The Economic Risks of Divestment from Israel for University Endowments

As encampment protests riled college campuses throughout the Spring 2024 semester, some universities agreed to formally consider protestors’ demands that their endowments divest from companies with business interests in Israel. It is the latest iteration of the years-long Boycott, Divestment, and Sanctions (BDS) campaign that seeks to isolate Israel economically. 

Brown University reached an agreement for student protestors to take down their encampment and refrain from further disrupting campus life. In exchange, the governing Corporation of Brown University will hold a formal vote on divestment in October. UC Riverside, The New School and Johns Hopkins University came to similar agreements with students. With anti-Israel divestment protests likely to gain steam again when students return to campuses at the end of summer break, other universities may very well follow this example. 

However, acquiescing to these demands carries significant economic risks that can easily have a deep negative impact on those endowments. These include lower endowment returns, reduced alumni contributions, and constrained access to capital. This trifecta of challenges, as well as additional tax-related risks, would have real-world consequences, impacting a university’s ability to fund scholarships and research and to maintain its facilities.  

All of this is in addition to the many moral and legal reasons to oppose divestment. Divestment campaigns unjustly single out Israel as solely responsible for the Israeli-Palestinian conflict and feed the demonization of Israel and rise of antisemitism. 

Protestors’ goals vary school by school, but many are demanding that their endowments divest from all companies with any ties to Israel. Others are seeking more limited divestment only from companies that produce weapons or have direct military ties, like Boeing. Regardless, universities that agree to divestment are likely to face significant economic ramifications. 

Lower Endowment Returns 
 

We live today in a more globalized and financially interconnected world than we ever did in the past–certainly more so than during the 1980s South Africa divestment movement.  

According to JLens, an ADL affiliate representing the endowments of Jewish organizations with assets totaling $10 billion, more than 100 companies from the S&P 500 conduct business in Israel. This includes some of the largest and most successful global companies, like Apple, Microsoft, and Amazon.  

More recent campus divestment movements, such as those in the 2010s focused on guns and fossil fuels, involved removing relatively small numbers of companies whose businesses directly revolved around those issues from university endowments.  

Fully divesting from Israel, therefore, is not a straightforward process of selling off investments in a handful of companies. Given the sheer number of companies with economic ties to Israel and the size of some of those companies, it’s not a stretch to predict that divestment could result in significantly lower returns and a less diversified portfolio.  
 

Lower Alumni Contributions 

Universities that divest from Israel, in either an expansive or more limited form, also risk alienating donors and alumni for whom a connection to Israel is core to their Jewish identity.  

Already, a number of high-profile, high-net-worth donors have announced they’re withdrawing support from their alma maters because of campus antisemitism and what they see as universities' inadequate responses to protect Jewish students. Robert Kraft, owner of the New England Patriots football team and a major donor to Columbia University, is just one example. And the same is true for an unknown number of rank-and-file donors whose names (and net worths) do not make headlines. Jesse M. Fried, a Professor at Harvard Law School, and David H. Webber, a Boston University Law School professor, note in a Newsweek piece that the “further universities move in the direction of boycotting Israel in any respect, the further donations will fall.”  

Additionally, even donors who do not care deeply about the Israel issue specifically may be frustrated by universities' willingness to consider divestment demands from students who have violated school policies and fueled antisemitism on campus–especially since those demands can decrease the value of the university’s endowment. 

Reduced Access to Capital 

As donors increasingly withhold contributions–and endowments suffer from the lower returns that divestment will bring–universities divesting from Israel may face reduced access to capital. This would, in turn, force them to rely more on debt financing.  

Investors may also view divesting universities as higher risk, leading to lower bond prices and higher borrowing costs, making it harder for universities to finance themselves.  

 
Tax Risks

In recent years, the taxation of endowment income has become a contentious political issue, with lawmakers increasingly viewing it as a potential tool to influence university behavior. Although the idea of taxing university endowments was for decades considered off-limits, this is no longer the case. Since 2018, many private colleges and universities have been subject to a 1.4% federal excise tax on endowment income. 

More recently, some lawmakers have proposed taxing endowments even more aggressively in cases where universities fail to adequately protect students from antisemitism on campus or allow disruptive encampments. In fact, several congressional bills suggest raising the current 1.4% tax rate on endowment income to significantly higher levels, ranging from six to as much as fifty percent, depending on the circumstances and perceived infractions of the universities in question. (On the state level, too, some lawmakers have proposed levying taxes on large private university endowments, albeit for different policy reasons.) 
 
As the idea of taxing endowments becomes an increasingly politicized issue, universities that use their endowments to make political statements, such as divesting from Israel, risk exposing themselves to higher taxes on their endowment income.
 

Once political considerations enter the conversation about endowment investing, universities can expect to face unintended consequences like those outlined here–and, in all likelihood, others that may not even be foreseeable at this point. Avoiding this path allows endowment decisions to remain focused on providing universities the financial support they need for continued academic excellence and positive impact on the world.  

ADL publishes this piece in partnership with JLens.