Harvard University will keep phasing out all investments tied to oil, gas and coal, it announced on Sept. 9. Harvard President Larry Bacow cast it as a response to climate change – part of a broader trend that’s gaining steam among many large institutions with endowments.
Climate activists called the announcement a victory in response to their yearslong campaign demanding fossil fuel divestment.
But as a law professor who writes and researches about the role climate change considerations can play in investments held by universities, foundations and other large institutions, I instead see it as part of a bigger story. Investing with climate change in mind is now an accepted practice for endowments, whether or not an institution uses the word divestment to describe this strategy.
Interestingly, Bacow didn’t say Harvard is divesting from fossil fuels.
Instead, he explained that less than 2% of its roughly $42 billion endowment is connected to those industries, through stakes in private equity funds. These indirect investments will soon be phased out, and Harvard will not acquire any new assets with fossil fuel exposure in the future.
The term divestment is generally used in business to refer to selling an asset or the division of a company. In this context, it means selling off stocks, bonds and other assets held in an investment portfolio tied to a specific industry based on ethical reasons – rather than for financial motives.
Investing with climate change in mind is now an accepted practice.
Harvard, however, has refused – even now – to use that word. As a result, students, faculty and others had continued to pressure Harvard to divest, even after it began to move in this direction in 2008.
What changed?
The use of strategies for sustainable and responsible investing has undergone a transformation and become far more common in recent years.
Investing that incorporates environmental, social and governance factors into decision-making may mean avoiding a company because that information indicates uncompensated financial risk.
Since many people are used to thinking of climate or environmental factors as nonfinancial, the idea of using environmental information in an investment decision sounds risky, but it need not be. The environmental information is added to traditional financial metrics, with a goal of improving financial returns or reducing financial risk.
Efforts to act on concerns about climate change and its serious financial consequences are creating good investment opportunities that might help investors make money too. A study that looked at 35 university endowments that divested from fossil fuels – whether they called it that or not – found that refraining from investments in those industries generally didn’t affect endowment performance from 2011 to 2018.
Aligning an organization’s investments with its mission has also become a more common and accepted practice for charities.
The IRS has issued guidance regarding how charities may use investments to help carry out their missions – not just to produce income. Indeed, the IRS said that some charities can earn a below-market return on their investments due to practices that are tied to their missions.
That is why I was intrigued to see that Bacow’s open letter to the Harvard community recognized that seeking to slow climate change is connected with the university’s mission. Its endowment “is building a portfolio of investments in funds that support the transition to a green economy,” he wrote.
The letter also emphasizes Harvard’s mission: “The principal way we influence the world is through our research and teaching,” Bacow wrote.
As complicated as strategies for using a university’s endowment to address climate change may prove, I expect to see other schools following Harvard’s lead.
Susan Gary is professor emerita of law at the University of Oregon. Distributed by The Associated Press.
