close look at climate science shows that the outlook is poor. More and more investors are waking up to this reality.

The Basics of Climate Change

We agree with the Board of Managers and administration that governmental action is needed to prevent runaway climate change. The world’s governments have already committed, in theory, to limit temperature increase to 2° Celsius. Climate scientists believe that exceeding 2°C will trigger feedback cycles, leading to far higher temperatures. In this world, food production is likely to decrease by as much as 50% in tropical and subtropical climates, including the southern United States.[3] Extreme weather events on the magnitude of Hurricane Katrina, Sandy, or this summer’s wildfires will become far more frequent. A study in the prestigious journal Nature estimated the total economic cost of climate change at $400 trillion. By comparison, the global economy is only $70 trillion each year.

We’re not usually fans of the World Bank, but it released a sobering report this year. In referring to the event of a 4°C warmer world, which we will reach this century if business as usual continues, it writes, “Given that uncertainty remains about the full nature and scale of impacts, there is no certainty that adaptation to a 4°C world is possible. A 4°C world is likely to be one in which communities, cities and countries would experience severe disruptions, damage, and dislocation, with many of these risks spread unequally. It is likely that the poor will suffer most and the global community could become more fractured, and unequal than today. The projected 4°C warming simply must not be allowed to occur.”

 Betting On Climate Failure

Policy-makers are increasingly aware of the dire threat of climate change, whether from their own research or because of pressure from grassroots movements. This is why the world’s governments have agreed to limit warming to 2°C. As they act on this commitment, fossil fuel companies and their investors will pay the price.

All fossil fuel extraction corporations own underground “reserves” of coal, oil, and/or gas that they plan to extract and sell in the future. A corporation’s reserves are factored into its stock price. Carbon Tracker International (CTI) has calculated that, if the world’s governments take action to prevent climate disaster, 80% of existing fossil fuel reserves will have to be left in the ground. This is very bad news for investors. HSBC, the largest bank in the world, backed up CTI’s analysis and calculated that the entire fossil fuel sector could decline in value by 40-60% when governmental action finally occurs. In other words, fossil fuel companies are currently valued much more than they should be. When a whole industry is overvalued, it’s called a “bubble.” Remember the housing bubble? This is the “carbon bubble”–and smart investors need to get out of the way before it pops. Those who don’t stand to lose a lot of money.

Mainstream investors are starting to take notice of the carbon bubble, as the HSBC report indicates. Another study found that  53% of fund managers divested or avoided at least one company last year because of concerns about climate change.Still, most investors, Swarthmore included, are exposed to the carbon bubble. We know from personal conversations that Niemczewski and the Investment Committee are aware of the carbon bubble risk, but they continue to invest anyway. We can think of two reasons why this may be the case.

First is the possibility that Swarthmore and other investors want to profit from the carbon bubble until the minute before it bursts. This is the logic that fuels financial bubbles and crashes–everybody thinks they’ll get out at the right moment, but most of them are wrong. Just before the 2008 financial crisis, a Citibank executive famously said about his practice of making risky loans, “As long as the music is playing, you’ve got to get up and dance.”Citibank got slammed in the ensuing crisis. If Swarthmore dances too long in this case, we will be hit even harder when governmental action on climate change finally comes. Even if you think it is moral to dance up to the edge of ecological disaster, are we good enough to get out in time?

Second is the possibility that Niemczewski and his colleagues don’t believe the carbon bubble will ever pop. In the words of one divestment activist, they are “betting on climate failure” by expecting that governments will fail to act on climate change, and we’ll blow past the safe limits. In this scenario, fossil fuel corporations remain profitable for a while longer, but beyond that all bets are off. Remember, the World Bank says that human adaptation may not be possible in this scenario–our civilization itself could fall apart. Needless to say, civilizational collapse poses a large threat to the existence of Swarthmore College.

It’s Not Too Late To Come Around

There is a third possibility, which we see as most likely. We doubt that Christopher Niemczewski, Sue Welsh, Rebecca Chopp would have Swarthmore willingly profit from an industry that is threatening the entire global order. Even though we’ve talked to them about the carbon bubble and the climate crisis, it’s likely they haven’t fully internalized it.

