February 10, 2016
Last week, the Finance Committee of the UBC Board of Governors voted to endorse the recommendation of its Responsible Investment Policy Committee and reject fossil fuel divestment. The principal rationale for rejecting divestment is that “it would not be consistent with the board’s fiduciary obligation to endowment donors.” This conclusion relies on a faulty definition of the Board’s fiduciary obligations with respect to the endowment, and rests on assumptions about financial returns under divestment that are unsupported by any evidence presented by the committee (and, in fact, are directly contradicted by the publicly-available literature). Furthermore, the Finance Committee’s interpretation of fiduciary duty appears to contradict research from the UBC Allard School of Law and an external legal opinion sought by the University of Toronto President’s Advisory Committee on Divestment.
The Board’s narrow definition of fiduciary duty is not supported by law
My expertise is in environmental policy, and not the law of trusts. But the literature review that I’ve done about fiduciary responsibility reveals that the Finance Committee’s statement that the Board’s fiduciary duty is the donors is unsupportable. The Association of Governing Board’s defines fiduciary duty like this: “Fiduciary responsibility entails three particular duties to the institution, commonly known as the fiduciary duties of care, loyalty, and obedience. Taken together, they require board members to make careful, good-faith decisions in the best interest of the institution consistent with its public or charitable mission, independent of undue influence from any party or from financial interests.”
Fiduciary duty has its origins in common law, and in some jurisdictions is codified in statutes. British Columbia has a Trustees Act that codifies as the law on fiduciary duty as embodying a standard of care whereby “a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.”
The Board’s duty is not to donors per se, but for the purposes for which the endowment was established. That purpose is guided by the University Act, s. 19.1, which states that “The members of the board of a university must act in the best interests of the university.” Board policies also clarify the endowment’s purpose. The Board’s Endowment Management policy states that “The University is committed to ensuring that the endowment funds maintained in the endowment pool are used in such a way as to maximize their benefits for the advancement of education at the University, including educational and research activities carried on by the University which benefit society generally.” The Board’s Endowment Responsible Investment Policy defines its “primary fiduciary responsibility” as “acting in the best interest of the University and its stakeholders.” It continues, “When considering divestment, the University must consider the interest of its multiple stakeholders, which include students, faculty, staff, alumni, donors, the government and taxpayers.” [i]
Traditionally, fiduciary duty has been understood to emphasize financial criteria, particularly pursuing the best possible return over the long run with due consideration to risk. Investment criteria, however, are not limited to financial gain. UBC, for example, has broadened its criteria to include Environmental, Social, and Governance (ESG) principles. The normal expectation is that such screening will either increase or at least not jeopardize financial returns. In principle, screening investments for non-financial criteria, even if it did sacrifice financial return, could be consistent with fiduciary duty as long as the beneficiaries of the trust made this value choice explicit (see the Richardson memo cited below). But that’s not the issue for fossil fuel divestment as there is no evidence divestment will materially decrease returns, and indeed growing body evidence that maintaining fossil fuel investments may decrease returns (see next section).
As a side note: The legal opinion solicited by the Board states ”Divestment is compatible with the fiduciary standard if alternative investments are available with a higher rate of return having regard to the relevant risk.” This statement must be an error, as it is inconsistent with the understanding of fiduciary duty in the literature, which states that such screening should be permissible so long as it does not jeopardize financial returns.
The Board’s assumption that divestment creates a financial risks is not supported by evidence
The Finance Committee appears to assume, without citing any evidence, that divesting the endowment of fossil fuels would create financial risk. Our Responsible Investment Proposal, and our September 15 research update, both cite a substantial body of research showing that fossil free funds would have experienced either similar or higher returns. Given the weight of this evidence, the burden of proof should be on the Board to demonstrate that there would be a financial risk. Yet no such analysis has been provided.
Moreover, concern has been increasing in the investment community about the long term financial risks of exposure to fossil fuel stocks, given that most of the reserves on the books for fossil fuel companies will become stranded assets as the world moves to address the climate crisis. Arguably, fiduciary duty requires that the Board examine the long-term financial risks from holding fossil fuel stocks (See the Kosky-Minsky report, especially p. 25).
The Finance Committee rejects divestment on the grounds that it is inconsistent with their fiduciary duty. Yet their legal standard for fiduciary duty is flawed, and they do not support their concern of the financial risk of divestment with evidence. Fiduciary duty requires the the Board “exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.” The Board does not seem to have done the due diligence necessary to fairly consider the divestment proposal.
An external legal opinion (pg. 18) obtained by University of Toronto contradicts UBC, instead finding fiduciary duty does allow for divestment.
“After considering all the evidence and given the long-term nature of the University’s obligations with respect to the Funds, the Committee concludes that divesting from the University’s direct holdings in fossil fuels companies whose actions blatantly disregard the 1.5-degree threshold (or any evolution of this standard, upwards or downwards, as the best scientific and policy evidence produces a new consensus) would be consistent with the University’s fiduciary duties and the long-term financial best interests of the beneficiaries of the trusts. “
Professor Benjamin Richardson, “Legality of Socially-Responsible Investing (SRI) by University Endowment Funds,” Memorandum to UBC Board of Governors Finance Committee, August 3, 2013. This Memorandum states “because SRI emphasizes a long-term approach to investing financial capital in a manner that addresses ongoing and emerging concerns such as climate change and respect for basic human rights, SRI is arguably quite compatible with the purpose of an endowment fund. To manage and preserve the endowment in perpetuity for the benefit of current and future generations of students, staff and other stakeholders in the university requires being attentive to ESG issues of long-term financial salience.” The Memorandum concludes, “there is no insurmountable fiduciary or trusts law barrier to UBC’s endowment funds practising SRI. Rather, the legal imperative is increasingly that these funds must be managed for SRI purposes – SRI should be viewed as a way to legally fulfill the purpose of endowment funds and to nurture the wider best interests of the university and its members.”
At an earlier point in the document, the policy does say “Fiduciary responsibility dictates that UBC invest and act solely in accordance with the requirements of its donors in accordance with the common law investment standards for trustees.” However, this statement is inconsistent with the more accurate characterization of fiduciary duty found later in the document, and the common law and statutory law on it. The sentence would correctly characterize the concept if it had said “Fiduciary responsibility dictates that UBC invest and act solely in accordance with the requirements of its donors AND in accordance with the common law investment standards for trustees.” Donors can dictate specific investment practices in their deeds, and when they do they must be honoured by trustees. But there’s no evidence that much of the Board’s endowment is constrained in that way.