Socially Responsible Investing by Universities and Colleges

Abstract

We analyze the socially responsible investing (SRI) practices of universities and colleges. Although SRI may align with an institution's mission and enhance its “brand,” these activities may also arise from agency problems. We find evidence of both effects. Consistent with branding effects, we find significant differences between independent and church‐affiliated schools, we find that highly selective and elite schools do not seek differentiation through SRI and are unlikely to sacrifice returns for SRI, and we find that Less Selective schools appear to regard costs of SRI as branding investments. Consistent with agency problems, attributes of investment committees bear on policy choices. For independent schools, larger committees and those where professional representation is low are likely to screen, allow sustainability considerations to influence investment choices, and vote proxies along SRI lines. “Social boards,” those with more alumni and less investments expertise, appear more oriented toward generating donations and less focused on investment policy.

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

“…The flip side of this, as raised by Dam and Scholtens (2015), is that a low portfolio evil level may give investors the "warm glow" described by Andreoni (1990). Empirically, Smith and Smith (2016) find that higher education investment committees that are larger or have a smaller fraction of investment professionals are more likely to engage in SRI, a pattern they argue is consistent with agency problems on the part of investment committees.…”

“…The potential to hurt fundraising is another concern with increasing objectionable investments. In an empirical analysis of private university and college SRI implementation, Smith and Smith (2016) find that less selective and more religious schools are more likely to engage in SRI, which they cite as evidence of branding as a motivator for SRI. To examine how broad this branding motive might be for private foundations, in Table 1 I show that according to private foundation tax returns, 64 percent of all foundations (holding more than half of the assets) accepted 0 donations in 2011.…”

Divest, Disregard, or Double Down?

“…The literature on divesting as an SRI strategy specifically for philanthropic endowments has primarily surveyed the prevalence of or advocated for (or against) the practice (see McKeown (1997), Wood and Hagerman (2010), Emerson (2003), Kramer and Cooch (2007), and Cleveland and Reibstein (2015)). In an empirical analysis, Smith and Smith (2016) show that SRI implementation patterns at private universities and colleges are consistent with both branding motives and agency problems on the part of investment committees. However, the institutional perspective has not yet been formally modeled.…”

“…Smith and Smith (2016) argue show that universities and college endowment investment committees that are larger or have a smaller fraction of investment professionals are more likely to engage in SRI activities. They argue that this is evidence that some SRI activity is based on agency problems.…”

“…Smith and Smith (2016) argue that their finding that less selective and more religious schools are more likely to engage in SRI shows that these school use SRI for branding. This further supports the conclusion that the fundraising trade-off could be significant for a subset of endowments.…”