As we slowly come to grips with the truth of climate change, as individuals and as a Swarthmore community, one essential fact will become clear: In order to preserve a stable future, we must build a mass movement to stop fossil fuel extraction in an incredibly short time-frame. We need vast changes in our communities, institutions, and governments to make the change needed. Through the visionary and financially sound tactic of divestment, Swarthmore can make a real change and encourage other individuals, institutions, and policymakers to do the same. Otherwise, we are truly betting on climate failure and unimaginable consequences.


[1] Assuming a long-term inflation rate of 2%, the Federal Reserve’s target, inflation-adjusted endowment stability requires a 6.25% average return (4.25% for spending plus 2% for inflation). 50% reinvestment in domestic indexes and 50% in international indexes will yield 6.5% average return for divested funds, if trends hold.

[2] During the 2008 financial crisis, the Board made severe cuts to programs and services instead of exceed the usual endowment spending rate.

[3] Projected changes in agricultural productivity, Cline, W. R. 2007. Global Warming and Agriculture: Impact Estimates by Country. Washington D.C., USA: Peterson Institute.


  1. 0
    Concerned Student says:

    Wake up. It doesn’t matter how much it costs to divest. It matters that it costs at all. You expect the college to divest and lost any amount of money for a futile and inconsequential moral point. Even if every school in the US divested, what would change? Nothing, because these companies are still profitable due to a system of tax evasion, law evasion, and government support. Try addressing the issue at a deeper level through lobbying, writing to congressman, or studying law. Divestment is most likely to occur over time anyway; as long as oil becomes a less viable form of energy and alternative energy sources become more reliable (which is mostly reasonable to assume), then there won’t be a reason for Swarthmore to be invested in these companies. Our hedge funds will be invested in something else more profitable.
    That this article even exists just proves the point that MJ has not thought about this issue enough, and are still in the “Let’s save the Whale” mentality which is too shallow of a viewpoint to affect change, compared to “Let’s address the root causes of Whaling”.

  2. 0
    Swarthmore Econ Graduate says:

    “There are a lot of horrible companies out there, and I’d love us to avoid all of them.”

    ^Is this an official Mountain Justice position?

  3. 0
    Suzanne Welsh says:

    This response is intended to further inform readers about the endowment and the College’s budget.

    Growth of the Endowment

    Swarthmore’s objective in managing the endowment is “to provide a sustainable level of distribution in support of the College’s annual operating budget while preserving the real purchasing power of the endowment.” An endowment by definition is meant to provide support in perpetuity for its intended purpose. To maintain the real purchasing power, that support must increase as the costs of the designated program grow each year.
    The total investment return on the endowment must, therefore, be divided between what is spent each year (4.25% is the target for Swarthmore) and what is reinvested in the endowment. Funds must be reinvested so that the endowment support to the budget the following year can be larger to reflect inflationary increases in the costs of the program supported. If the principal of the endowment does not grow, then the spending amount in the budget (4.25%) will also not grow. Gradually, the endowment will provide less and less support on an inflation-adjusted basis.
    For example, consider the case of an endowed scholarship with an initial principal amount of $800,000 in 2011-12. Assuming an endowment spending rate of 4.25%, that scholarship would have provided a scholarship of $34,000 to a student, or 64% of student charges (this was approximately the average Swarthmore scholarship in 2011-12). Looking to the following year, the endowment principal must grow by at least the amount that student charges increased (between 2011-12 and 2012-13, the increase was 4.7%), in addition to generating income of 4.25%. Otherwise, the scholarship provided to the student will not equal 64% of student charges in 2012-13.
    What this example shows is the importance of both income and growth in the principal in the endowment in assuring the long-term health of the College. It is not sufficient for the College to simply meet the goal of a 4.25% return. To have financial stability, the total endowment return must be the sum of our long-term annual increase in costs and our endowment spending rate.

    The College Budget

    In 2011-12, the cost to educate a Swarthmore student was $81,902. Revenues from student charges net of financial aid averaged $34,219 and paid for 42% of the total cost. This is an average across all students. Students not receiving financial aid paid more, while many students on financial aid paid much less or even nothing. The other major revenue source was the spending from the endowment. This amounted to $31,547 per student or 39% of the total cost. Every student at Swarthmore received a “scholarship.” Even students not on financial aid who paid full student charges received an education costing almost $29,000 more than tuition, fee, room and board charges of $53,250 in 2011-12.
    Student revenues and endowment provide about 80% of the revenues needed to cover total costs. A simple way to think about the costs is that 58% of expenses are for faculty and staff compensation with 42% for all other expenses.
    Over many years as the endowment has grown, it had paid for a greater share of expenses. Its growth has also enabled the College to make policy changes to increase financial aid. Most recently, in 2007 the Board of Managers decided that financial aid awards would no longer include a loan component and replaced it with increased scholarship. This would not have been possible had the endowment not experienced the growth to pay for this enhancement.

