Harvard decision to drop fossil fuel investments reflects changing realities
Harvard University will continue to phase out all investments related to oil, gas and coal, she announced on September 9. When Larry Bacow, the school president, announced the plan, he touted it as a response to climate change – part of a larger trend gaining ground among many large endowment institutions.
“We must act now as citizens, as academics and as an institution to address this crisis on as many fronts as we have at our disposal,” he wrote.
Climate activists on and off the Harvard campus have called the announcement a victory in response to their multi-year campaign to demand divestment from fossil fuels.
But as a law professor who writes and researches the role that climate change considerations can play in investments held by universities, foundations and other large institutions, I see it more as part of it. ‘a bigger story. Investing with climate change in mind is an accepted practice for endowments whether or not an institution uses the word divestment to describe this strategy.
No quick change
Interestingly, Bacow didn’t say Harvard is moving away from fossil fuels.
Instead, he explained that less than 2% of his roughly $ 42 billion endowment is tied to these industries, through stakes in private equity funds. These indirect investments will soon be phased out and Harvard will no longer acquire new assets exposed to fossil fuels in the future, its president said.
“We don’t think such investments are prudent,” Bacow said.
We do not believe that such investments are prudent.
And it’s not a sudden change. The university’s stated intention to divest its fossil fuel holdings is a continuation of a long-standing strategy. Several months earlier, in February, Harvard had said it “no longer had direct exposure to companies exploring or developing new reserves of fossil fuels.”
The term divestment is generally used in business to refer to the sale of an asset or the division of a business. In this context, this means selling stocks, bonds and other assets held in an investment portfolio linked to a specific industry for ethical reasons – rather than for financial reasons.
Some schools, including Rutgers University and American University, followed a strategy similar to Harvard’s and called it “divestment.”
Harvard, however, refused – even now – to use this word. As a result, students, faculty and others continued to pressure Harvard to step down, even after it started moving in that direction in 2008.
Investing for climate change, or, more broadly, using sustainable and responsible investment strategies, has transformed and has become much more common in recent years.
Investing that incorporates environmental, social and governance factors into decision-making, known as ESG investing, can mean avoiding a company because this information indicates unmatched financial risk.
Since many people are used to seeing climate or environmental factors as non-financial, the idea of using environmental information in an investment decision seems risky, but it is not necessary. Environmental information is added to traditional financial measures, with the aim of improving financial returns or reducing financial risks.
Efforts to address concerns about climate change and its severe financial consequences create good investment opportunities that could help investors make money as well. A study that looked at 35 university endowments that disengaged from fossil fuels – whatever they call it that – found that refraining from investing in these industries generally did not affect the performance of the 2011 endowments. to 2018.
Refraining from investing in these industries generally did not affect staffing performance.
Aligning an organization’s investments with its mission has also become a more common and accepted practice for charities – a category of nonprofit organizations that includes Harvard and thousands of other universities.
The Internal Revenue Service has issued guidelines on how charities, as long as certain conditions are met, can use investments to help carry out their missions – not just to generate income. Indeed, the IRS has stated that some charities may achieve a lower return on investment than the market because of practices related to their missions.
For example, a charity seeking to improve air quality may invest its holdings in wind, solar, and other forms of renewable energy. Even though these investments may seem doomed to produce a lower return than other types of assets, which may prove to be an unfounded fear, the investment should nonetheless be considered prudent because it achieves the mission of the organization.
This is why I was intrigued to see that Bacow’s open letter to the Harvard community recognized that seeking to slow climate change was tied to the university’s mission. Its endowment “constitutes a portfolio of investments in funds that support the transition to a green economy,” he wrote.
The letter also emphasizes Harvard’s mission: “The primary way we influence the world is through our research and our teaching,” Bacow wrote.
As complicated as strategies to use a university’s endowment to combat climate change may be, I expect to see other schools follow Harvard’s lead.