Divest vs. the rest: Harvard’s noble quest with potential environmental consequences

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Harvard University elated climate activists last week when it pledged to divest all its fossil fuel holdings, saying such investments don’t fit with the imperative to decarbonize the economy.

Harvard’s endowment fund had already been selling down its stakes, although it still has investments in private-equity funds that have exposure to the industry. They make up about 2 per cent of the school’s US$42-billion in total holdings.

Those remaining investments won’t be renewed, Harvard president Lawrence Bacow said in a letter to staff and students. Instead, he wrote, “[Harvard Management Co.] is building a portfolio of investments in funds that support the transition to a green economy.”

It’s a noble quest, positioning the richest U.S. university endowment to support the global push to net-zero carbon emissions. Students have been campaigning for this for a decade. But the divestiture movement Harvard is championing also has trade-offs with negative consequences for the environment – not least giving up its influence on corporate policy to allocate capital for the energy transition.

There’s no question that the world must slash carbon emissions to avoid the worst effects of climate change. The International Energy Agency and the UN’s Intergovernmental Panel on Climate Change issued reports in recent months spelling out the tough medicine necessary for doing so.

Still, some energy companies have devised pricey strategies to cut and capture greenhouse gases as well as to diversify their businesses to include renewables and cleantech investments. Others need to be pushed harder. With a transition being just that – a years-long switch – energy producers with deep pockets and expertise with infrastructure must be enlisted.

In addition, for every sale of assets there’s a buyer, so the companies continue to operate, albeit with less financial wherewithal just as the capital is needed for the green shift.

Harvard is far from the first to pull its money out of oil and gas. Brown University, Rutgers University and the University of Southern California are among others. The latter cited the investment risks tied to carbon-intensive industries as policies get tougher. In Canada, the University of Victoria, the University of British Columbia and the University of Quebec at Montreal have announced divestments.

Some pension funds have also joined the movement. This year, the state of Maine ordered its public pension fund to divest fossil-fuel holdings. Funds in other states, such as New York and Minnesota, have announced plans to sell oil, gas or coal holdings.

The Canadian oil and gas industry has been in the crosshairs of a number of targeted campaigns to dump investments, especially in the oil sands. For years, European financial institutions and insurers have said they would no longer finance new projects in the sector in a bid to reduce their impact on climate change.

Often, these moves stemmed from broad-brush approaches to eschew specific high-carbon production or even entire regions after pressure from investors.

Don’t get me wrong – this is not another call to “stand up” for Canadian energy regardless of some poor corporate records on carbon reduction, lest it be replaced in the world market by suppliers with bad human rights records. That argument is often used as an excuse to let some players’ weak environmental performance slide.

What is needed for action though, is a seat at the table. There’s merit in investment strategies to persuade company boards and managers to devote meaningful resources to improving environmental practices. Several major institutional investors are doing just that. BlackRock Inc., the world’s largest investment manager, is Exhibit A, demanding companies in its portfolios disclose how they will survive in a net-zero world. Companies that lag face proxy votes against management or even potential divestment.

The Climate Action 100+, a group of 570 global investors, is pushing large emitters to set goals to reach net-zero emissions, with game plans that include pressing boards of directors to tie executive pay to climate-related targets.

Earlier this year, an investment fund called Engine No. 1 showed the power of investor pressure when it enlisted enough support from shareholders of Exxon Mobil Corp. to install three nominees on the board in a push to get serious about climate-related risks.

As bastions of research, universities should be front and centre in the effort to meet Paris agreement goals and to reach net-zero emissions by 2050. Some of their endowment funds must be directed to clean technology for doing so. But it’s important to use some of that financial muscle to nudge the old economy into the fight too.

Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at jeffjones@globeandmail.com.

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