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October 22

Question: Should Carleton's endowment be used to promote the College’s values, or should it be managed to maximize return to better allow the college to accomplish its mission?

One of the most important changes in the investing world in the past decade has been the rise of what has been called “socially responsible” investing. This is a phenomenon in which small investors are able to purchase mutual funds that employ a series of “screens” or rules that limit stock choices, with the objective of making the investor’s portfolio consistent with their personal values. Large investors had already been able to do this through their choices of individual stocks, but smaller investors who typically purchased mutual funds, which hold the stocks of many different companies, were not able to target their choice of investments as precisely. But many new options are now available to investors and even Carleton’s retirement plan offers faculty and staff the option of a social choice mutual fund through TIAA-CREF.

As socially responsible investing has become more popular, some individuals have naturally asked whether the College, with its large endowment, should also be engaging in socially responsible investing. In many ways this discussion is a variant of the divestment debate that occurred in the 1980s over investing in United States’ companies that chose to operate in South Africa during the apartheid regime.

Just like the earlier divestment controversy, the concerns raised by social choice investors often have a political or social dimension. The most common screens used by socially responsible mutual funds include prohibitions on alcohol, tobacco, firearms and gambling stocks, limits on certain kinds of defense related stocks or energy companies that produce nuclear power, and overweighting the fund’s portfolio with environmentally or worker friendly companies. Through these types of mutual funds, I as a small investor can tailor my personal portfolio to reflect that I am an environmentally conscious, gun control advocate who does not like animal testing or a wind power lover who wishes to shrink the defense budget

The problem is how would this work for an institution like a college? I have heard it suggested that Carleton investment policies should reflect the Carleton community’s values. Certainly we could come up with some Carleton values: education and toleration spring to mind, and while we could likely add more to this list, the challenge is to operationalize these values for the purpose of make investment choices. I would suggest that, if we truly care about valuing other’s opinions, this task is extremely difficult for a community, as opposed to an individual.

Would we refuse to invest in tobacco? How would smokers view this? Of course everyone supports being environmentally friendly, but are nuclear power or fossil fuels truly environmentally unfriendly? Does the community object to handguns? Surely there are some second amendment absolutists among us. What is the definition of a worker friendly company? Don’t defense contractors need access to financial capital? These are just a few of the many questions that would arise if we tried to set up the Carleton Community Screens for our investment committee

They simply point to a broader problem that social scientists have been struggling with for many years: how can we aggregate individual preferences into community preferences? Many social scientists have concluded that this task is literally impossible.

Obviously there are a variety of social choice mechanisms designed to get out of this bind and many of us will be participating in one of these imperfect alternatives on November 2nd. I, however, would argue that rather than engaging in a potentially divisive and costly struggle over whose values are given voice in our endowment policies, that we should simply let our investment committee purchase any legally traded financial assets in order to maximize the return to the College’s portfolio. This income can then be used to engage the Carleton value we call all agree on: learning from one another by thinking about and discussing ideas in the classrooms and dorm rooms at Carleton.

Michael Hemesath

Economics Department