    Lower Endowment Return Expectations

    If investment returns from the endowment were to be lower in the future because of divestment or for some other reason, taking this simplified budget approach, then the College would be pressured to have greater revenues from student charges and/or to reduce the growth in costs to maintain a balanced budget. Increasing revenues from student charges would involve larger increases in tuition and fees and/or reductions in or constraints on financial aid. Reducing the growth in costs would likely involve trimming and eliminating programs. Because faculty and staff compensation is such a large percentage of expenses, reductions in positions and constraints on salary and benefits would have to be considered.
    There is no question that the College could resize its budget to achieve financial sustainability with a smaller or more slowly growing endowment. Many other liberal arts colleges have smaller endowments than Swarthmore. But readjusting Swarthmore’s budget would involve sacrifices and would impact the quality of the Swarthmore education.

  4. 0
    one thing ( User Karma: 0 ) says:

    One thing, you state that the college makes 8.4% returns on the endowment and only spends 4.25% and therefore “If we didn’t have this extra money, it wouldn’t actually harm the operations of the school.” This is false. An obvious fact that is missed is that it is indeed necessary to return investment gains back into the endowment (In this case (8.4% – 4.25% = 4.15%)) because in the next year the dollar value of the 4.25% spending will increase. (ie. 4.25% of X + N is greater than 4.255 of X when 0 <= X <= N) . The reason spending must increase is to keep up with annual inflation and increased cost of operations. Also spending is how Swarthmore ultimately improves and produces talented people who can then go out into the world and help push back against fossil fuels usage in other ways. This article seems to under-report the economic and social consequences of divestment at swarthmore for the reasons stated here and a few others reasons. In my opinion, MJ would be more effective if the did not try to pretend they where informed economists or financial experts. It would be much harder to poke holes in their arguments. Sorry if someone else had the same comment, I did not read all of them.

  5. 0
    alum says:

    As an alum who works/researches in (green) energy, although I can get behind the symbolism of divestment, I think there are some important things about the global situation vis-a-vis fossil fuels that MJ has yet to address:

    1) Gas, oil, and coal are not the same, do not operate the same in the market, and cannot be treated the same. In particular, gas and coal are natural competitors for one another (at this point, at least). Opponents of fossil fuel use should be exploiting that, not pursuing strategies that align the two as allies.

    2) The oil companies that would be affected by divestment are publicly-traded corporations. These corporations certainly play a major role in extracting and refining fossil fuels. However, they do not own the majority of the reserves. Most of the world’s oil is ultimately state-owned (http://upload.wikimedia.org/wikipedia/en/1/11/Reservespie.png). Even if Exxon, Shell, and BP all went under tomorrow, there would still be entities outside of the reach of the NYSE that have a major interest in getting oil to the market. And there would still be a market!

    3) Because of the above, there is only one policy measure that will actually address climate change in a substantial way, and that is a large carbon price. There are debates about the form this should take (tax, cap and trade, etc.) but no expert in the field that I know of realistically thinks that there is another path that would be as effective. MJ has yet to clearly explain how divestment will get us closer to a carbon price. All I’ve seen is some hand-waving about knocking fossil fuel companies off their lobbying throne.

    4) The reason that we need a carbon price is not just to decrease our own use of fossil fuels, but also to encourage market conditions that allow clean alternatives to reach cost parity. Clean technologies are coming down the cost curve, but not quickly enough, and the way to help that situation is by making them cheaper or making the old ways more expensive. And they need to be a lot cheaper to really fix the problem: the tragic reality is that although the U.S. and Europe may be blamed in large part for creating this problem, we are no longer able to fix it by acting alone. Even if the U.S. and Europe totally stopped emitting CO2 within our borders, it wouldn’t be enough to avoid catastrophe. Non-OECD countries now account for 60% of annual carbon emissions, and that is growing: http://www.eia.gov/forecasts/ieo/emissions.cfm We are in no position to demand that citizens of developing countries give up or stop trying to obtain energy services (e.g. heating, lighting, transportation), nor can we realistically prevent them from exploiting their own natural resources. What we can do is try to make the alternatives as favorable as possible, and that means they have to be comparably cheap. Not cheap in the long-term, dealing with externalities way — cheap right now.

