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.
Mountain Justice (MJ) is having a referendum today. While MJ has campaigned for many years on the platform of outright divestment of the college’s endowment in fossil fuels, this referendum calls for “partial divestment”. The text of the proposal includes jargon such as “separately-managed accounts”, “commingled accounts” and “fossil fuel free fund”, which can be a bit technical for those without an understanding of the investment management industry.
Thankfully, The Daily Gazette is here to try and help decipher the meaning behind these proposals.
We’ll use an analogy– food, to try and help make some sense of what MJ is asking for. “Fossil-fuel free” would here mean “vegetarian”, a “restaurant” and “chef” would refer to investment managers.
“Instruct managers of our separately-managed accounts, which are customized for Swarthmore and can be changed based on our preferences, to ‘screen out’ (avoid) holdings in the Carbon Underground 200.”
Analogy: Asking your personal chef to only use vegetarian ingredients to cook a meal.
“Separately-managed accounts” means that the managers of these accounts respond to the College’s requests of what kind of assets to invest in. MJ proposes that the college asks the managers of these accounts to sell off stock of companies named in the “Carbon Underground 200”. This list comprises the top 100 public coal and top 100 oil and gas companies globally.
According to the 2013 Q&A on divestment, separately-managed accounts only apply to a small portion of the endowment. Only “domestic equity” (U.S. stocks) have separately-managed accounts, and this is in addition to commingled funds. Since 22% of the endowment falls under domestic equity, the actual proportion of the endowment affected by Proposal 1 will be small. In an email to the Daily Gazette, Greg Brown wrote that “very few of our investments are in separately managed accounts.”
“Instruct managers of our commingled accounts (pooled investment vehicles that cannot be easily customized) that already have fossil fuel free investment options to switch our account to the fossil fuel free fund.”
Analogy: You’re visiting a restaurant. The chef is cooking a 5-course meal for your friends which is non-vegetarian. Dismayed, you notice that this restaurant offers vegetarian options. You ask the chef for a vegetarian meal instead.
Swarthmore College entrusts its endowment to the hands of at least 60 investment managers. When Swarthmore invests in a “commingled fund”, it is investing in a fund alongside other institutions (such as other College endowments, pension funds, and sovereign wealth funds). An ordinary person would invest in mutual funds if they want to pool their investments with many other ordinary people. A commingled fund is similar in concept, but for large institutions like Swarthmore.
Large investment managers typically offer a wide array of funds to pick and choose from, with criteria such as the size of the company, geography, and level of risk. Another criteria– social responsibility– is possible. Investment management companies such as State Street Global Advisors, BlackRock and Allianz Global Investors have set up ‘green bond’ funds to meet client demand.
While we don’t know how many of Swarthmore’s 60+ investment managers also offer green funds, it’s possible that some do and more are thinking of setting them up.
The issue with simply withdrawing our money from a fund and putting it in another is that it could incur high fees. Investment managers don’t want their clients to withdraw randomly, as that may constrain the amount of cash they have and force them to sell assets. That is why they charge exit fees for investors that pull out before a target date.
Proposal 2 assumes that if we kept the money with the same investment manager and simply switched to their fossil-fuel free funds, it would be cheaper than withdrawing money from the investment manager altogether. We don’t know for sure if that’s true. The fees incurred for exiting a fund and entering another one under the same investment manager would depend on the terms that Swarthmore has agreed to.
“For commingled managers that do not have fossil fuel free options, request that they consider developing fossil fuel free investment options, and that when they do offer those options, switch our account to a fossil fuel free fund.”
Analogy: The restaurant you’re in has no vegetarian options. However, instead of leaving the restaurant, you’re still hungry and have a non-vegetarian meal. Afterwards, you kindly send a note to the manager to include some vegetarian options on their menu in the future.
Proposal 3 asks the college to take a wait-and-see approach and to apply pressure for its investment managers to create green funds.
As of December 2016, 688 institutions representing $5.2 trillion in assets announced some degree of divestment from fossil fuels, creating a large demand for investment managers to create fossil-fuel free alternatives to their traditional funds.
In order to attract clients, investment managers have to listen to customer demand. If over $5.2 trillion in assets are partially or wholly divested, that is a large market for asset managers to cater to. If more and more institutions announce divestment, as MJ hopes, investment managers will face the reality of needing to create such products in order to attract business.