Debunking UBC’s dubious legal position on divestment

UBC continues to resist divesting its $1.75 billion (Canadian) endowment from the fossil fuel industry, despite years of pressure from groups including UBC350 and recent encouragement from top UBC officials including President Santa Ono and Board of Governors Chair Michael Korenberg. Henry Anderson does a great job of documenting and critiquing this continuing resistance in an article in this week’s Ubyssey, UBC’s official student newspaper.

Among the reasons UBC’s financial managers give for this resistance is that it would not be lawful for UBC to divest its endowment even if it wanted to. Around 80% of the endowment is held in charitable purpose trusts, which the University has a fiduciary duty to manage in the best interests of their charitable purposes and in accordance with the terms of the donation. The other 20% is the University’s own money, which it must manage in the best interests of the University. The University claims that these duties preclude fossil fuel divestment.

I can understand why UBC’s lawyers and bean counters would want to be cautious about divestment, but there is a very good legal argument that fossil fuel divestment can be consistent with, and might even be required by, the University’s duties.

Back in 2016 my Allard Law colleagues Dennis Pavlich and Jocelyn Stacey wrote an op-ed in the Ubyssey exposing one fallacy in the University’s legal reasoning: the University does not owe a fiduciary duty to its donors. Its fiduciary duty as trustee is owed to the trust beneficiaries. That said, the University is right that a trustee must manage trust assets in accordance with the terms of the trust and in the best interest of achieving the trust’s charitable purposes. But that does not preclude divestment.

Professor Benjamin J. Richardson, one of the world’s leading experts on the law of ethical investment and a former Canada Research Chair in Environmental Law and Sustainability at UBC, concluded in an article in a leading peer-reviewed climate change law journal that in most circumstances, fossil fuel divestment of university endowments would be lawful. UBC’s position that fossil fuel divestment and other forms of socially responsible investment are generally impermissible is a serious oversimplification. Whether divestment is legal or illegal depends on the University’s reasons for divesting, the purposes of the invested funds and the purposes of the University.

First, there is an increasingly strong case that fossil fuel divestment is financially prudent.

Although divestment from a particular sector or country might be seen as increasing financial risk by reducing portfolio diversification, fossil energy is increasingly viewed by financial and economic experts as a risky investment while renewable energy is increasingly attractive. The case for fossil fuel divestment as a prudent investment management strategy is continually gaining strength. The financial community itself is increasingly recognizing climate change as a material financial risk, urging its incorporation into corporate reporting and questioning the viability of fossil fuel investments.

At a minimum, it is incumbent on institutions like UBC to subject fossil fuel investments to a rigorous stress test, and it seems increasingly clear that it would be defensible to conclude that they fail this test or at least that they perform worse than numerous alternative investments. In this sense fossil fuel divestment can be seen as simply incorporating environmental, social and governance risks into investment decision-making, which UBC accepts is permissible for both charitable purpose trusts and UBC’s own funds.

Second, there is a good argument that continued fossil fuel investment is inconsistent with the University’s best interests and its duties as trustee of charitable endowments.

If an investment conflicts with the purpose of a charitable trust, it must be avoided regardless of financial considerations. Similarly, if an investment conflicts with UBC’s purposes, it should not be considered a valid use of the University’s own money. UBC seems to discount the possibility that continuing fossil fuel investment might conflict with these charitable and university purposes.

Let’s start with UBC’s charitable purpose trusts. Traditionally, most lawyers and courts would have agreed that the best interests of a trust’s charitable purposes are served by maximizing financial returns. And even today it remains true that a trustee may not do anything the trust instrument forbids, or choose not to do anything the trust instrument requires it to do. So, if a trust instrument expressly forbids fossil fuel divestment or expressly requires fossil fuel investment, the University would be bound by these constraints—but I’m not aware of any such restrictions and I hope that I’m not naive in thinking the University would be unlikely to agree to them.

Setting this unlikely scenario aside, there are two important caveats. First, it is permissible for a charitable trustee to make ethical investment decisions if they do not increase the fund’s financial risk. So if the trustee and its investment advisers conclude that fossil fuel divestment will not jeopardize financial returns, they may go ahead with divestment.

The second caveat is that a trustee may not make investment decisions that conflict with the trust’s charitable purposes. A credible argument can be made that investment in carbon-intensive industries such as fossil energy conflicts with the charitable purposes of UBC’s endowments.

Regardless of the express purposes of any particular UBC charitable trust, surely all such trusts must share UBC’s basic purpose, which is “pursuing excellence in research, learning and engagement to foster global citizenship and advance a sustainable and just society across British Columbia, Canada and the world.”

It is increasingly clear that continued investment in fossil fuels conflicts with the advancement of a sustainable and just society. One can also argue credibly that continued fossil fuel investment is inconsistent with fostering global citizenship. Global citizenship arguably includes respecting the overwhelming international scientific consensus about anthropogenic climate change and the international community’s commitment, in the 2015 Paris Agreement, to limit global average surface temperature increase to well below two degrees Celsius. One could not be seriously faulted for arguing that continued investment in fossil fuels is inconsistent with this global consensus and commitment. Finally, there is a good case that investment in fossil fuel companies is inconsistent with the University’s purpose of advancing the pursuit of knowledge and the free exchange of information and ideas, in light of the evidence—mounting almost every day—of fossil fuel companies’ active promotion of public misinformation about climate change.

All three of these purposes—advancing a sustainable and just society, fostering global citizenship and avoiding misinformation—also apply to UBC’s management of its own money. It would be hard to argue that pursuing investment strategies that conflict with these stated purposes is in the “best interests of the university,” the legal standard required by the University Act.

Coming back to charitable purpose trusts, a 2015 legal opinion by a leading British lawyer concluded that fossil fuel investment may be impermissible for charitable organizations with purposes related to health, the environment, poverty or other priorities that will be compromised by climate change. On this basis, there is a good argument that fossil fuel investments are impermissible for UBC charitable trust funds that have purposes related to environment, health, poverty or social justice, because such investments conflict with the trusts’ purposes. Beyond such express conflicts, investment in fossil fuel companies might also be impermissible if it alienates the trust’s beneficiaries or supporters or otherwise impedes achievement of the trust’s objectives, and there is no financial justification for the investment.

Dozens of universities around the world, including many in jurisdictions whose legal rules are basically the same as ours, have joined the fossil fuel divestment movement. It beggars belief that all of them are acting on bad legal advice.

In short, the argument that the law prevents UBC from adopting a fossil fuel divestment strategy is unconvincing.