    As a note, there are things Swarthmore could be doing to help clean energy get cheaper. Swat already buys enough renewable energy credits on the PA market to offset its own energy consumption (http://www.swarthmore.edu/facilities-management/maintenance/energy.xml), but there’s nothing that says it can’t buy more. At this point, without solar and wind being at grid parity prices for electricity with coal or gas, a high REC price makes the difference between a renewable project being financially viable or not. I haven’t done the research to figure out how much Swat would have to spend on RECs to make a splash in the price, but I’m quite sure it’s less than $200 million given that the size of the PA REC market as a whole appears to be under $10 million/year.

  6. 0
    Swat Sociology Grad says:

    Ben and Footnote 1–

    First of all, “assuming trends hold” is exactly what Niemczewski does in his presentation. His assumptions are replicated here, as the piece mentions.

    Second, when you talk about how we need a “cushion,” I talk about “infinite growth on a finite planet, with no regard for present or future consequences.”

    Third, I would love it if an economist engaged with the carbon bubble argument in a serious way. “We’ll figure it out” doesn’t cut it.

    1. 0
      Ben says:

      1) It is fine to have historical trends be a baseline assumption, but analysis must be robust in case of small variations as trends change. In Niemczewski’s example, maybe divestment would cost $250M, or $200M, or $300M if trends shifted a bit; fine, those numbers are all of similar magnitude and sign. The MJ citation argues that a split of index funds would effectively cut endowment growth to ~0%, and it is misleading at least to imply that the endowment definitely will not shrink if there are movements from a ~0% growth rate. Sign changes matter. If everyone was totally honest and said “yes, the endowment might shrink a little in real terms, but that is worth it” that would be one thing, but the message I hear is that there will definitely not be shrinkage. This seems dishonest. Aside: as someone who took six figure debt to go to Swat, the financial aid policies are not that friendly already, and having the endowment go down would make this worse.

      2) This feels like a strawman. I have not commented on climate change one way or the other (I am generally against, btw). Real economies work off of relative valuations and prices, not platitudes, and evaluating most-cost-effective course of action is the right way to go (in my view). The remark I made about dominating presidential campaign funding was not in jest; I think that idea is better than this one, and costs about as much. I am not sure what else to say; I think your point was dulled by brevity.

      2.9) Who here said “we’ll figure it out?” My ctrl+f is not finding it. You might want to go raise your argument with them.

      3) I am not sure why anyone needs to hit this argument, if they think there are more cost effective ways of accomplishing the same ends than those proposed here. Lambasting critics as being intolerant of your values (rather than your methods) looks like misdirection. If you insist, though: this argument uses very different premises than most things involving economics, so it is hard to incorporate and/or address. For example, one response is that there is no “right price” for anything, and there is no “valued much more than they should be” because there can be no “should”. This literalist view of economic activity says that all the things we look back on as really, really dumb (like tulip speculation) were functions of personal information, perspective, and preference, and were naturally entailed by those factors. This view has little problem with the idea that human beings are frequently dumb, inconsistent, shortsighted, and cruel; their choices merely reflect that. (For example, human trafficking: cruel, but coherent within the value frame of the traffickers or else they would not be doing it, and cruelly valued by society because there is demand). It is entirely possible that the way we approach climate change is in that category, but the problem is less the economics and prices than the human beings. Getting this question wrong would not be the first albatross around the neck of humanity due to recklessness and stupidity, and the pricing is not wrong or the problem: it’s the people.

      A different economic response: great, you have a market view. Go short energy indices, hedge your credit risks, and make mad bank (unless you are wrong, and then you pay out the nose).

      Finally, a different interpretation of the same data: energy companies only get more valuable when their chief commodities (with entirely inelastic demand) are made more scarce. Perhaps energy companies are not overvalued due to skepticism about government action, but undervalued! Now you have two market views.

