One year after Yale announced it was divesting from seven oil and gas companies linked to Sudan, a recently discovered connection between the University and two of the blacklisted stocks is shedding light on the sometimes conflicting motivations underlying divestment.
The investment in question is known as a “put option” and is essentially a bet that an index fund which includes the stock of the companies will drop. The method has been described by University officials and leaders in the Sudan divestment movement as a more effective divestment strategy than simply selling the stock. But some other experts in the field say it is morally questionable to profit while divesting.
This disagreement, along with the University of Chicago’s decision earlier this month not to divest from Sudan and recent revelations about Harvard University’s indirect holdings in the country, is raising larger questions about the goals of divestment and how the process should work. The issue also illustrates how splintered the activist community has become in the decades since widespread divestment from South Africa.
The put option
According to forms filed two weeks ago with the Securities and Exchange Commission, Farallon Capital Management, which operates several hedge funds in which Yale invests heavily, has a put option on a fund focused on stocks in countries straddling the developing and developed world. Included in the index fund’s holdings are Petrochina and a subsidiary of Sinopec, both of which are on the University’s blacklist of seven oil and gas companies it will not invest in as of last February. Neither Farallon nor Yale has any influence on the holdings in the fund, called the iShares MSCI Emerging Markets Index Fund.
Petrochina and Sinopec have both conducted business with the Sudanese government, which is accused of genocide. But officials say the put option does not violate Yale’s commitment to divestment from such corporations. With its “put option” on the emerging markets index fund, the Farallon hedge fund — and, indirectly, the University — does not own shares of the two Chinese oil companies. Rather, Farallon is betting that the index fund will decrease in value, and the fund will profit only if the value does indeed fall by the time the option contract expires.
Jonathan Macey, professor of corporate law and chair of Yale’s Advisory Committee on Investor Responsibility — the body that reviews Yale’s holdings for potential divestment — said the put option is not merely consistent with divestment but is an extreme form of divesting.
“Holding a negative position is even better than holding a zero position,” Macey said. “[The hedge fund] is profiting if the stock goes down.”
But not all agreed that a put option would be in line with the spirit of divestment. Louis Putterman, an economics professor at Brown University, served as chairman of Brown’s Advisory Committee on Corporate Responsibility in Investing when it recommended that Brown divest from companies tied to Sudan. While he did not know about Farallon’s put option until told by a News reporter, he said it could be inappropriate.
“My impression, personally, is that any attempt to profit from financial movements or manipulations associated with this political or ethical issue seems to be questionable from a moral point of view,” Putterman said.
Farallon has a put option on $38 million worth of the index fund. That sum, according to the fund’s manager Barclays, would total approximately $375,000 of Petrochina stock and about $26,000 of Sinopec Shanghai Petrochemical Co., a Sinopec subsidiary. The put option was placed to capitalize on weaknesses in the overall emerging market, not to take advantage of the two specific companies losing value due to American institutions’ decision to divest from them. Exactly how much of Yale’s $18 billion endowment is invested in the bet against the index fund is unclear, since Yale does not release information on how much of the endowment it invests with Farallon.
The value of Farallon’s put option on the index fund has increased steadily since it first appeared in federal filings on Aug. 14, 2006. Hedge funds report their holdings only once every three months, and Farallon placed its initial put option sometime between May 12 and Aug. 14 of that year, months after Yale had decided to divest from Sudan.
According to Daniel Millenson, the national advocacy director for the Sudan Divestment Task Force, such techniques are consistent with divestment if they only succeed when the targeted company’s value decreases. But the tactics are financially more risky than traditional divestment, which is accomplished by selling off any holdings in targeted companies, and his group could not recommend them to investors. Millenson was not familiar with the specific Farallon investment in question.
Morals, economics, or both
Differences in philosophies of divestment seem to underlie the disagreement over the appropriateness of a put option. In Putterman’s opinion, Brown alone could not have enough impact on the targeted companies’ value to cause them to pull out of Sudan and stop financing the government there. The advisory committee thought at the time that together with other institutions, it could have such an impact, he said. But economic concerns were not paramount in Putterman’s mind.
“There is a plain moral dimension,” he said. “It seems morally unacceptable for a university to obtain funds for its operations by profits from certain kinds of activities.”
But Macey describes Yale’s motivation for divestment as a hybrid of the moral signal sent by divestment and the actual impact it can have.
“I think it’s kind of a weird combination of the two,” he said. “The divestment idea serves largely a signaling function that the University is not just an educational institution — it’s also a moral actor.”
If any university can have an economic impact through divestment, it is one of a handful with exceptionally large endowments, such as Yale or Harvard, Millenson said. But even those two schools cannot force companies to pull out of Sudan on their own, he said. Most universities see divestment as both a symbolic, moral act and a potentially effective one, Millenson said.
It is likely that Yale’s initial divestment had little economic impact on Sudan. At the time, Yale President Richard Levin said the University held only a small amount of one of the seven banned companies. Yale’s investment managers, such as Farallon, were told to avoid any future investments in the companies.
