Why President Faust Got It Wrong

On October 3, 2013, President Drew Faust rejected calls for Harvard to divest its endowment from fossil fuel companies. In her her remarks, Dr. Faust made several statements that do not align with the facts on the ground.  I respond below to a few of Dr. Faust’s statements.

“…we maintain a strong presumption against divesting investment assets for reasons unrelated to the endowment’s financial strength…”

Investment in fossil fuel companies is a direct threat to Harvard’s “financial strength.”  Material efforts to enforce a carbon budget commensurate with a 2 ºC temperature increase will result in a dramatic loss of value for fossil fuel assets, principally in the form of stranded carbon assets. One study suggests that  in a world with policies that stabilize emissions at 450 ppm CO2-eq, the net present value of revenue for all fossil fuel extraction from 2010 to 2100 falls by 12 to 50 percent compared to a no-policy world.  There is increasing pressure to internalize the substantial external costs (environmental and social) associated with fossil fuels, and to eliminate the subsidies enjoyed by the industry.  Both actions will reduce the profitability of fossil fuel extraction.  Public fossil fuel companies face increasing pressure from their shareholders regarding the magnitude of the risk associated with a potential drop in the demand for fossil fuels. Taken as a whole, these forces will reduce the market valuation of fossil fuel companies.

 “Significantly constraining investment options risks significantly constraining investment returns.

This demonstrably false. There is an expanding suite of choices for investors that seek to insulate themselves from the risks associated with fossil fuels. These fossil-free investments perform as well as funds that contain fossil fuel companies.  See the review of that research in the download available here.

“Universities own a very small fraction of the market capitalization of fossil fuel companies.  If we and others were to sell our shares, those shares would no doubt find other willing buyers.  Divestment is likely to have negligible financial impact on the affected companies.  And such a strategy would diminish the influence or voice we might have with this industry.”

Divestment from fossil fuel companies will help create a stigma associated with producing hydrocarbon fuels. The individual institutions that divested from tobacco companies and business in South Africa did not expect their act to create immediate financial pressure. That was not the goal. They expected to draw attention to the perils and tobacco and the injustice of apartheid, and in doing so help create social pressure to abandon those activities.

Shareholder advocacy and “engagement” don’t work when you are out to change core business practices. This is akin to asking Apple to stop selling iPads.  Asking the oil and coal companies to “green” their supply chain will not solve the problem. We need to stop producing oil and coal. Shareholder advocacy, if it is to contribute to solutions, must be used to influence a company to transition to new business activities.

“I also find a troubling inconsistency in the notion that, as an investor, we should boycott a whole class of companies at the same time that, as individuals and as a community, we are extensively relying on those companies’ products and services for so much of what we do every day. “

Hypocrisy only arises if one’s investment behavior is misaligned with the nature of your research and teaching programs, and with your campus operations. No one expects to flip a switch and be divorced from fossil fuels. Harvard has expansive research programs that provide elements of the roadmap to a sustainable future, teaching programs that prepare young adults to navigate life in that future, and campus operations that reduce the institution’s carbon footprint and overall environmental impact. In this situation there is no hypocrisy in divestment, even if the institution continues to rely on fossil fuels for some time.  Starting down the path to divestment is critical.  Once this work is commenced, the question concerning where the line is to be drawn recedes in importance.

Read the full report “The Path to Fossil Fuel Divestment for Universities: Climate Responsible Investment.”