  7. 0
    Nathan Graf says:

    Divestment will not cost us $200 million. This article is more so intended to dispel the ridiculous assertions that we’ll have to cut financial aid/other working budget items if divestment occurs. Even at the most hyperbolic extreme, we’d still be okay. But there is every reason to believe we don’t have to spend nearly that much. I’ll respond in more length when I have more than a few minutes, but for starters, I encourage you to explore the NorthStar article.

    “From there, the so-called “cost” of socially responsible
    investing has been tumbling down a path of inaccuracy and inappropriate quotation. Perhaps most notably, Swarthmore College’s Board Investment Committee Chair Chris Niemczewski publicized his estimations using Timothy Adler and Mark Kritzman’s flawed methodology from their 2008 paper, “The Cost of Socially Responsible Investing,” that divestment would cost Swarthmore College $200 million over the next 10 years. In turn,the Swarthmore Daily Gazette then illustrated that it would cost each student another $13,333 in tuition during that same timeframe to make up that loss. Sadly, Swarthmore
    College’s rationale to not divest has been based upon inaccurate assumptions put forth in the Adler-Kritzman paper. In this paper, we attempt to clarify this supposed “cost.”

    “This leads to the conclusion that there is, in fact, no substantive reason for investment fiduciaries to not divest their fossil fuel holdings.”

    They come to a number closer to the order of 3 million over 10 years.

    And even if you’re not fond of NorthStar, Niemczewski’s numbers completely neglect the possibility of actively managed divested funds or having our current fund managers divest.

    1. 0
      Huzilla says:

      “Niemczewski’s numbers completely neglect the possibility of actively managed divested funds or having our current fund managers divest.”

      There are literaly thousands if not millions of managed funds out there. Why hasn’t MJ been able to identify one that would be willing to invest in a way satisfactory to them?

      1. 0
        Nathan Graf says:

        For fun, I googled “socially responsible investment fund sustainable fossil fuels” checked the first hit, http://www.greenamerica.org/fossilfree/, which listed
        Boston Common Asset Management Pax World Funds
        Calvert Asset Management The Sustainability Group
        Clean Yield Asset Management Trillium Asset Management
        Jantz Morgan LLC Veris Wealth Partners
        Krull & Company Walden Asset Management
        Legg Mason Investment Counsel Washington Square Capital Management
        North Sky Capital Zevin Asset Management
        Northstar Asset Management, Inc.

        Its not that we haven’t been able to identify them, it is just that there are so many that the question is quite trivial.

        1. 0
          Mary says:

          Wow! I see that you took this effort quite seriously. I definitely think that MJ can be trusted with our money now that you’ve referenced google as a source!

          1. 0
            Nathan Graf says:

            The intent of the google thing was to point out how easily Huzilla could have found those funds with ~10-15 seconds of effort. We’ve been talking with SRI folks for quite a while.
            As for identifying a high performing fund, that’s nearly as trivial as finding one, and I’d honestly feel disingenuous replying with one, because it means nothing about SRI as a whole. There are hundreds of SRI groups and funds out there, and with that many possibilities, of course a lot of them are going to do well and a lot of them will do poorly. But even those that do well for a few years aren’t necessarily always going to do well in the future, that’s a fairly central tenant of investment. I could look at past trends and extrapolate, but one of very few things I do trust our board to do is to be able to project more accurately on the future of a fund than I could. That’s kind of their entire career, and I trust them to choose a more profitable set of SRI funds then MJ could.

            Huzilla’s point about choosing companies, I agree with completely, actually. There are a lot of horrible companies out there, and I’d love us to avoid all of them. Honestly, at this point in our negotiations that’s a point that they’ve brought up, but in reverse. They claim they can’t divest because it would legitimize other divestment campaigns against other horrible companies, (Like we’ve been citing the Apartheid campaign) and they don’t want to have to divest from all these horrible companies. Fossil fuels to me stands out as trying to get what I can out of them, even if I wish it was more. Fossil Fuel companies were chosen for historical reasons, but I think I’m comfortable with choosing them as the worst as a category right now because of the really short timespan we have to deal with climate change. JP Morgan is horrible too, but we can put that one off for a few years and not have millions more die because of it.

            (side note- JP Morgan would be completely futile at this point since two of the new board members this year were vice presidents at JP Morgan. )

        2. 0
          Re: Septacular (Huzilla) says:

          “MJ actually shouldn’t be selecting those funds, because the Finance Office has that expertise and could spend minimal time seeking out the most profitable funds.”

