Values and Value

The following is an op-ed piece written by Susan Gary, Professor of Law at the University of Oregon, and originally published on April 27, 2014 in the Eugene Register Guard.


The recent University of Oregon student vote on divestment raised the question of whether the University of Oregon Foundation should remove investments in fossil fuel companies from its portfolio.  If the goal is to take action to address climate change, the vote focused on the wrong thing.  Simply screening out the stocks of certain companies is not likely to have a substantial impact on those companies, and doing so may result in negative effects on investment performance. 

Environmental, social and governance (ESG) investing (also called impact investing) is a better way to use endowment assets to address problems like climate change.  The UO Foundation is already a leader in national efforts to increase the use of ESG investing by university endowment funds.  Last spring the UO Foundation became the first foundation connected with a PAC-12 university to adopt an investment policy incorporating ESG factors.

The question for foundation managers and for people concerned about climate change is how best to harness the power of endowments.  Empirical studies in the past few years have demonstrated that using ESG factors in investment decision making can improve a portfolio’s performance.  The investment decisions then have two salutary effects: addressing environmental or social problems while also increasing returns on the investments.

Someone who manages funds for someone else – a trustee managing funds for a foundation, for example – owes fiduciary duties to the person or organization for whom the funds are managed.  The manager cannot make decisions just because the manager thinks the decisions are a “good idea.”  The fiduciary duties require the trustees who set policy for foundations to act as prudent investors.  The concept of “prudence” is a legal one, and in the context of investment decision making it means taking into account general economic factors, the needs of the organization for its programs and purposes, and the appropriate risk and return when those purposes are considered.

The idea of what it means to be a “prudent investor” in the fiduciary sense has evolved over time.  In the 1900s state governments adopted “legal lists” – lists of investments considered safe enough for fiduciary investing.  Then in the mid-20th century, the concept of modern portfolio theory took precedence.  Risk was spread across a portfolio, and more risky investments could be considered as long as the overall portfolio was appropriate.  The concept of prudence continues to evolve, and given the strength of the data concerning ESG investing, a prudent investor can, and perhaps should, consider these non-financial factors.

What this means for foundations is that trustees can embrace ESG investing without concern about violating their fiduciary duties to act as prudent investors.  A foundation need not take lower returns when it invests in ways that address climate change.  Instead, a foundation can invest for value (improved investment results) and values (concern for the future of the planet) in a way that is likely to have an impact. 

ESG investing can address environmental concerns in several ways.  An investor might choose not to invest in a company dependent on extraction of oil and gas because increasing regulation is likely to make that company less profitable in the long run.  An investor might also choose to invest in a clean technology fund, in a company developing solar power, or in a company operating its manufacturing process in a way that reduces its carbon footprint.  By supporting eco-efficient companies, the investors can help grow those business efforts.

Some impact investors engage in shareholder actions that influence companies to change policies.  Shareholder actions and proxy voting can encourage companies to take actions necessary to reduce global warming.  Organizations are creating coalitions of investors to make proxy voting more efficient for individual investors and increase the impact of shareholder actions that affect climate change.

All of these strategies can be part of an overall investment policy, and the use of ESG factors as part of that overall policy can have a significant positive impact on climate change. The UO Foundation should be commended for being one of the first university foundations in the country to adopt an investment policy that includes ESG investing.


Susan N. Gary is the Orlando J. and Marian H. Hollis Professor of Law at the University of Oregon.  She recently participated as an invited speaker at a conference on Intentionally Designed Endowments in Boston, sponsored by Hampshire College (a leader in ESG investing) and Second Nature.


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