Israel Divestment: Why It's So Difficult For Colleges - Forbes

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Topline

A wave of protesters on university campuses nationwide have called on schools to divest their endowments from companies linked to Israel’s military in recent weeks—a controversial idea that could prove difficult and costly due to some targeted companies' vast size and reach, though schools have chosen to divest from industries or countries in the past.

Key Facts

Protest demands vary, but most want their school endowments to cut off investments in companies they argue are linked to Israel's war in Gaza—sometimes including Israeli firms, defense contractors and major U.S. companies with business ties to Israel or its government, like Google parent Alphabet, Microsoft and Amazon.

Universities typically provide only high-level details about their assets: For example, Columbia—an epicenter of the protests—offers limited information about how its $13.6 billion endowment is invested, and while protesters have pointed to investments in Alphabet, Amazon and Microsoft, as well as BlackRock exchange-traded funds held by a university-related trust, this only accounts for a small fraction of the school’s assets.

Fully divesting from large firms like Amazon and Alphabet could prove difficult since many are included in investment products such as mutual funds or ETFs—including some funds that just track the S&P 500 or other stock indexes.

Pulling out of such investment portfolios could lead to transaction costs and investment penalties, says Todd Ely, a professor at the University of Colorado-Denver who studies nonprofit finances.

And while Columbia’s protesters have called for the school to pull out of ETFs in their most recent formal proposal, avoiding large firms like BlackRock who manage such funds could also lead to “higher costs and more limited investment options,” Ely tells Forbes.

BlackRock does offer screens for some businesses that deal in civilian and “controversial” weapons, including cluster munitions, landmines, depleted uranium weapons, biological/chemical weapons, blinding lasers, non-detectable fragments and incendiary weapons—but these would not include big tech firms like Amazon or Google, and this might not cover some of the non-defense companies protesters have also singled out for doing business in the occupied West Bank, like AirBnB or Caterpillar.

What Colleges Have Agreed To Divest From Israel?

Union Theological Seminary is the first affiliated college at Columbia University to announce it will begin the complex process of divesting from companies it says are profiting from the war in Gaza, Ely noted. Union did not provide a comprehensive list of what companies it will divest from, but said it will direct its advisors to “companies substantially and intractably benefiting from the war in Palestine that may not be captured by existing screens.” Union will then direct its asset managers to divest holdings in commingled accounts and mutual funds including those companies. The seminary said it will “find another alternative vehicle” if the funds cannot divest. Other universities have reached deals with protesters to explore divestment in the near future or listen to ideas, but haven’t necessarily committed to changing their investment strategies. Northwestern promised to disclose its investments to students who request the information, while administrators at schools like Harvard and Brown agreed to meet with protesters and listen to their proposals in exchange for ending the protests.

Key Background

The interest in divestment comes after weeks of campus protests over the war in Gaza across the United States. Students at Columbia University created the first “solidarity encampment” in April. Columbia President Minouche Shafik quickly moved to shut the protest down and called in the NYPD to clear out the encampment, but protesters quickly set up a new one, as similar encampments sprung up at other colleges around the country. Although the protests were mostly peaceful, their demands to cut ties with Israel drew controversy, and some detractors criticized the rhetoric at some of the protests as antisemitic. In the last few weeks, thousands of protesters have been arrested on campuses, while some students have continued protesting at college commencement ceremonies.

Contra

Colleges have typically pushed back against calls for divestment and avoided offering concrete details about their holdings—leading some protesters to demand that schools disclose more information about their investments. Columbia rejected a proposal last year to divest from Israel-linked companies, arguing the idea lacked a "broad consensus within the University community," unlike previous pushes to divest from fossil fuel companies or apartheid South Africa. Some public colleges could also face legal hurdles. A total of 38 states have enacted laws or passed executive orders designed to discourage boycotts of Israel—including barring their governments from investing in companies that participate in boycotts, or banning pro-boycott companies from competing for state contracts.

Surprising Fact

Columbia has a long history of divesting from certain industries or nations due to moral concerns and protests. Following a wave of protests, Columbia’s Board of Trustees finally approved the sale of all of the university’s South African assets in 1985—about $41 million, the Columbia Spectator reported at the time—in opposition to that country’s apartheid government. The organization that manages the majority of Columbia’s endowment has already divested the university’s assets from several controversial businesses, including the tobacco industry, private prison operators, thermal coal production and fossil fuels, moves that were prompted by student protests. The school also divested from businesses with ties to Sudan from 2006 through 2020, protesting the genocide in Darfur. Other universities, including the University of Michigan and Yale University, were quick to divest from Russia after the 2022 invasion of Ukraine.

Is College Divestment Effective?

Experts are unsure if divestment would be effective in pressuring companies to stop doing business with Israel or its military. “Divestment by colleges and universities has not been especially effective at applying financial pressure to specific companies,” Ely said. “At the same time, the attention received through calls for divestment definitely elevate and increase the saliency of social issues and can help legitimize a cause.” Laura Starks, a finance professor at the University of Texas-Austin, said decades of studies have produced “contrasting results.” A 1999 study noted divestment from South Africa had “little discernible effect on firm values,” noting “corporate involvement with South Africa was so small” that decisions to pull out of the country didn’t leave much of a mark on their own. However, more recent studies have shown divestment can raise awareness about a cause, “serving as banners for subsequent political actions rather than through the action itself,” Starks wrote in a research paper in 2023.