Universities and Colleges as Socially Responsible Investors

Abstract

We analyze the socially responsible investing (SRI) practices of US colleges and universities. While SRI may appear inconsistent with the fiduciary duty of university trustees, certain practices may be appropriate if they align with the mission and enhance the “brand.” Alternatively, SRI may reflect agency costs. We find evidence consistent with both hypotheses. SRI is predominantly a private school phenomenon. Among private schools, there are important differences in the policies of independent and church‐affiliated schools. Whereas independent schools are likely to adopt screens related to environment, social, and governance (ESG) concerns and to avoid others, church‐affiliated schools are likely to also adopt policies that align with their religious philosophies. Independent schools recognized as “thought leaders” generally do not seek differentiation through their SRI policies and, if they do, are unlikely to sacrifice investment returns for SRI objectives. In contrast, less selective independent and church‐affiliated schools indicate willingness to sacrifice returns, suggesting that they see the cost of SRI policies as investment in their brand/mission. Consistent with the agency cost hypothesis, governance attributes of investment committees bear significantly on policy choices. For independent schools, larger committees and those where representation of investment professionals is low are more 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. At church‐affiliated schools, where investment committees are likely to share a common religious background, there is evidence of homogeneous thinking. For these schools, larger committees work against SRI activism, as does having more investment expertise on the committee.