Why the student push to get schools to disclose, divest faces uphill battle

Across the United States, student antiwar groups have been calling upon their universities to disclose endowment investments implicated in Israel's brutal war in Gaza and to divest. The moral demands are clear: these students do not want their institutions to benefit from or be complicit in what many view to be a genocidal war on Palestinians.

One that has to date displaced hundreds of thousands of people, killed enormous numbers of innocent civilians (including aid workers, more than 100 journalists and thousands of women and children), destroyed all of Gaza's higher education institutions, killed hundreds of academics, and left at least 90,000 college and graduate students unable to continue their education.

Campus protests have been met with varied reception from administrators and trustees, including violence. For example, President Minouche Shafik at Columbia University notoriously called in the New York Police Department (NYPD) to clear protests.

However, the trustees of its affiliate, Union Theological Seminary, just announced a plan for divestment in support of student protesters, something that had been in the works since November of 2023.

But in almost all cases, divestment has proven to be challenging for several reasons.

Both Columbia and Union Theological Seminary are private, and can in principle invest or divest as they see fit. But the country's public universities are subject to additional legal constraints set by individual states.

This includes "anti-BDS" laws that have so far been passed by 38 out of the 50 states. While specific provisions vary, some would likely sanction or prohibit state university systems from divesting from Israel.

A number of states even require divestments from any companies that participate in the Boycott Divestment, Sanctions movement.

Financial debate

On campus, some critics warn that student calls for divestment could expose trustees to legal liability for breaching fiduciary obligations.

Detractors have also claimed that giving in to student demands would lead to a slippery slope, and that "endowments can't be in the moral adjudication business."

Such critics evidently view investing as a "value-neutral" activity, concerned only with ensuring healthy returns for beneficiaries.

A similar notion about apparent "neutrality" lies behind the recent wave of Republican-led legislation against the application of ESG (Environment, Sustainability, Governance) criteria, such as reducing pollution and waste and having a more inclusive leadership and workforce.

But these efforts have met with mixed to little success. ESG enjoys wide support among many managers of private funds (which include private equity, hedge funds, and venture capital), so excluding these funds for being "woke" could potentially result in substantial losses and violations of fiduciary duty.

If some endowments and pensions are required to divest from companies that support BDS, they are obviously already in the business of moral adjudication and hardly neutral.

And if ESG standards have become enough of a norm within the world of private funds and investing that *excluding* them would conceivably violate fiduciary duty, then there is no necessarily clear, bright line between ethics or norms and the market.

Times change, as do moral norms and social values, however gradually. If the status quo of 1800 were to persist today, after all, people would still be bought and sold on the market as property.

Human cost in Gaza

Gaza now challenges us all to consider those human "costs" of war and violence that will never be contained by actuarial science and numbers, something the US (but not only the US) has avoided for far too long.

One challenge students face in getting their universities to divest is that not many people know what these institutions are investing in.

The heavy allocations that many, if not all, endowments have in the private fund industry present additional, if not insurmountable, challenges (given the many successful divestments from the fossil fuel industry, a movement aligned with ESG).

Nondisclosure remains the rule within and indeed the privilege of the industry, benefitting as it does from an exemption to the 1940 Investment Act which allowed business transactions between "sophisticated private investors" to proceed with little to no government regulation.

Back then, the typical beneficiaries of this exemption were wealthy individuals and their personal broker-dealers. Fast forward to today, and the landscape has significantly changed.

Working people's pension funds and higher education endowments are now investing in largely unregulated private funds of all sorts, which has expanded the circle of stakeholders enormously.

Critics have complained about student naivete regarding the complexities of endowments and investing. But this only underscores their lack of understanding of the exemption's original rationale, which was to allow individuals to invest their personal funds as they saw fit, with little government interference or oversight.

Murky disclosures

First, while some institutions may be willing to identify and even divest from "direct" or "public" investments (such as publicly traded things like stocks and bonds) in identified companies, which is relatively easy to do, such actions will not affect whatever part of the endowment is invested in private funds.

Second, proprietary databases/strategies and private contracts may exclude public disclosures of specific investments and expose disclosing institutions to potential legal liability, as reflected in the wording of Northwestern University's recent agreement with student protesters.

Institutions investing in hedge funds and "absolute return" strategies will not even know themselves what is being bought and sold because that information is considered proprietary by the funds.

Further, immediate divestment could expose institutions to breach of contract depending on the timeframe of its investment contracts, which can range from the short-term to periods of 10 years or more.

Again, circumstances and investment strategies vary, as do institutional character and context. It is not therefore surprising that there has been a range of institutional responses to student demands for disclosure and divestment, as to the protests in general (the vast majority of which have been peaceful).

These recent calls for divestment represent a far greater challenge to the status quo than ESG does, however, although they share a normative orientation.

Private funds and their institutional beneficiaries have not been nearly so eager to acknowledge or act upon ethical demands, norms, or standards that they have not themselves been involved in defining, or that they cannot control (hence, the recourse to police, with all the consequent violations of trust).

That may be a predictable liberal failing, but it has an autocratic, oligarchic core that is fundamentally antithetical to the democratic and human rights the US has long proclaimed to be central to its foreign policy. It is also antithetical to learning, education, and change.