The Real Meaning of Divestment

Students at dozens of colleges and universities across the country are occupying quads, lawns, and buildings in opposition to Israel’s bombardment of Gaza, demanding that their universities divest from arms manufacturers and Israeli companies. But is cutting such financial ties even possible? And even if it were, would the loss of colleges’ investments actually change the bottom line for businesses operating in the region or providing arms for the conflict?

Institutions of higher education hold close to $1 trillion in their endowments, much of it parked in index funds, hedge funds, and private-equity funds that invest in equities, bonds, derivatives, real estate, start-ups, and so on. They do not generally make individual investments themselves, meaning that divestment would not be as simple as executing a few stock orders.

That does not mean they have no say over where their money goes, however. Many universities already can claim that they avoid pouring money into industries that damage the planet or hurt people. In one survey of 688 schools with endowments, 187 said they had a “responsible investment strategy.” Many put their cash in “environmental, social, and governance” (ESG) funds that invest only in firms committed to meeting environmental and social standards (such as measuring their carbon output and reporting on the gender and racial balance of their workforce). Other endowments engage in “impact investing,” pushing cash to for-profit enterprises working for the common good (such as ones building homes, grocery stores, and schools in low-income neighborhoods). Still others bar investment in gambling and tobacco.

Plus, universities have divested before. In the 1980s, protesters at schools around the country formed encampments and demanded divestment from businesses operating in apartheid South Africa. Many schools agreed. (Endowments were smaller and simpler then.) In the past decade, scores of colleges and universities—including Columbia, Brown, and Harvard—have divested from fossil-fuel firms after being petitioned by campus activists; others pulled money out of Russia after its incursion into Ukraine; others divested from private prisons and the retailers of assault weapons.

Divestment from Israel would not be straightforward. It might not be immediate. (And at least one state, Ohio, has a law barring its public universities from divesting from Israel.) But it is certainly possible, Charlie Eaton, a sociologist at UC Merced who studies university endowments, told me. “If you’re a Columbia or a Brown or a Princeton or a Harvard, you have a lot of leverage as a very large investor. If you’ve got an endowment that’s valued in the tens of billions of dollars, you can find somebody who will manage the funds according to your preferences.”

If schools chose to do this, they would face little financial risk. Their investments are so big that pulling back from arms manufacturers and Israeli companies, a tiny share of the global economy, would do essentially nothing to their bottom line.

[Read: If you’re worried about the climate, move your money]

The specific decisions that a college would have to make are more complicated. Schools could divest from Israeli firms and military contractors around the world if they actually wanted to. But what about firms with major operations in Israel? Firms whose wares or services are purchased by the Israel Defense Forces? Some students at Columbia argue that the school should drop its investments in all companies “profiting from Israeli apartheid,” including Amazon, Airbnb, Hyundai, and Google, among others.

A yet-bigger question is whether divestment would do anything. In terms of changing the financial outlook for the firms being called out, the clear answer is no, not much. The old investing chestnut applies: For every seller, there is a buyer. If University A sells its shares in military contractor B and Israeli technology firm C, pension fund D is going to pick them up. Unless a huge share of the world’s investors refuses to put money into the companies in question, share prices and financing costs won’t be affected much. Indeed, studies of ESG investing show no effect on a company’s expected returns. The South Africa divestment campaign did not seem to do much either.

That said, some studies of fossil-fuel divestment show a small, but measurable, effect. Divestment has reduced the share price of American coal companies, for instance. The world’s financiers came to see investing in coal as riskier, in essence, and lower returns as likelier.

Still, this kind of analysis misses the point. Most students understand that divestment would not bring down the Israeli economy or end the war. Their goal is not really a financial one but a political one: They don’t want their universities supporting Israel or associated with the human tragedy in Gaza. They oppose the war.

Likewise, the real opposition to divestment is political, not technical. Most Americans believe that Israel has a valid reason to be targeting Hamas; the country is split on whether the bombardment campaign itself is justified. Many donors to colleges and universities find the protests anti-Semitic, support Israel, and don’t want to see administrators give in. Some are even promising to quit giving money to their alma maters if the schools divest.

University administrators, for their part, seem to be searching for ways to make everyone happy, by promising to study the issue or hold votes on their investment strategies. Brown committed to meet with a divestment coalition. The University of Minnesota agreed to share more information about its holdings. It seems unlikely that much will come from these initiatives. But if colleges felt compelled to divest, they could certainly do so.