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Students all over the US have been pitching tents, barricading buildings and demanding that their universities stop profiting from Israel’s treatment of Gaza. “Disclose, divest, we will not stop, we will not rest,” they chant. If only it were that simple.
Leaving the thorny question of the wisdom and effectiveness of severing financial ties to one side, the practical challenges of doing so have multiplied since student protests prompted more than 150 universities to divest from apartheid-era South Africa. Investing has changed dramatically since then.
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Most endowments and foundations now supplement their holdings of individual stocks and bonds with pre-packaged funds and alternatives such as private equity and private credit. Some investors do not even know where their exposures are. Even those that use new technologies to add transparency are finding their positions can be very difficult to unwind.
Consider the New York State Common Retirement Fund, which started reviewing its fossil fuel investments in 2019 amid climate change concerns. The fund divested from 22 thermal coal companies that it decided “were not prepared to thrive” in a low-carbon economy. But it still drew criticism for an indirect stake in a massive Ohio coal plant through its investment in a Blackstone private equity fund. Such funds require multiyear commitments and most clients buy the whole package.
Many universities also entrust big chunks of money to active managers who pick and choose stocks or bonds for an entire fund, rather than personalising selections for individual clients. Similar issues occur with low-cost index tracking funds: clients historically took the whole offering or stayed away. That passivity has left endowments in a bind.
Brown University recently acknowledged that its publicly trumpeted divestments from tobacco and Sudan only applied in full to the 4 per cent of its endowment in directly held public securities. Its fund managers for the rest are given more freedom. Brown also said it was contractually barred from even disclosing what those holdings are.
Such secrecy impedes accountability. One university executive told me last week that when they asked for a full accounting of their institution’s exposure to defence stocks and companies that do business in Israel, they were told it was too hard to calculate quickly.
That is absurd. Asset managers who serve religious charities or those with scruples around military hardware have been keeping their clients out of guns, cigarettes and other “sin” products for decades. Crude screens provided by data companies such as MSCI have gradually become more granular. Tracking has also expanded to a much wider range of characteristics amid the recent enthusiasm for investing based on environmental, social and governance factors.
Readily available data can pinpoint how much of a public company’s revenue comes from a particular country or business line. Investors and money managers simply have to decide to pay for it and for the technology needed to link it up with their holdings.
Today’s protests are about Gaza, but institutions should see this as a wake-up call more generally. Predicting the next hotspot is difficult. Western sanctions on doing business in Russia that were imposed after its 2022 invasion of Ukraine showed the importance of having clear line of sight into where and how companies make money. Having the data in place to help clients determine financial exposure is a no brainer.
Financial services providers are wary of being seen to profit from tragedy, but they point out that there are technological solutions to the bind that universities and others have put themselves in.
Institutional and wealthy retail clients can choose to invest not through funds but through “separately managed accounts” which may follow the investment strategy of a larger fund but involve direct ownership of the underlying assets. Popular because they can be used to minimise taxes, SMAs are now being marketed as a way to let clients express their beliefs. In “direct indexing” SMAs, for example, clients can replicate the S&P 500 while removing stocks that raise specific concerns. “Customers are going to want to speak with their money,” says one big provider.
Tech arms of big financial groups, including State Street Alpha and BlackRock’s Aladdin platform also offer “transparency services”. These let institutional investors look through their fund stakes to the underlying securities for detailed information on exposure to specific companies and regions. Some can even provide real-time estimates on the potential cost of getting out. These proved invaluable last spring when investors were scrambling to determine exposures to failing US regional lenders such as Silicon Valley Bank.
Amid the protests last week, administrators at Brown and Northwestern sought to de-escalate the conflicts on campus by promising more disclosure around investments and serious consideration of divestment requests. For that to be credible, universities need verifiable data. They must also demand accountability from their professional money managers rather than ceding all control in the name of high returns.
These tools do not come for free, but they are inexpensive compared with the fees for active management or private equity and hedge funds. They could also prove invaluable in managing this crisis as well as future geopolitical and other hot-button conflicts. Financial ignorance can no longer be an excuse.
