The 2023–2024 academic year was defined by a wave of campus activism that challenged the core operations of American higher education. As students across the country staged protests—ranging from encampments to walkouts—a central, recurring demand emerged: divestment. Whether targeting fossil fuel companies, defense contractors, or entities linked to the ongoing conflict in Gaza, protesters demanded that university boards of trustees purge their massive, multi-billion-dollar endowments of "immoral" assets.
Yet, despite the intensity of these demonstrations, the vast majority of universities held firm, refusing to yield to calls for divestment. Boards of trustees cited a combination of fiduciary obligations, the principle of institutional neutrality, and the practical impossibility of purging complex, modern investment portfolios.
According to a comprehensive new study published in the Harvard Business Law Review by law professors Max M. Schanzenbach of Northwestern and Robert H. Sitkoff of Harvard, these universities were not merely being stubborn. They were, in many cases, acting to preserve the legal integrity of their institutions. The researchers argue that the modern endowment—a nearly $1 trillion pool of capital—is governed by strict legal mandates that make the kind of ideological divestment demanded by students both legally precarious and financially irrational.
The Evolution of the Conflict: A Chronological Overview
The debate over endowment divestment is far from new, but its recent resurgence highlights a growing disconnect between student expectations and the realities of modern finance.
The Era of "Moral" Investing (1980s–2000s)
Historically, the most cited precedent for divestment is the movement against South African apartheid in the 1980s. Activists often point to this period as a template for success. However, closer inspection reveals that the reality was far more measured than popular memory suggests. Only one of the 25 largest university endowments—the University of California system—undertook a broad, system-wide divestment. Even then, that decision was only finalized after the Board of Regents received specific indemnification against potential fiduciary liability lawsuits.
The Climate Shift (2010s–Present)
Following the anti-apartheid movement, universities faced sporadic calls to divest from tobacco and, eventually, fossil fuels. Our analysis shows that between the 1990s and the 2010s, only five major university endowments divested from tobacco. Of those, four eventually reversed their decisions. When the climate movement gained traction, three of the top 25 endowments—Princeton, Yale, and the University of California—made high-profile, non-financial divestments. These moves have arguably placed these institutions in a state of potential breach of their fiduciary duties.
The Current Crisis (2023–2024)
The current wave of protests surrounding Israel and Gaza represents a departure from previous movements. Unlike the anti-apartheid era, where there was broad, global consensus and explicit U.S. government policy against the South African regime, the current environment is marked by deep geopolitical division. Furthermore, many states have passed statutes specifically forbidding or discouraging state institutions from divesting from Israel, effectively creating a legal roadblock for public universities.
The Law of Divestment: Fiduciary Duty vs. Moral Urgency
To understand why divestment is so difficult, one must look at the legal framework governing charitable trusts and non-profit endowments. Under the law, endowment management is governed by the “prudent investor” rule. Trustees are tasked with maximizing returns to support the university’s charitable purpose: research and education.
The Charitable Purpose Constraint
A university’s endowment is not a general-purpose slush fund for social activism. It is a collection of restricted and unrestricted gifts, all intended to further the institution’s primary mission. A useful legal heuristic is to ask: Would a direct donation of university funds to a specific cause be permissible? If a university cannot legally write a check to the Sierra Club or a political organization, it cannot ethically or legally "skew" its investment portfolio to achieve the same result. By doing so, the board risks violating the terms of the specific, restricted gifts that make up the endowment.
The Administrative and Financial Burden
The "Yale Model" of investing has fundamentally changed the way endowments work. Gone are the days of simple stock-picking. Today’s portfolios are composed of pooled investments, private equity, and hedge funds, often managed by third-party firms.
- Portfolio Costs: Divestment from certain sectors necessitates the termination of profitable, diversified funds, forcing the university to seek alternatives that are often more expensive and less effective.
- The "Direct Holdings" Myth: Many universities claim to have divested from "direct" holdings in fossil fuels. However, because most universities own almost no individual stocks, these statements are frequently performative. Often, the same institutions claiming to be "fossil-free" continue to operate high-emission, on-campus energy plants, highlighting a hypocritical disconnect between rhetoric and reality.
Supporting Data: The Landscape of the Top 25
The sheer scale of the financial power at stake is immense. The 25 largest university endowments account for roughly $500 billion—half of the total $1 trillion in higher education endowment wealth.
| Institutional Stance | Representative Examples |
|---|---|
| Categorical Nondivestment | MIT, University of Chicago |
| "Abhorrence" Exceptions | Stanford, Northwestern |
| Broad Non-financial Divestment | Princeton, Yale, UC System |
| Performative/Limited Divestment | Harvard, Dartmouth (Direct holdings focus) |
The research indicates that the "abhorrence" policies—which allow for divestment in cases of extreme moral failures like genocide—are rarely, if ever, triggered. Instead, they serve as lightning rods for campus debate, forcing trustees to define subjective moral concepts in a legal setting, a task for which they are ill-equipped and which invites endless litigation.
Implications: The Risks of Judicial Intervention
As universities become more polarized, the risk of litigation is rising. Historically, only state attorneys general had the standing to sue a university for mismanagement of a charitable trust. However, the legal landscape is shifting. Recent developments in trust law, including the recognition of "donor standing," mean that individual donors or groups could potentially sue a university if they believe the institution is violating the conditions of their gift by engaging in ideological investment policies.
If a board decides to divest for non-financial reasons, they effectively forfeit the "safe harbor" of the prudent investor rule. This exposes trustees to personal liability. While such lawsuits have been rare, the increasing politicization of higher education makes them an inevitable feature of the next decade.
Conclusion: A Call for Educational Honesty
The irony of the divestment movement is that it often forces universities into a position of dishonesty. By issuing vague statements about "winding down direct investments" or "forming committees to study divestment," universities are, in effect, misleading their students about the legal constraints of their own endowments.
Universities have an expansive, protected sphere in which to engage with social issues: the academic program. They can, and do, fund climate research centers, host symposia on geopolitical conflicts, and provide scholarships to students affected by crises. These are legitimate, non-fiduciary uses of university resources.
The authors of the Harvard Business Law Review study conclude with a necessary, if uncomfortable, piece of advice: Universities should stop treating their endowments as political weapons. Instead of yielding to the performative pressure of divestment, administrators should fulfill their duty as educators. They should explain to their students why their endowments must remain neutral, why fiduciary duty is a legal necessity, and why the most effective way to change the world is through the research and intellectual inquiry that define the university’s true purpose.
Divestment, in its current form, is a distraction from the fundamental mission of the university. It is time for boards of trustees to move past the rhetoric and return to the principles of sound, prudent, and honest financial management.
