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The Three Letters

ESG for Endowments: Universities, Foundations, and Long-Term Capital

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How Do University Endowments and Foundations Approach ESG Investing?

University endowments and private foundations occupy a distinctive position in the ESG investing landscape. They manage perpetual capital — portfolios designed to support institutional missions across generations rather than pay out to specific beneficiaries by a defined date. This long time horizon creates both strong theoretical arguments for ESG risk management and distinctive governance pressures: students, faculty, alumni, and the public regularly call for values-aligned investing, while investment committees composed of sophisticated fiduciaries must evaluate ESG approaches against the requirement to maximize long-term financial return. The history of endowment ESG is largely the history of student divestment campaigns — and the institutional responses, ranging from principled refusal to comprehensive implementation.

Quick definition: Endowment ESG refers to how university endowments, private foundations, and other perpetual capital pools incorporate environmental, social, and governance factors into investment management — through exclusions, ESG integration, engagement programs, or mission-related investing that aligns the investment portfolio with the institution's values or programmatic mission.

Key takeaways​

  • University endowments face persistent student and faculty pressure to divest from fossil fuels; by 2024, over 1,500 institutions globally had made fossil fuel divestment commitments of varying scope.
  • Endowments are not subject to ERISA — they operate under state law and their own governing documents, giving investment committees more flexibility to consider values-alignment alongside financial objectives.
  • The Uniform Prudent Management of Institutional Funds Act (UPMIFA), adopted in most US states, allows endowments to consider charitable purpose alongside financial return when managing funds.
  • Harvard, MIT, Stanford, Yale, and Princeton have taken divergent approaches to divestment and ESG — their reasoning illustrates the genuine complexity of endowment ESG governance.
  • Mission-related investing (MRI) and program-related investing (PRI) — investing the endowment to advance institutional mission — are more widely adopted at foundations than at university endowments.

Unlike pension funds (which are subject to ERISA's financial-primacy requirements), university endowments and private foundations operate under different legal frameworks.

Uniform Prudent Management of Institutional Funds Act (UPMIFA): Adopted by most US states, UPMIFA governs the investment and spending of charitable endowment funds. Section 3 of UPMIFA explicitly allows institutions to consider "the charitable purposes of the institution and the purposes of the institutional fund" alongside financial factors when making investment decisions. This provision is the legal basis for values-aligned endowment investing — including ESG integration and fossil fuel divestment.

Private foundation rules (IRC section 4944): Private foundations are subject to specific rules about "jeopardizing investments" — investments that put the foundation's assets at unreasonable risk without adequate justification. Program-related investments (PRIs) — below-market investments made to advance the foundation's charitable purposes — are explicitly exempted from jeopardizing investment rules.

Donor restrictions: Many endowment funds are subject to donor gift agreements that specify investment restrictions or purposes. An endowment restricted by donor agreement to specific purposes may be subject to different standards than unrestricted endowment funds.

The Fossil Fuel Divestment Campaign​

The student-led fossil fuel divestment campaign, launched around 2012 by 350.org and campus activist organizations, has been the most sustained and visible ESG campaign specifically targeting endowments.

By 2024, more than 1,500 institutions — universities, pension funds, cities, and foundations — representing over $40 trillion in assets, had made some form of fossil fuel divestment commitment. The scope of these commitments varied enormously:

  • Some committed to divesting from only the "Carbon Underground 200" (the largest coal and oil and gas reserve holders)
  • Others excluded only coal but retained oil and gas holdings
  • Some made comprehensive fossil fuel exclusions across the entire endowment
  • Many made commitments to divest over multi-year timelines from specific categories

The divestment campaign arguments were twofold: financial (stranded asset risk makes fossil fuel investments financially imprudent for long-horizon investors) and moral (universities that benefit from fossil fuel profits while educating students about climate change are complicit in the harm).

Endowment ESG decision framework​

How Major Universities Have Responded​

Harvard: Harvard's $50+ billion endowment — the largest in the world — was the subject of intense divestment campaigns from 2012 onward. After years of stated resistance, Harvard Management Company committed in 2021 to allow its existing fossil fuel investments to "run off" (not reinvest in new fossil fuel commitments) and committed to achieving a net-zero portfolio by 2050. Harvard's approach — natural runoff rather than active divestment — represents a middle path that has satisfied neither divestment advocates nor those concerned about performance impact.

MIT: MIT committed to fossil fuel divestment in 2021, building on a comprehensive climate investing strategy that also included $1 billion in climate-focused investment. MIT's approach combined divestment with positive impact investing — illustrating the increasing integration of exclusion and impact in major endowment ESG programs.

Stanford: Stanford announced divestment from coal companies in 2014 — one of the first major university fossil fuel commitments — but resisted broader oil and gas divestment for nearly a decade before making broader commitments in 2023.

Yale: Yale's endowment, managed by the David Swensen model (high allocation to alternatives), has generally resisted prescriptive divestment policies while emphasizing engagement. Yale's approach emphasizes that active investment managers' engagement with portfolio companies is more effective than divestment.

Smaller colleges: Many smaller liberal arts colleges — Hampshire College (first to divest in 2011), Green Mountain College, Pitzer College — led the early wave of comprehensive fossil fuel divestment and have served as models for more politically flexible institutions where investment committee composition is closer to campus activist communities.

