Divest, Disregard, or Double Down?

Abstract

How much, if at all, should an endowment invest in a firm whose activities run counter to the charitable missions the endowment funds? Endowments typically disregard the objectionable nature of or divest from such firms. However, if firm returns increase with activities the endowment combats, doubling down on the investment increases expected utility by aligning funding availability with need. I call this "mission hedging." This paper offers the first model that characterizes the endowment's investment decision on the objectionable firm, defines investment trade-offs, and examines related evidence. Bad actors provide good opportunities to hedge mission-specific risks.

Keywords: Socially responsible investing, Divestment, Endowment, Foundation, Philanthropy, Portfolio, Universities and colleges

JEL Classification: G11, L31, D64, Q5