The distinction between the moral and economic motivations for divestment becomes more apparent when looking at the University of Chicago, which earlier this month announced its decision not to divest from Sudan, citing a need to preserve academic independence. David Greene, vice president for strategic initiatives at the university, had previously been involved in divestment decisions at Smith College and Brown University, both of which divested from Sudan early on in the movement. For the University of Chicago, he said, divestment would not be an effective tool for changing the situation in Sudan.
“It’s something we struggled with at the University of Chicago,” Greene said. “If it’s a largely symbolic act, should we be moving in this direction if we don’t think it will have much impact on Darfur? The moral issue has been enough at other places.”
At Chicago, administration support for divestment might have been more widespread if there were stronger evidence that it would succeed as a form of economic pressure on Sudan’s government, he said. Instead of divesting, the University of Chicago plans to set aside $200,000 for students and faculty to devise activities the university could carry out to mitigate human rights crises.
Under the 1967 Kalven report that officially guides Chicago’s divestment decisions, the university is restricted from taking a position on social or political issues in all but the most exceptional cases. Divestment advocates have sharply criticized the school’s decision, saying the Darfur crisis represents an appropriately exceptional case.
“A lack of shared values”
Divestment from Sudan has now spread to more than 30 universities and seven state governments, with another 20 states considering legislation to divest their pension funds from the country, Millenson said. But even with model divestment plans such as that provided by the Sudan Divestment Task Force, institutions are carving their own paths.
“It’s because of the way university divestment developed,” Millenson said. “The companies were picked before a lot of research was available.”
The movement is not nearly as cohesive as it was during the divestment from South Africa in the late 1970s through mid-1990s, when universities attempted to bring an end to apartheid, Macey said.
“There does not appear to be any consensus with respect to the criteria that would generate a divestment decision,” he said. “It’s a lack of shared values.”
Today, each university makes its own decisions, including which companies to avoid in their portfolios. In the South Africa divestment movement, universities sold off shares of any company involved in the country that did not adhere to the Sullivan Principles, a list of seven human rights goals drawn up in 1977 that companies would pledge to uphold.
“It used to be that people would generally follow the Sullivan Principles,” Macey said. “In that way, there was more of a sense of community.”
But convenience, rather than a common set of moral principles, may have contributed to the similarity of divestment approaches with regard to South Africa. Most of the large multinational corporations ultimately signed the Principles and eliminated their direct investments in South Africa, making divestment decisions easy to accomplish and easy to reconcile with the need for continued profit, Macey said.
“It wasn’t a huge sacrifice [for universities],” he said.
Divestment in South Africa was not all that successful compared to other tactics, Levin said. Shareholder activism was more effective, spurring companies to adopt the Sullivan Principles; divestment targeted only the non-responsive companies.
“Unfortunately, divestment is really a last gasp,” Levin said. “A more effective strategy is to be an activist investor. If you go back to the South Africa divestment, the shareholder activism and other forms of moral pressure played a significant role.”
Between 1978 and 1994, Yale divested from 17 companies operating in South Africa — totaling $23 million worth of shares.
But in some ways, the movement to divest from South Africa was also less cohesive than the current one for Sudan. Scott Warren, a Brown sophomore who is active nationwide in the Sudan Divestment Task Force, said the Sudan divestment is progressing faster than the movement to pressure South Africa. Sudan divestment is also more narrowly targeted to the worst offenders that do not directly aid civilians in the country, he said.
Even if the criteria are different, divestment has become common among the top universities, said Eric Bloom ’08, who was co-coordinator of Yale’s chapter of Students Taking Action Now: Darfur and helped push the University towards divestment. He noted with interest that the University of Chicago had to announce its decision not to divest.
“It was no longer a situation where they could not divest and not say anything,” he said. “We’re at a crossroads where everyone is sort of accountable. It’s something that applies to every institution.”
Last February, Yale divested from seven oil and gas companies linked to Sudan, but the Sudan Divestment Task Force’s list of the worst offenders now includes 30 names. Millenson said that Yale, while a leader in divestment from Sudan, needs to continue its progress. Macey said the University continues to monitor the activities of companies it has not blacklisted but placed on a watch list, though there are no specific plans to divest from more than the seven companies announced last year.
STAND is now focused on pushing divestment at the city and state levels rather than seeking to increase the number of companies on Yale’s blacklist, Bloom said.
Farallon was a major player in the University’s more recent flirtation with divestment. Last spring, the hedge fund sold off its stake in Corrections Corporation of America, a private prisons company, weeks after high-profile protests by Yale’s Graduate Employees and Students Organization. School of Management professor Geert Rouwenhorst, then chairman of ACIR and still a member of the committee, said at the time that CCA did not appear to cause “grave social injury,” as would be required for divestment. GESO representatives maintained that their pressure helped push Farallon to sell its CCA stock.