          I’m not going even go into how hypocritical I found the above statement…

          But, if MJ can’t find a fund that has a similar rate of return, why do you think one exists? Isn’t MJ motivated to show that one can invest “pro-socially” and still not lose a lot of money? It’s not like this is classified information. Funds show you information on how they are doing so you can see if you want to invest in them…

        3. 0
          Huzilla says:

          I’ll also add the following:

          Even in a fund identified as meeting MJ’s ethical standards, one of the top holdings of this fund was JP Morgan. This raises 2 questions that I’d like MJ to address:

          1. Why does MJ have the right to declare certain companies ethical and other companies non-ethical? Don’t other activists that MJ often ally with have issues with a lot of business practices in the financial industry?
          2. How many degrees of separation is necessary for a firm to environmentally friendly/ green? Isn’t it entirely possible that a company like JP Morgan would help fund a lot of the activities that MJ rejects? Perhaps for the very companies on MJ’s sordid sixteen?


          p.s. I’d like to add that the concerns I have about the performance (returns) of a fund like this still remain. This fund, for example, charges a lot in expenses and is returning much less.

        4. 0
          Huzilla says:

          Nathan, thank you for your response and link.

          Now that we you have identified a fund that fits your needs, we can actually look at returns and make calculations based on passed results.

          After you identified your fund, I found this fund’s returns: http://greencentury.com/our-funds/balanced-fund/

          Correct me if I’m wrong, but in the past 10 years the green century balanced fund has averaged 5.43% returns.

          If this is true this is even WORSE than the S&P’s returns in the past ten years. I will quote your own article:

          “5.8%: This is the average annual return of the S&P 500 Stock Index over the last 10 years. This is an “index fund” that tracks the performance of the U.S. stock market as a whole. Investors can make “passive investments” in index funds, called “passive” because, unlike “active” investments, managers do not pro-actively change the stocks.”

          tl;dr this is fund is doing even worse than the passive index strategy that MJ criticized in the board of manager’s meeting.

          **If my observation is wrong in anyway please let me know where.**

          1. 0
            Septacular says:

            And to clarify, that would be shifting away from the Sordid Sixteen, all held in domestic and international holdings, all currently in co-mingled funds so far as I know. It wouldn’t be shifting the whole endowment, just the parts MJ is asking to be shifted because shifting hedge funds and private equity would be much, much more complicated.

          2. 0
            Septacular says:

            The actually isn’t a totally accurate way to look at things.

            The reason Swarthmore has a finance office is so that they can choose the most profitable funds–otherwise Swarthmore would just throw its money to the market. As of now, they choose the most profitable (non-screened) co-mingled funds, hedge funds, private equity, etc. This same standard would apply to any socially responsible funds in which the school would invest. They also have a more extensive knowledge for what those funds are that extends beyond a simple google search. So, looking at any one firm in particular, or at an average of all socially responsible firms, can’t predict what we would actually be making, because we would choose the most profitable socially responsible funds, many of which exceed S&P average. MJ actually shouldn’t be selecting those funds, because the Finance Office has that expertise and could spend minimal time seeking out the most profitable funds. Those funds do exist, are profitable, and stand to be more profitable as the demand for sustainable financial products increases with the growth of the divestment movement (already 300 campuses, 5 colleges and 11 major cities divested and counting) and the mounting reality of the carbon bubble and governmental regulation on emissions that would render fossil fuel corporations a bad investment.

            Even beyond that, the Investment Committee of the Board is heavily involved in the finance industry. Marshfield Associates, run by the chair of the Board’s Investment Committee, is the school’s third top-paid contractor. He could conceivably create a fossil fuel-screened co-mingled fund, making sure that Swarthmore’s divestment would be profitable. The school’s highest paid contractor and investment manager, Cambridge Associates, manages the funds of a number of schools with active divestment campaigns. Even if just these two funds each made a comingled fund, Swarthmore and other colleges could conceivable shift their endowment out of fossil fuels entirely to co-mingled funds.

          3. 0
            Huzilla says:

            to clarify:

            if you can identify a specific fund (rather than the company) that would be great to look at actual returns which is important. You know, to calculate how much money we could be losing.

            The above analysis I did was for the Green Century Balanced fund which was the first listed first in your link.

