The recent decision by Harvard to divest from fossil fuels is part of a trend and also a precedent-setting event.
Earlier this year, BlackRock informed the New York City pension funds that the divestment movement is no longer limited to small investment funds. Its report found that an increasing number of large institutional investors are scrubbing their portfolios of fossil fuels. A number of large public pension funds, including New York City, New York State and the University of California have divested. Now, Harvard’s $40 plus billion endowment—the largest in the United States—has chosen to do so, as well.
Harvard students filed a complaint with the Massachusetts Attorney General
Harvard students, with the assistance of the Climate Defense Project, took innovative steps to achieve the goal. The students filed a complaint with the Massachusetts Attorney General under the Uniform Prudent Management of Institutional Funds Act. The model law was adopted by Massachusetts and 48 other states. The act serves as a guide for charitable organizations that manage investment portfolios. It establishes investment standards that an endowment like Harvard must meet to comply with its charitable mandate.
Harvard is a non-profit organization, governed by state and federal charitable statutes. It invests gifts from donors, a typical practice of large endowments. Its enormous portfolio allows it to take advantage of the profits generated by private companies, many listed on stock exchanges. The returns from the investments are required to be used for the charitable purpose of the organization or reinvested.
Under the law, investments by charities are carried out much like any private, for-profit entity. Due diligence is required. Nonprofit trustees have an obligation to acquaint themselves with the facts of a given investment and to understand its strategic importance to the fund as a whole. With the assistance of financial experts, they adopt an investment strategy and are expected to adhere to it.
Provisions in the law allow organizations to make exceptions to their investment plans under special circumstances. One provision states: “An institution shall diversify the investments of an institutional fund unless the institution reasonably determines that, because of special circumstances, the purposes of the fund are better served without diversification.”
The students argued that investments in fossil fuels run contrary to the university’s mission
The students argued to the attorney general that Harvard’s investments in fossil fuels run contrary to the mission of the university. The damaging impact of fossil fuels on the climate and human society; the science of climate change; hostility of oil and gas interests; and weak financial performance of the sector made the case for an exception. The fund would be better served by avoiding such future investments, they argued.
The complaint continues that the failure of Harvard to divest may be seen as a violation of the law, and the issue needed to be vetted using the investigative resources of the attorney general. In short, the students argued that investments should not be made at any cost, and that Harvard’s insistence on that standard ran afoul of its charitable mission.
Hanging over the complaint is an action taken by BlackRock earlier this year. In a three-volume report to the City of New York on the divestment issue, BlackRock surveyed numerous funds that had divested. The findings were clear—no fund that divested experienced negative consequences. Investment returns were either neutral or positive. These findings reflect the direction of the market over the long term. The Morgan Stanley Capital International (MSCI) fossil-free index has shown superior performance to the MSCI global index over the last decade. MSCI is a standard benchmark index used globally.
With the financial matter settled that investment returns will not be impaired by divestment, Harvard needed to reconsider the legal, scientific, political and moral issues at stake. In the past, the administration had dismissed concerns expressed by faculty and students that Harvard’s investment portfolio would be better served without fossil fuels. In the past, the Harvard administration had not been placed in a position where it might have to answer to the state attorney general.
The attorney general has not expressly disclosed the status of the complaint, but all indications are that it is being reviewed. Even after Harvard’s divestment decision, the issues raised at Harvard and also at Boston College should be formally vetted.
The issue of potential conflicts of interest was also raised
The students also raised the issue of potential conflicts of interest. Whether the role of fossil fuel money in research or on the board of directors and Harvard’s donor base constitutes a conflict with essential educational values that guide the university is not simply an academic question. When Dartmouth College rejected its students’ appeals to divest, it made an honest but startling disclosure: Part of the divestment consideration was based on the position taken by some alumni that if the university divested, they would no longer donate to the school.
It is understandable why Harvard might divest instead of having to answer thorny and complex questions related to the university’s charitable status. Harvard remains an intellectual and ethical compass for a large segment of America. The science of fossil fuels and climate is clear, and the institution’s investment strategy has not been aligned.
Harvard can embrace its leadership role now. Its divestment action leads the way for other universities to consider or reconsider their positions. Harvard could help inform other universities by releasing the memoranda and relevant reports from advisors that assessed the pros and cons of divestment for Harvard. The City of New York, for example, made an important contribution when it released BlackRock’s three volumes of analysis. It’s time to share the knowledge.
Other helpful steps could involve bringing more students into the financial planning process of the university.
How Harvard travels the road of a climate change leader is important. It will set the stage for discussion and dialogue at the university level—and in the halls of universities throughout the nation and globally. Harvard and other institutions need to consider the divestment issue based on foundational principles of higher education and philanthropy. These values must guide the investment structure for our institutions of higher learning. Taking such a pathway not only benefits such universities as institutions, but also their students and the broader society they serve.
Tom Sanzillo ([email protected]) is IEEFA director of financial analysis.
IEEFA: Major investment advisors BlackRock and Meketa provide a fiduciary path through the energy transition. March 2021.
IEEFA: NYS Comptroller DiNapoli’s bold divestment plan may inspire investors to follow suit. January 2021.
IEEFA: The Financial Case for Fossil Fuel Divestment. July 2018.