Why Do Universities Divest From Fossil Fuels?

U.S. colleges and universities are feeling the heat from students and alumni demanding that action be taken to address global climate change. Among their top targets: the investment portfolios and endowments of these higher education institutions.

University endowments are like savings or retirement accounts. The principal, or corpus, generates interest that must be spent according to the donor’s wishes. That principal remains untouched in perpetuity, meaning forever.

As an example, say a donor establishes a $100,000 endowment. Using a 5% spending rate (college rates typically range from 4-6%), the endowment will pay out $5,000 that must be used according to the donor’s wishes — as a scholarship, for instance.

Colleges invest these endowed funds, generating returns that often exceed the 5% expenditure. Excess funds are added to the corpus so it continues to grow over time and keep pace with inflation. Otherwise, that $100,000 endowment will have far less impact on future generations.

Profits from these investments can be a portion of funds used to pay university employees, such as faculty, staff, or student employees, as well as other institutional functions.

To build these funds, some colleges have chosen to invest in fossil fuel companies.

However, the pressure to utilize renewable energy and sustainable practices instead of fossil fuel is only growing in the United States — and much of that pressure is coming from college students. Higher education institutions are responding by investigating their investments and divesting from fossil fuel companies that fund their operations.

Divestment is an action that institutions can take to stop investing. Political and social movements typically trigger divestments — for example, the divestment movement against apartheid in the 1970s and ’80s.

Universities and other institutions can do this by selling their assets or stocks in different companies.

For an institution to divest from fossil fuels, it must commit to selling its investments in the fossil fuel industry, whether that be partial or complete divestment.

A full divestment is a binding commitment to divest direct ownership, shares, commingled mutual funds containing shares, corporate bonds, or any asset classes from any fossil fuel company within a set timeline, according to the Global Fossil Fuel Divestment Commitments Database.

The University of Washington (UW) is one of the latest to join many other colleges and universities in divesting from all fossil fuel companies.

The UW board decided to exit all direct investments in fossil fuel companies and divest by fiscal year 2027, according to a Sept. 8 UW news release.

The decision comes 18 months after the University of Washington Institutional Climate Action (ICA) group submitted a petition calling for the university to divest from the fossil fuel industry. The group considers this a giant step to creating a fossil fuel investment-free university.

Still, the group is displeased that UW extended the deadline two years past what ICA demanded.

ICA is a climate justice divestment coalition formed by students, faculty, and staff at Washington state’s publicly funded higher education systems.

ICA called for stronger wording from UW to make boundaries stricter when it comes to deciding which companies the university could invest in to avoid greenwashing.

In February 2021, ICA made the following demands on the University of Washington:

The commitment from UW compromises on the timeline. It plans to divest all endowments from fossil fuel companies by fiscal year 2027 and commit to achieving net-zero emissions in the endowment fund by fiscal year 2050.

UW’s process to streamline divestment propositions began in 2016, the year after the university decided to divest from thermal coal.

UW’s Advisory Committee on Socially Responsible Investing (ACSRI), established in 2017, was tasked by the board of regents to evaluate the university’s fossil fuel investments.

The 2016 discussions analyzed the historical cost of divestment for the university. The committee considered peer universities’ accomplishments and the local and national social climate, which paved the way for a streamlined procedure used by UW to investigate divestment since 2017.

The 2022 complete fossil fuel divestment resolution is not the first time the university has investigated its environmental investments. The earliest environment-related divestment made by the board of regents was in 2000 for tobacco, then divestment from thermal coal in 2015.

The University of Washington’s investment policy states, “While fiscal goals are of central importance, due consideration shall be given to the degree of corporate responsibility exercised by the companies in which investments are made.”

At UW, proposals are scrutinized under the “Criteria to Divest,” created in 2017.

1. The actions of the invested company must be morally compromising and contribute to harm that is gravely inconsistent with university goals and principles. The decision to divest from a company must also have a meaningful positive social impact.
2. The divestment must be more viable and appropriate than continuing the shareholder agreement.
3. The divestment also must not harm the university’s ability to carry on its educational mission. For example, it must not cause deep divisions in the university community.
4. The divestment must have substantial university community support, including students, faculty, staff, and alums.
5. There must be a company or a list of companies with measurable industry criteria.

There is one caveat for companies that cause social harm, but not on the level of moral reprehensibility. If a company meets those criteria, qualifications must meet three through five.

Unity College in Maine celebrates 10 years of fossil fuel divestment in 2022. According to the school’s website, it was the first U.S. higher education institution to divest from fossil fuels.

Unity College’s board unanimously voted to divest from fossil fuels on Nov. 5, 2012, in collaboration with divestment program 350.org. President Stephen Mulkey used an announcement a few days later to call out other higher education institutions and encourage them to follow Unity’s urgency in divesting from fossil fuels.

“Higher education is positioned to determine the future by training a generation of problem solvers,” said Mulkey in his announcement. “Unlike any time in the history of higher education, we must now produce leading-edge professionals who are able to integrate knowledge from multiple disciplines, and understand social, economic, and resource tradeoffs among possible solutions.”

Mulkey said that the college would end direct investments but could not guarantee zero investment with their endowment exchange-traded funds. He said the returns from those funds would contribute to the sustainability revolving fund.

Ten years later, students are pushing universities to follow in Unity College’s footsteps.

On Feb. 16, student-led campaigns filed lawsuits regarding fossil fuel divestment at Yale University, the Massachusetts Institute of Technology, Princeton University, Stanford University, and Vanderbilt University.

The Fossil Free 5 is a coalition of students at these institutions who are calling for the divestment of fossil fuels.

The coalition alleges that the institutions’ fossil fuel investments violate the Uniform Prudent Management of Institutional Funds Act. The act defines an “institutional fund” as a fund held by an institution for charitable purposes, “whether the fund is expendable currently or subject to restrictions.”

The coalition argues that fossil fuel investments blatantly conflict with the institutions’ educational purposes and respective missions.

“Across our five schools, our chancellors, board members, trustees, faculty, and donors are financially tied to the fossil fuel industry,” said Yale first-year student Avery Long in the Fossil Free 5 press release. “It is unacceptable that our decision-makers are actively profiteering off of climate destruction.”

Harvard University, Princeton University, and Cornell University, which had 4.2% of its long-term investments in fossil fuels, divested recently after student-led lawsuits against their respective schools.

In their news releases, Harvard and Cornell promised to not only divest from fossil fuels but to accelerate sustainability efforts.

Harvard appointed James Stock as its first vice provost for climate and sustainability, according to its news release. The university also reminded readers that Harvard announced, in 2018, that its goal is to eliminate all fossil fuel resources that power vehicles and campus operations and be fossil fuel neutral by 2026.

Cornell hopes to become carbon neutral by 2035 and is exploring Lake Source cooling from Cayuga Lake and Earth Source Heat, a geothermal system. They also said they would invest more into sustainable efforts and research.

“We’re still focusing on risk-reward, but we know that technology is changing every day and we have to get in front of technology,” said Ken Miranda, the university’s chief investment officer in the news release. “Increasingly, the world is evolving to an alternative energy future.”