What Should Colleges Invest In?
The precocious and progressive young students of Swarthmore College are currently urging their school to completely rid itself of any investments in fossil fuels. The school pointed out that this move could potentially raise each student's tuition costs by $13,000 per year. Is there any way to make divestment work?
In any discussion like this, it's important to acknowledge two points right up front:
1. College students often do not have a firm grasp on the financial implications of what they are advocating.
2. That doesn't necessarily mean they're wrong.
Most people today would agree that the movement in the late 1970s and 1980s to get colleges to divest themselves from apartheid South Africa was not only just, but ultimately effective. On the other hand, if you allowed committees of college students to guide their schools' investment decisions, those schools' portfolios would probably be a mishmash of ideologically driven crapola that didn't translate to stable long-term financial footing. (Although they probably wouldn't do any worse than the adults in charge of Cooper Union).
The investment industry, in its eternal bid for customer service, does offer "socially conscious" mutual funds and whatnot, which invest only in companies that meet certain standards in human rights and corporate conduct and whatever else you wish. But that generally comes at the cost of performance. Vanguard's FTSE Social Index, for example, has returned just over 6% annually in the past decade, compared to nearly 8% returned by the S&P 500 as a whole. When you're talking about an investment of hundreds of millions of dollars, those percentage points add up to a significant hit to a school's bottom line. And, as a bonus, these sorts of funds probably won't satisfy very liberal student bodies anyhow— the Vanguard Social Index includes large holdings of JP Morgan Chase, Citigroup, and Bank of America, among others.
Even if Swarthmore's claim of a $13K annual tuition increase as a result of divesting from fossil fuels is high, it's common sense that any investing strategy that makes choices based on politics rather than financial considerations will come with a cost. And that that cost will ultimately be passed on to students, and their parents, and to society at large, when some portion of them default on their insane student loan balance. There is some amount of cognitive dissonance involved in holding the positions "My college is too expensive" and "My college should purposely pursue a lower return on its investments" simultaneously.
But let's not let schools off the hook here. The constantly increasing cost of elite colleges does not pay off for students in the final analysis. Everyone, in fact, would be better off if colleges learned to operate more cheaply, and then passed those cost savings on to students. The idea of accepting lower returns in the name of morality should not necessarily be dismissed. (The ability to cogently formulate a code of morality is a big part of what you're teaching college students, after all). So— keeping in mind the fact that even the simplest mutual fund investment covers so many different corporations engaged in so many different activities that the idea of being able to effectively police corporate behavior through sector-specific divestment is a bit of a fantasy— how about these simple rules for these student-driven divestment campaigns: A) The students must find divestment targets supported by reasons more philosophically and logically sound than "dude, you know what sucks? Fucking Exxon"; B) The school will make an accurate estimate of the cost of this divestment, in good faith; and C) The students will then make a proposal for how to account for these costs, either by cutting something from the school's budget, or by showing that they are willing to pay more from their own pockets in order to make the divestment plan a reality.
Investing in purely evil shit has been much more lucrative than investing in, you know, hemp. But maybe divestment is a clever way to be righteous, and to cut college costs down to size. By necessity.
