Analysis of Ethical Investing at Berea College-1

Analysis of Ethical Investing at
Berea College
Prepared by Sai Thiha, Jordan Engel,
and the Future Investors of Berea
January 15, 2013
The Future Investors of Berea
• Since 1920, all unrestricted bequests have
been placed into the College’s endowment
Goals of Ethical Investing
• Invest our endowment in ethical firms and
institutions which offer the same rate of return as
our current investments.
• Use our endowment to support the Great
Commitments and our Christian values.
• Balance the key elements of social values,
environmental values and financial returns.
• Use policies and four key ethical investment
methods with the consideration of diversifying
Berea’s Mission
• From the Great Commitments:
• “To serve the Appalachian region primarily through
education but also by other appropriate services.”
• “…work toward both personal goals and a vision of a world
shaped by Christian values, such as the power of love over
hate, human dignity and equality, and peace with justice.”
• From Berea’s official Investment Policy [2006]:
• “The investment of Berea’s endowment should be made
with sensitivity to these Great Commitments, the ethical
values they embody, and the significant dependence of the
operating budget on endowment income.”
Introduction to Endowments
• Endowments are colleges saving account and
earns returns from investments.
• The return from investments go back to
endowments and general operating accounts
• Endowment performance is evaluated using
benchmarks or pre-established goals.
Berea’s Endowment
• 80% of the College’s operations budget is funded
by income from the endowment
• Unlike many colleges and universities, Berea’s
endowment is the centerpiece of the funding
strategy for its educational mission of learning,
labor and service. In a real sense, Berea’s
endowment is its “tuition replacement fund.”
Consequently, Berea’s investment strategy must
promote both real growth and acceptable levels
of risk if the College is to maintain its no tuition
Berea’s Endowment (cont.)
• Rate of Return: Berea’s earnings target is
about 0.5% above the growth rate of the
S&P500 over the last 3 decades.
• The investment policy has been strategically
developed to earn an acceptable rate of
return over the long term with a moderate
level of associated risk.
Berea’s Endowment (cont.)
Berea’s Endowment (cont.)
Berea’s Endowment (cont.)
• Transparency - 76% of the endowment is in funds that are
publically viewable within the office of the VP of Finance.
• Stocks included:
Berea’s Endowment (cont.)
Berea’s Endowment (cont.)
Relevant Basics of Finance
• Invest in a range of asset classes in order to
minimize investment risk and maximize
investment returns
• Diversify risks- low risk low return, high risk
high return
• Hedging to prevent from complete loss
• Holding different kinds of assets in case one
asset or group of assets underperforms
Basics of Finance (cont.)
• Education endowments returned an average
of 19.2% in FY2011
Basics of Finance (cont.)
Conventional Investment for Typical
Cash – large corporate banks
Bonds – suggest by investment consultants
Stocks – mutual funds
Assets and Real Estate – buy building around
• Private Equity – invest in private equity firms
• Hedge Funds – without transparency in term of
social impact
• Venture Capital – invest in companies with the
best growth potential
Ethical Investment for Typical Assets
• Cash – community investment
• Bonds – community investment
• Stocks – shareholder advocacy, impact investing,
positive screening, negative screening, divestment
• Assets and Real Estate – invest in sustainable assets
and real estate
• Private Equity – negative screening
• Hedge Funds – fund manager engagement, screening
• Venture Capital – impact investing, positive screening
Four Methods of Ethical Investment
Divestment/Negative Screening
Shareholder Advocacy
Positive Screening/Impact Investing
Community Investment
• Investors exclude some stocks, bonds or investment
funds that are unethical or morally ambiguous from
their portfolio by negatively screening their funds.
• Successful past college divestment campaigns include
Darfur, Tobacco and South African Apartheid.
• 155 campuses—including Berea—had divested from
companies doing business in South Africa.
• “The divestment movement played a key role in
helping liberate South Africa. The corporations
understood the logics of money even when they
weren’t swayed by the dictates of morality,”
– Archbishop Desmond Tutu
Divestment (cont.)
• The top 500 or so college endowments hold
nearly $400 billion
Divestment (cont.)
• The “Filthy 15” are some of the largest, dirtiest
coal companies in the U.S. These companies are
destroying our Appalachian communities, and are
fast-becoming an increasingly risky investment.
Shareholder Advocacy
• Investors take an active role as the owners of
corporate America.
• Frequently involves filing, and co-filing
shareholder resolutions on social issues which
are then presented for a vote to all owners of
a corporation.
• Shareholder engagement does not involve any
changes in investments, therefore, it does not
impact endowment investment returns.
Shareholder Advocacy (cont.)
• Faculty/Student Shareholder Responsibility
Committees exist at many colleges. The
committee does the research, writes the
recommendations, and only leaves a small time
commitment is required by the Trustees.
• The committee at Williams has been empowered
to vote on behalf of the college. As a result, at
Williams board involvement consists of a single
15-minute agenda item at the May trustee
meeting where the committee presents its
annual report.
Shareholder Advocacy (cont.)
Positive Screening
• Socially Responsible Investing (SRI) is a broad-based
approach to investing that now encompasses an
estimated $3.74 trillion out of $33.3 trillion in the U.S.
investment marketplace today.
• SRI recognizes that corporate responsibility and
societal concerns are valid parts of investment
decisions. SRI considers both the investor's financial
needs and an investment’s impact on society. Creating
positive social change while maintaining a standard or
exceptional financial returns
Positive Screening (cont.)
Positive Screening
• Socially Responsible Investment (SRI) has
grown rapidly
Positive Screening (cont.)
• Portfolio 21 - fund invested in companies
designing ecologically superior products, using
renewable energy, and developing efficient
production methods.
Community Investment
• Community Investing directs capital from investors and
lenders to communities that are underserved by traditional
financial services institutions.
• Potential to inject capital into Appalachia as an investment
strategy that remedies economic disparity by providing
lower-income people access to capital, credit, and training
that they otherwise would not have.
• Community investing, however, is beyond charity and is a
sound investment practice. These investments earn
competitive returns, like non-community development
investments, but also produce a social return that is
attractive to investors and helps communities in need.
Community Investment (cont.)
• In 2012, a total of 1,043 community
development financial institutions (CDFIs),
including community development banks,
credit unions, loan funds, venture capital
funds, and microenterprise loan funds
collectively managed $61.4 billion.
Community Investment (cont.)
• “The best investments aren’t in the Dow,
they’re in Appalachia.”
College Successes in Ethical Investing
Guiding Questions
• What do the students want? How can that
• What do trustees and the administration
want? How can that happen?
Our Recommendations
1. That Berea College appoint a permanent Ethical Investment
Committee within the shared governance structure of the
College with at least two student members.
2. That the President and VP of Finance advocate this cause to
the Board of Trustees Investment Committee.
3. That Berea College continues to increase endowment
4. That Berea College invests 1% of the endowment in an
Appalachian Community Development Fund
5. That the administration assess the interest of students in
adding an investment class to the curriculum that would
manage and impact investment fund.