potential effects of Fossil Fuel DIvestment
Divest Smith has urged Smith College to exert economic pressure on the fossil fuels industry — and make a political statement — by refusing to hold endowment investments in the industry. Ruth Constantine, vice president for finance and administration, and Investure LLC, the college’s investment manager, conducted an analysis to investigate the potential effects of divestment on Smith’s endowment and financial health.
- As is the case for other colleges and universities with large endowments, investment management firms commingle funds allocated from Smith with their other clients’ funds to achieve the best returns on investment. In addition, for 10 years Smith has had a shared investment office — Investure — that commingles its clients’ funds when allocating funds to those managers. The average return on Smith’s endowment investments over the past 10 years was 10.3 percent.
- To divest from the fossil fuel industry, Smith would need to leave the Investure consortium and also drastically limit its choice of investment managers to those who do not invest in the industry. It is reasonable to assume that under those constraints, Smith’s investment returns would fall to the market’s average performance.
- Over the past 10 years, an investment portfolio passively invested in stock and bond index funds would have earned an average annual return of 7.8 percent. When we calculate the potential loss of annual operating income over the next 10 years if Smith were to earn an average annual return of 7.8 percent instead of 10.3 percent, we would have $140 million less to spend on our operating needs over the 10-year period (or on average, $14 million a year less).
- With Smith’s operating budget of $215 million in expenses plus $60 million for financial aid, a loss of $14 million would be felt across the college. Currently, endowment support covers $70 million of the college’s spending. A potential loss of $14 million is equal to nearly one-quarter of annual spending for financial aid, or 30 percent of faculty compensation. Together, financial aid and compensation for staff and faculty account for two-thirds of the college’s annual spending.
Apriil 14, 2014