Doing Good at Cambridge Means an Unholy Row
(Bloomberg Opinion) -- The reason university politics is so vicious is because the stakes are so small, Henry Kissinger is reputed to have said. So when the stakes are high – as in fate-of-the-planet high – the political infighting in academia can become truly poisonous.
The University of Cambridge has been trying to balance the need to generate returns from its endowment funds with its environmental, social and governance responsibilities. Its stated aim is “to achieve the twin investment goals of positive environmental impact and attractive financial returns.”
Under pressure from students, some of its own professors and a former Archbishop of Canterbury, the university set up a working group in May 2017 to consider divesting from businesses involved in fossil-fuel extraction. In June, the University Council agreed to begin partially adopting some, but far from all, of the group's recommendations.
The result? Some 200 academics accused the University of offering only “distant and ill-defined proposals.” The Cambridge Zero Carbon Society called its proposed actions a “farce.” And Chief Investment Officer Nick Cavalla and three of his colleagues recently resigned their positions and will stop managing the University's money later this year.
The Cambridge University Endowment Fund oversees about 3.3 billion pounds ($4.4 billion). While it has no direct investments in the fossil-fuel industry, its policy with regard to external funds it might allocate capital to is to keep “indirect investment in the most polluting industries to the bare minimum.”
The report notes that in the nine years since its inception, the investment team has delivered an annualized return of more than 10 percent. In the year to mid-2017 the fund's managers posted investment gains of 19 percent, twice the total return from the FTSE 350 index. (Disclosure: I'm a member of the investment committee at King's College, which, like other colleges that make up the university, has allocated a portion of its own endowment to the CUEF.)
Mindful of that stellar performance, the University declined to oblige the endowment managers to disinvest from external funds that aren't carbon neutral, or from alternative-energy initiatives by fossil-fuel companies. Such a move “would result in significant limitations on the CUEF’s ability to invest as successfully as in the past,” the council decided. It also rejected a proposal that a minimum of 10 percent of the externally managed money should be invested in funds specifically marketed as targeting ESG principles.
It did, however, pledge to hire an ESG specialist in the investment office and to fund an 18-month research project to enable the University to “play a leading role specifically in the development of environmental impact investment.”
For their part, the four fund managers clearly felt the debate was a distraction from their job of delivering returns. They’re off to join Talisman Global Asset Management in London, where they presumably won't have to deal with clients going on hunger strike or chalk-bombing buildings to influence their investment decisions.
The university has clearly tried to walk a tightrope between acknowledging the environmental concerns of the protesters and the right of its fund managers not to become overly constricted in their investment strategies. In the end, it has satisfied neither.
Cambridge is in good company in wrestling with how to adopt ESG principles. Harvard University, whose $39 billion endowment is the world’s biggest, declined to disinvest from fossil-fuel companies in 2014 amid student protests, arguing that engagement was a better solution. A pressure group called Fossil Free Yale has petitioned Yale University, which has a $29 billion endowment, to abandon its fossil-fuel investments.
But it's an impossible circle to square, and not just because restricting the universe of allowable investments intuitively means forfeiting some returns, something billionaire hedge-fund manager Cliff Asness has argued.
Should a fund avoid investing in farmland that's used to breed livestock because going vegan is “the single biggest way to reduce your impact on planet Earth,” as a study published in the journal Science in May argued? Does the environmental harm caused by generating electricity mean electric vehicle makers should be shunned in favor of the producers of cleaner and more efficient designs of internal combustion engines? And should oil companies be ostracized for their past environmental crimes, or should investors collaborate with them in their more climate friendly initiatives?
The mess Cambridge finds itself in says less about the local actors involved in the drama than it does about the difficulties the entire investment industry faces in reconciling the pressure to do good with the need to make money. It’s a dilemma which will only get worse before it gets better.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
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