Commentary on Political Economy

Thursday 2 May 2024


Today’s Points:

Disclose and Divest at Columbia

As this is a note on Columbia University, I must start with a lengthy disclosure: I have two degrees from Columbia (from the journalism and business schools); I met my wife there; I sit on the board of advisers of a fellowship program; and two of my children attend Columbia Secondary School, which the university sponsors. I have strong feelings about the events of the last few weeks, and find it savagely depressing that nobody emerges with any credit. Now, I will try to focus dispassionately on the students’ central tangible demand, which is a big topic for Points of Return — that the university divest from companies that support Israel’s war effort. 

Divestment has had some successes. But like the Israel-Palestine conflict itself, it’s more complex than it looks. Ethical investment, or excluding companies on moral grounds, started as fund managers’ response to demands from clients. Many wanted to exclude alcohol and tobacco, even if it cost them a little financially, so their managers facilitated it. As a moral stand, it makes sense. If you don’t own tobacco stocks, you don’t profit from people smoking and giving themselves cancer, and that’s meaningful. As a practical stand, it doesn’t.

Economic sanctions have a long history, and it’s not clear they work. Fidel Castro never lost power despite a decades-long US trade embargo; sanctions on Vladimir Putin haven’t halted his assault on Ukraine. The end of apartheid is the clearest counter-example — but South Africa had been isolated from the global community in many other ways. Another example was the 1998 threat by US public pension funds to divest from all Swiss stocks unless the nation’s banks compensated the relatives of Holocaust victims whose accounts had fallen dormant. UBS and Credit Suisse agreed to a $1.25 billion settlement.

In 1978, with decades to go. Photographer: Prensa Latina/AFP

But these were focused cases, dealing with rational actors who had a clear course of action to escape the sanctions. Broader history suggests that excluding sin stocks has no effect, beyond allowing less scrupulous investors to make even more money. Religious investors have been barring alcohol stocks for generations; tobacco steadily became almost untouchable for many during the course of the 20th century. And yet the British academics Elroy Dimson, Paul Marsh and Mike Staunton found that alcohol stocks were the century’s best performing sector in the UK, while tobacco did best in the US (because alcohol stocks had an enforced hiatus during Prohibition). Here are the charts to prove it, from the 2020 Global Investment Returns Yearbook:

Eschewing sin involved missing out on great profits; and Dimson comments that performance might even have been helped by ethical investors, as they attracted the less morally squeamish to buy at a lower price. In further research in the Global Investment Returns Yearbook, Dimson, Marsh and Staunton crunched the numbers on exclusionary screening (which has since been demanded by Columbia’s protesters):

We find that investment strategies based on exclusions are on average likely to face a small return and diversification sacrifice. The magnitude of this is unlikely to be material: The price for ethical principles appears small, and one that many virtuous investors may be content to bear.

In other words, you can do this, but it won’t make much difference. By holding a few shares bought on the secondary market, Columbia University isn’t helping Israel’s war effort, and divesting wouldn’t hinder it. What can make a difference, according to Dimson, is active engagement. When institutions take significant stakes in poorly performing companies and apply pressure, they profit while changing corporate behavior.

As for fossil fuels, ESG (Environmental, Social and Governance) investing has been booming for years. It aims to change corporate behavior, but it hasn’t led to greater returns for clean rather than conventional energy. This is the relative performance of the BlackRock iShares exchange-traded funds tracking MSCI’s global energy and clean energy indexes:

Protesters don’t want Lockheed Martin Corp.’s share price to go down; they want it to stop selling arms to Israel. More disquieting is the evidence that ESG investment doesn’t affect corporate behavior. A study published last year by Jan Fichtner, Robin Jaspert and Johannes Petry for the Danish Institute for International Studies concluded that “most green funds do not have a sustainability impact” and that the “vast majority of ESG funds neither define nor execute effective shareholder engagement strategies.”

In Counterproductive Sustainable Investing, Samuel Hartzmark and Kelly Shue went further, finding that ESG, intended to reward green companies with a lower cost of capital (thanks to their higher share price), and to punish others, was having the opposite effect: 

Reduction in financing costs for firms that are already green leads to small improvements in impact at best. In contrast, increasing financing costs for brown firms leads to large negative changes in firm impact. Thus, sustainable investing that directs capital away from brown firms and toward green firms may [make] brown firms more brown without making green firms more green.

This is a big debate. It’s fair to say there’s serious doubt over whether divestment strategies really work.

Furthermore, it’s strange that the issue is creating unrest at Columbia, because it has been well ahead of the curve. An Advisory Committee on Socially Responsible Investing was set up in 2000, long before the issue became salient, with a membership drawn equally from faculty, alumni and current students. Its agenda for this year can be found here, while instructions for making proposals to it are here. It’s bureaucratic, like much of university life, but seemed to work.

Columbia divested from tobacco companies in 2008, private prison operators in 2015, and thermal coal producers in 2017, while in 2021 it adopted a fossil fuel policy that bars investment in oil and gas companies but requires the endowment to evaluate “whether a company has established a credible plan to net zero and has achieved significant strides towards that plan.” None yet meet that standard. From 2006 to 2020, it barred investments in Sudan. 

An organization called Columbia University Apartheid Divest has been calling to boycott Israel for years. It says these companies “profit from Israel’s violation of Palestinian rights” and should be divested: Caterpillar Inc., Hyundai Heavy Industries Co., Hewlett Packard Enterprise Co., Elbit Systems Ltd., Mekorot, Bank Hapoalim, Boeing Co., and Lockheed.

What if there was deep engagement, not divestment? Photographer: Eric Thayer/Bloomberg

Can universities adapt policies like this? Yes, for the same reason that they have a right to free speech. No company has a divine right to Columbia’s dollars. The university can exclude companies if it wants. I don’t think they should, in much the same way that I’m appalled when students chant “from the river to the sea” but accept their right to shout it. 

But as it’s deep engagement that might make a difference, Columbia’s students should press the university to sink money into Lockheed et al, and then bring resolutions to stop sales to Israel. Students could even go to the shareholder meetings wearing keffiyehs. 

Columbia already has a good process for deciding on divestment issues, so it’s bizarre that the administration could find no way to calm down the campaigners. Instead, some dreadful leadership missteps will, I fear, do the university lasting damage. That’s not in the interests of Columbia students or starving Gazans. 

As for the students, is their cause of Columbia’s divestment from Israel an effective way to end the bombardment of Gaza? No. And it isn’t worth going to the lengths of occupying a campus building and getting arrested.  

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