Refusing to adopt alternatives to divestment, Swarthmore’s Mountain Justice (MJ) members have latched-on to a report issued by a Boston area firm, NorthStar Asset Management. In brief, the report argues that the Swarthmore Board’s calculations, which led its members to reject the divestment scheme, are based on faulty financial assumptions; “the cost of divestment,” they say, “is grossly exaggerated.” Beyond the obvious humor of MJ’s ragtag environmentalists posing as investment experts, the sheer randomness of this report is striking.
NorthStar Asset Management is a small firm that specializes in “socially-conscious” investing. A look at NorthStar’s staff reveals many of its investors to have an avowed activism streak, which brings up questions of confirmation bias. It seems that they’ve recognized a niche clientele for highly politicized, activist-driven wealth management. To capitalize on that market, NorthStar has weighed-in on the college divestment movement. Good for them. In a free market, there’s room for these kinds of PR stunts. We’re sure NorthStar’s 65 clients sleep better at night knowing that their analysts are busy scrutinizing Home Depot’s political donations to non-PC candidates.
But NorthStar’s analysis of Swarthmore’s endowment is off base and irrelevant. Julie Goodridge, president and founder of NorthStar, admits that her company only oversees $160 million in wealth. To put that in perspective, $160 million is less than 11% of Swarthmore’s $1.5 billion endowment. While it might be relatively easy for NorthStar to exclude the oil industry from the S&P 500 and see very small loses, Swarthmore’s endowment cannot afford a passive approach. The Board has made clear that it does not use index funds but, instead, relies on separately managed accounts or comingled funds. This strategy has outperformed index funds by 1.7 to 1.8 percent per year.
NorthStar’s report continues to assume that Swarthmore mimics the market diversification, which the Board has already refuted. Further, the analysis entirely ignores private equity firms and hedge funds, which tend to invest in a handful of promising companies. Divestment would mean abandoning those opportunities, since very few hedge funds exclude the energy sector. Whether or not they believe in hedge funds, NorthStar certainly likes to hedge terms. In the report, they state, “[I]n the real world, there could be a premium for a socially responsible strategy that divested fossil fuel stocks—not a cost.” But in the real world, a premium is still a cost.
Earlier this year, Christine Jantz, an investment analyst at NorthStar, told Inside Higher Ed, “My view of the Swarthmore paper is that it’s asking, ‘What’s the worst possible case of what it’s going to cost to divest?’” She makes out as if that’s an unreasonable question. We can think of many clear consequences to divesting, including cuts to financial aid, less funding for professorships (especially in the humanities), less support for student programming, and less willingness on the part of alums to contribute to a politicized endowment.
Board chairman Gil Kemp ’72 would not have released the Board’s decision rejecting divestment without widespread agreement from members. One student who has repeatedly discussed business matters with members of the Board tells us that the Board strives for Quaker-inspired consensus, especially on controversial issues like divestment. Swarthmore’s Board is composed of a diverse group of individuals who are extremely willing to exert shareholder activism and hold some of America’s most profitable companies to high standards. They certainly don’t need to be lectured about “socially-conscious” investing from an unknown Boston firm or MJ rabble-rousers.