Beyond divestment, endowments — particularly foundations — have developed mission-related investing (MRI): actively deploying endowment capital to advance the institution's mission, not merely to avoid harm.

For a health foundation, MRI might mean investing in healthcare technology companies. For an environmental foundation, MRI might mean allocating to renewable energy infrastructure. For an education foundation, MRI might include investments in education technology or workforce development.

The Ford Foundation's 2017 announcement that it would invest $1 billion from its endowment in mission-related investments — specifically in affordable housing, financial services for underserved populations, and sustainable agriculture — was the most prominent MRI commitment by a major US foundation and catalyzed broader MRI adoption.

The key tension in MRI is the risk-return trade-off: mission-related investments may carry different risk profiles than pure-financial investments, and board fiduciaries must be satisfied that MRI is consistent with their obligation to maintain endowment purchasing power for perpetual institutional support.

Real-world examples​

MacArthur Foundation's 100% impact: The John D. and Catherine T. MacArthur Foundation committed to aligning its $7+ billion endowment entirely with its mission — a comprehensive MRI approach that goes well beyond selective divestment. MacArthur's approach represents the most comprehensive endowment ESG program among major US foundations.

California State University's divestment: The California State University system committed to fossil fuel divestment under pressure from students and the state legislature — illustrating how public university endowments may face governmental as well as campus pressure for ESG action.

Rockefeller Brothers Fund: The Rockefeller Brothers Fund's decision to divest from fossil fuels in 2014 was particularly symbolic — the Rockefeller family fortune was founded on Standard Oil, a predecessor of ExxonMobil. The divestment decision attracted global media coverage and is frequently cited as a turning point in the perceived legitimacy of fossil fuel divestment as institutional policy.

Common mistakes​

Ignoring governance process in divestment decisions: Investment committees that commit to divestment without adequate deliberation, documentation, and legal review of their governing documents may expose the institution to legal risk from donors whose gift agreements specified otherwise, or from board members who argue the decision was made without appropriate fiduciary process.

Treating divestment as costless: Some divestment advocates argue that fossil fuel divestment has no financial cost because fossil fuel stocks have underperformed. This is selection-period dependent and not reliable as a prospective claim. Endowments should evaluate divestment decisions on both values and expected financial impact.

Failing to communicate with stakeholders: Endowment ESG decisions — particularly divestment commitments — generate significant stakeholder interest from students, faculty, alumni, and donors. Institutions that make ESG commitments without adequate stakeholder communication processes often find themselves managing expectations and reputations poorly.

FAQ​

Is fossil fuel divestment legally permissible for endowments?​

Under UPMIFA, yes — investment committees may consider the charitable purposes of the institution when making investment decisions. Comprehensive divestment has been implemented by many endowments without successful legal challenge. However, specific fund restrictions or donor agreements may limit divestment options for certain portions of an endowment. Legal counsel should be consulted before implementing divestment.

Does fossil fuel divestment hurt endowment returns?​

The financial evidence is mixed and period-dependent. Analysis covering the 2012–2020 period (when energy sector underperformed) showed divestment had little or no return cost. Analysis extending into the 2021–2022 energy sector recovery showed divestment had some return cost. Long-horizon analysis on stranded asset risk remains contested. No universal answer applies across all endowments and all periods.

What is the difference between divestment and engagement for endowments?​

Divestment sells the endowment's holdings in targeted companies or sectors. Engagement maintains holdings and uses investor rights to push for change through voting, resolutions, and management dialogue. Most investment committee debates frame these as alternatives; some sophisticated endowments use both — engaging as a first response and divesting when engagement fails to produce change within defined timelines.

Yes — the MacArthur Foundation's 100% mission approach demonstrates that comprehensive MRI is legally permissible and operationally achievable. It requires investment committee commitment to mission-alignment as a co-equal objective alongside financial return, and robust investment due diligence to ensure mission-aligned investments meet financial standards. Most endowments maintain a portion of assets in conventional financial strategies alongside MRI allocations.

How do foundations avoid the "jeopardizing investment" rule?​

Private foundations avoid the jeopardizing investment rule by applying the same prudent investor standard to their endowment investments as any fiduciary, ensuring that ESG and MRI commitments are based on reasonable financial analysis alongside mission alignment. Program-related investments (PRIs) — below-market investments made specifically to advance charitable purposes — are explicitly exempt from the jeopardizing investment rule and do not need to meet normal risk-return standards.

Summary​

University endowments and foundations manage perpetual capital under legal frameworks (UPMIFA for endowments, IRC rules for foundations) that allow consideration of institutional mission alongside financial return. This creates meaningful legal flexibility for ESG integration and values-aligned investing that pension fund fiduciaries under ERISA do not have. The fossil fuel divestment campaign has been the most visible endowment ESG pressure — by 2024, over 1,500 institutions had made some form of divestment commitment. Major universities have taken divergent paths, from Harvard's natural-runoff approach to MIT's comprehensive divestment and impact redeployment. Mission-related investing, led by foundations like MacArthur and Ford, represents the positive-allocation complement to divestment — deploying endowment capital to advance institutional mission rather than only avoiding harm.

Next​

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