  8. 0
    One Problem says:

    A problem that I have with the studies MJ puts out on the cost of divestment is that they are all done by “socially responsible” investment groups who have a strong incentive for people to divest -> “You wanna carbon-free invest? We’ve been doing that for years! Let us be responsible for your money!”

    Aperio Group: “customizes the constituents of portfolios to include only those meeting the client’s unique social, ethical, and governance standards.”
    NorthStar: “the client and the financial manager examine the financial and social impact of each investment and then take action through investment, divestment, shareholder activism, and strategic charitable giving.”

    I raised this concern to an MJ member saying that I don’t think that the Board is as anti-divestment as these firms are pro-divestment, so the figures produced by the Board might be worth considering. I was told by the MJ member that there was reason to believe that they are even more anti-divestment than these firms. I asked why, and I was told that there was a lot of history that a non-MJ member couldn’t understand, and that part of the conversation ended. So, yeah…

  9. 0
    versaceversaceversace says:

    Ah yes, I am sure that the ~20-year old social science and humanities majors making up Mountain Justice have unique insight into the secrets of investing that Niemczewski is unaware of… Oh wait none of you do so fuck off and stop spewing this economic nonsense at people who know what they’re doing far better than you guys do.

  10. 0
    Footnote 1 says:

    “Assuming a long-term inflation rate of 2%, the Federal Reserve’s target, inflation-adjusted endowment stability requires a 6.25% average return (4.25% for spending plus 2% for inflation). 50% reinvestment in domestic indexes and 50% in international indexes will yield 6.5% average return for divested funds, if trends hold.”

    The reason you (MJ) aren’t taken seriously is because you think that a .25% return cushion is enough to justify divestment. Sure, it might turn out that the endowment still grows, but you’re essentially arguing that the endowment could quite possibly decrease (in real terms) over the next ten years (with even the slightest deviation from your estimates) by divesting. Totally misleading.

  11. 0
    Ben says:

    The line that really gets me is “We Have More Than Enough”. In my experience*, this is exactly the wrong way to think about financial transactions.

    Most often, transactions can be expressed as a swap** of some kind: I will sell you my fixed interest rate for your floating interest rate; I will give you cash according to in exchange for regular delivery of according to ; I will take $X now in exchange for regular payments of $Y for Z years. Evaluating the worth of either side of these transactions (what you give or get) has nothing to do with acceptability, only optimality. Rephrasing: it does not matter which is OK, it matters which one is better.

    To me, it is not clear that foregoing 1/4 billion dollars and sending a message is better than taking 1/4 billion and doing whatever you think is best with it. Want to match US UNICEF funding for two years or pontificate for 30 minutes during the Superbowl? Or what about building our own network of spousal abuse shelters? Or donating massive amounts of funding to a candidate that is correct on climate change? (A quarter billion would be about 1/8 of total presidential race spending in 2012, so it would be a big stick.)

    Secondly, that first footnote is explosive. It reads as though you think splitting the difference on which indices to use (fair) would provide a more than sufficient cushion in endowment growth (ok…) of .5% (WAT) assuming trends hold. This seems like a lot to gamble on. Suggestion: math and finance speak in charts, graphs, and backtests. Use this and this to make something that looks like these. Use google finance to construct reasonable backtests and share your data. It’s what the pros do to be taken seriously.

    Finally, your aperio link is broken for me (using chromium just now). If that is the big citation to support divestment not really costing anything (which given the importance of energy I am deeply skeptical of), it should be a working link.


    *: 5 years of speculative finance.
    **: I am being kind of loose with terminology here, but the gist is “trade A for B”. There are definitely multiparty things to consider, but they can be framed as “state of the world A or state of the world B”.

    1. 0
      an observation says:

      “5 years of speculative finance” is no qualification to say what’s best for society, or even making money over the long run.

      Unless Swat qualifies for a government bailout…

      1. 0
        Ben says:

        I am not trying to say what is best for society. My experience does not qualify me for that, and it is a much longer wall o’ text. I can comment on how professionals with experience and knowledge cultivated through time address/think about these problems, (because lots of people not at Swat have been thinking about financial matters for a long time,) and bring that knowledge to bear. Recap: use data, do backtests, make charts, then be taken seriously. Other orderings do not work.

        Also, your bailout line is cheesy red meat, not of the cheesesteak variety, and feels forced. You probably want something more like “if you have a clue, where are your charts?”. And I can some for you. Like this one.

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