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John Harvard's Journal

Divestment Digest

May-June 2020

As reported, briefly, in the March-April issue, the Faculty of Arts and Sciences (FAS) voted on February 4 in favor of a motion calling on the Corporation to instruct Harvard Management Company to shed investments in future fossil-fuel production and to move toward assets that promote “decarbonization,” as part of the University’s response to climate change. (Find a detailed report at harvardmag.com/fas-divestdebate-feb-20.) Although President Lawrence S. Bacow has not yet reported back to the faculty about the Corporation’s response (only one intervening faculty meeting occurred before this issue went to press, and he had signaled that it would take some time to do so), much activity unfolded on other fronts.

• The demonstration effect. As of the day before the FAS vote, 550 faculty members and associates had signed Harvard Faculty for Divestment’s petition. By mid February, that roster had essentially doubled, no doubt in part reflecting both publicity about and reaction to the passage of the FAS motion, and Harvard Medical School’s subsequent Faculty Council vote in favor of similar divestment resolutions (directed to the Corporation and to Dean George Q. Daley).

• On other campuses. On February 6, Georgetown’s board of directors decided to divest public fossil-fuel investments within five years, and private ones within a decade. The university “will continue to make investments that target a market rate of return in renewable energy, energy efficiency and related areas while freezing new endowment investments in companies or funds whose primary business is the exploration or extraction of fossil fuels.”

Academic investment managers are scrutinizing climate change—and likely financial returns.

Two weeks later, the University of Michigan regents decided to freeze fossil-fuel investments—not “bring[ing] forward new direct investments” in such companies—while they pursue a thorough review of investment policy for the sector. It is apparently the first Big Ten school to adopt such a pause.

And in a March 4 letter to her community, Brown University president Christina H. Paxton described “concrete steps to reduce the carbon content” of its endowment. Without invoking “divestment” per se, she observed that climate-driven changes in energy sources are altering “how investment managers value, buy, and sell the assets of companies that extract fossil fuels,” raising the “long-term financial risk” associated with such assets. Accordingly, “Nearly two years ago,” Brown’s investment office “decided to sell its entire exposure to fossil fuels.” Some 90 percent of holdings in companies that extract fossil fuels have been sold, with the remaining illiquid positions being liquidated—and the fund managers are seeking opportunities to invest in companies that “develop sustainable technologies.” Separately, Brown seeks to eliminate its own carbon emissions by 2040 (Harvard’s target is 2050).

The contested Overseers’ election. On February 18, the Office of the Governing Boards announced that the Harvard Forward slate of five petition candidates for the Board of Overseers had qualified for the ballot (see harvardmag.com/divestslate-20). They join the eight candidates put forth by the Harvard Alumni Association’s Committee to Nominate Overseers and Elected Directors (see harvardmag.com/haa-slate-process-20). Thus, 13 candidates are seeking election to an anticipated five Overseer openings—five of whom are campaigning on a platform that advocates both divestment from enterprises engaged in fossil-fuel production and broad changes in the policies governing endowment assets generally. See the full roster here, and read the candidates’ profiles at elections.harvard.edu; voting has been postponed to July.

Engagement. Presidents Drew Gilpin Faust and Bacow, and the Corporation on which they both served, have maintained that the University needs to have the capacity to engage with private enterprises involved in fossil-fuel production, rather than proscribing investment in such assets. Divestment advocates have criticized such engagement as ill-defined or feckless.

So it was interesting to learn that Yale’s long-serving chief investment officer, David Swensen, met in February with Yale faculty members, student divestment advocates, and others to explain how he and colleagues have worked to shift its portfolio toward a more sustainable posture. (Swensen is widely considered the pioneer of the diversified endowment investment strategies that Harvard and peers now pursue—in Yale’s case, relying almost exclusively on external investment professionals, and eschewing most publicly traded securities in favor of portfolios heavily committed to private equities, venture capital, hedge funds, real estate, and natural resources).

Swensen also disseminated a “2020 Update on Climate Change.” Its starting point is that “Climate change poses a grave threat to human existence and society must transition to cleaner energy sources”—via “a combination of government policy, technological innovation and changes in individual behavior.” Stressing the academic mission, he continued, “As a premier research institution, Yale will have its greatest impact by doing what it does best: research, scholarship and education.”

Turning to the endowment, he described an engaged process, recalling that in 2014 the investment office asked its external managers to assess the greenhouse-gas (GHG) footprint of possible investments, “the direct costs of the consequences of climate change on expected returns,” and the prospective costs of measures such as carbon taxes on expected returns. They were further expected to discuss with the managements of companies in which they might invest the financial risks of climate change and the financial implications of government policies to reduce GHG emissions. That done, the investment managers were expected to mitigate financial risks, and increase returns, by working with companies to reduce such emissions—and to avoid investing in companies that neither acknowledge the costs (social and financial) of climate change nor take economically sensible steps to mitigate their impact.

Discussions between the investment office staff and Yale’s external managers, he reported, have reviewed “the carbon footprint of various sources of power; the fuel efficiency of companies’ fleets; the energy efficiency of buildings that managers are developing, renovating or leasing up; and the impact of potential sea level rise on a developer’s land bank.” He cited a case where a manager decided against investing in a services provider to the oil-sands industry (which involves particularly carbon-intensive extraction and refining processes). Swensen also cited managers’ reviews that led portfolio companies to reduce packaging waste and adopt energy-management systems, and to engineer a property that greatly reduced energy consumption and generation of waste water. Another manager is deploying a system to account for GHG emissions at its portfolio companies—a step toward reducing the carbon footprint of each.

In adjusting the endowment overall, Swensen wrote, “As these managers incorporate the full costs of climate change into investment choices and, in the cases of corporate investments, engage the management of portfolio companies in discussions about addressing climate change, the risks associated with climate change are reduced. The risk reduction may come from sales of offending investments, from avoiding offending investments or from influencing company managements to adopt climate-friendly policies. The accumulation of investment decisions that incorporate the full costs of climate change leads to a shift in flows of capital towards less carbon-intensive investments and away from more carbon-intensive investments.”

In 2016, he observed, Yale had readily tradable investments in thermal-coal miners and oil-sands producers. Those, and subsequently discovered public positions, have been liquidated. A private investment in thermal coal has been liquidated, and remaining ones are being disposed of. As a result, endowment’s exposure to thermal coal and oil sands has been decreased from 0.24 percent of its market value in 2014 to 0.02 percent now (the endowment was worth $30.3 billion last June 30). More generally, consistent with Yale’s policy of having managers incorporate the costs of carbon emissions in making decisions, investments with large GHG footprints “are disadvantaged” relative to those with smaller footprints.

Separately, in a conversation with the Yale Daily News, Swensen said that sudden divestment from companies involved in exploration and production of fossil fuels could actually be counterproductive because it could, in the near term, cause a shift from natural gas back to coal (for generating electricity)—raising the GHG intensity of that large sector, an outcome he called “perverse.” That matter aside, the conversation at Yale appeared to focus on the investment office’s active role in lowering carbon emissions.

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