Divest, Disregard, or Double Down? Philanthropic Endowment Investments in Objectionable Firms

Abstract

How much, if at all, should an endowment invest in a firm whose activities run counter to the charitable missions the endowment funds? I offer the first model characterizing this type of investment decision. I introduce a strategy called "mission hedging," where-in contrast to traditional socially responsible investing-foundations may benefit from skewing investment toward the objectionable firm in order to align funding availability with need. I characterize the trade-offs driving foundation investment decisions. By leveraging the idiosyncratic firm risk typically diversified away in profit-maximizing portfolios, foundations may find that bad actors provide good opportunities to hedge mission-specific risks. (JEL G11, G14, L31, M14)

Understanding Macro and Asset Price Dynamics During the Climate Transition

“…Therefore, fossil fuel rms and dirty rms respond negatively to good climate policy shocks (and positively to bad, tax-reducing climate policy shocks), such that their climate policy risk premia are negative. This result is in line with the intuition provided by Baker, Hollield, and Osambela (2019) and Roth Tran (2019) that dirty rms paradoxically provide a hedge against the consequences of climate change.…”

“…Taking this together with the response of the stochastic discount factor, we obtain positive climate policy risk premia for the clean sector and negative climate policy risk premia for the dirty sector. This result, which implies that climate policy risk premia dampen the devaluation of dirty and oil rms rather than amplifying it, is in line with the intuition provided by Baker, Hollield, and Osambela (2019) and Roth Tran (2019) that dirty rms paradoxically provide a hedge against the consequences of climate change.…”

Asset Prices and Portfolios with Externalities

“…We study the incentives -and disincentives -for moral or environmentally conscious investors to favor SRI, taking the externalities produced by some firms as intrinsic to their production technologies. In contrast to Roth Tran (2018), who considers the portfolio choice problem of a philanthropy in partial equilibrium, we consider a heterogeneous general investor population, and endogenize prices, investment, and the amount of the externality in equilibrium.…”