April 13, 2016

5 Things to Know about Yale’s “Divestment” Announcement

News of Yale University selling off holdings in three fossil fuel companies generated some media buzz this week, despite the small portion of these holdings compared to the school’s overall portfolio. To be clear, Yale did not announce it was divesting. So just what did it announce? Here are five things you need to know.

1)     Yale rejected divestment in 2014 and it is still not divesting.

In August 2014, Yale’s Corporation’s Committee on Investor Responsibility recommended against divestment, stating it was not “the right means” of addressing concerns related to climate change. Instead, Yale announced a number of sustainability initiatives on campus and requested Endowment Fund Chief David Swensen send a letter to Yale’s external investment managers on the role climate change in managing the endowment.  Swensen’s 2014 letter requested the fund’s managers take into account climate change when making investment decisions, stating “You should encourage managements to mitigate financial risks and to increase financial returns by reducing greenhouse gas emissions.”  So what does that actually mean for Yale investments?

2)     In fact, Yale’s announcement is largely an empty gesture, including the sale of holdings in only three companies.

In an effort to follow through on its previous announcement, Swensen stated in a letter to the Yale Community this week that the school was selling its holdings in three companies it found “inconsistent with our principles.” According to the letter, “as of June 30, 2015 the Endowment had de minimal exposure to {thermal coal miners and oil sands producers}. One manager held a small position in a publicly-traded company that engaged in the production and sale of coal. Another manager held interests on Yale’s behalf in two publicly-traded oil sands producers. Combined, these investments represented less than $10 million of exposure to Yale.”

Compared to Yale’s nearly $24 billion endowment –the second-largest university endowment in the country – the decision represents a minute portion of the school’s holdings. In fact, as we’ve seen time and again in the divestment movement, often endowments make headline-grabbing announcements in selling of their holdings in coal companies, while they hold little to none of these stocks in the first place.

3)     The announcement has received mixed reactions from the pro-divestment crowd.

While Bill McKibben called it a “key day in divestment drive,” the Yale Daily News stated that “several climate change activists criticized Swensen’s letter for grounding the decision in financial considerations rather than ethical ones.”

Fossil Free Yale Communications Director Chelsea Watson, class of 2017, stated “This is progress, but this is not divestment.” On their website, Fossil Free Yale also expressed confusion around the announcement, noting while the decision was a partial win, “this letter didn’t reflect any commitment to divestment on the part of the university, just the individual actions of two outside fund managers. This partial divestment was done not because of concerns about racial justice or climate justice, but because Yale investors, as usual, are most concerned with their bottom line.”

4)     The announcement says nothing about oil and natural gas companies.

Additionally, the letter from Swensen says nothing about the role of oil and natural gas companies in determining what companies are “inconsistent” with the school’s principles. That is a smart move on Yale’s part, given the opinion of EPA Administrator Gina McCarthy that the United States’ increased use of natural gas has “been enormously beneficial from a clean air perspective, as well as from a climate perspective.”

5)     Full divestment would actually cost Yale millions.

A report by Dr. Bradford Cornell, a visiting professor of financial economics at Caltech and a senior consultant at Compass Lexecon, found that divestment would cost Yale roughly $51 million each and every year. It’s not surprising, then, that the school has continued to reject divestment, given that in 2014 Yale’s endowment provided a third of the university’s operating income, supporting “professorships, student scholarships, maintenance, and books.

While divestment may be good at catching headlines, as Bloomberg accurately described, “even with the movement spreading to more than 1,000 campuses, only a few dozen schools have placed some restrictions on their commitments to the energy sector. Cornell University, Massachusetts Institute of Technology and Harvard were among the largest endowments to reject demands to divest.” Considering how crucial endowments are for schools like Yale in supporting students, scholarships, academic programs, faculty and more, any decision that may impact the financial performance of an endowment should not be taken lightly. Luckily for Yale students, this week’s announcement is more of an empty  gesture than substantial change for the endowment.