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April 26, 2017

*UPDATE* Harvard’s Divestment Rejection Remains Unchanged

UPDATE (4/28/17, 10:00 am EST):  Turns out we were right.

Environmentalists seemed to run with the news that Harvard was “pausing” investments in fossil fuels.  Bill McKibben said Harvard had “de facto divested from fossil fuels” calling it a “huge win.”  His group 350.org went as far as to issue a press release about the announcement.

But in the end, nothing has changed and Harvard has not divested.

In a statement, Harvard Management Company spokesperson Emily Guadagnoli said Colin Butterfield’s comments were  “referring solely to his analysis of investments within the natural resources portfolio and how they contribute to the financial strength of the endowment… It certainly was not a change in Harvard’s stance on divestment from fossil fuels, which was laid out in 2013 and remains the university’s position. ” (emphasis added)


— Original Post, April 27, 2017 —

The Harvard Crimson released an article based on comments from Harvard Management Company’s head of natural resources Colin Butterfield, noting that the university was “pausing” investments in some fossil fuels. Naturally, 350.org’s Bill McKibben took to twitter to turn the article into something that it’s not, stating “they won’t call it ‘divestment’ but Harvard ‘pausing’ fossil investments.”  Once again, 350 failed to acknowledge what the comments from Harvard actually mean.

Here’s what you need to know:

  • Whatever you want to call it, Harvard did not divest.

In 2013, Harvard explicitly rejected divestment and has not changed its stance since.  Addressing the university community,  President Drew Faust  stated, “we maintain a strong presumption against divesting investment assets for reasons unrelated to the endowment’s financial strength and its ability to advance our academic goals.”

Faust also stated in September 2015, “I don’t think that divestment is an appropriate tool, because I don’t think the endowment should be used for exerting political pressure. It is meant to fund the wide range of activities that the University undertakes. As we said before, 35 percent of our operating budget comes from the endowment. That is why people gave their funds to create the endowment. It should not be used as a weapon to exert pressure on one group or another. There are many dangers and it has little effective outcome. What would it mean if we sold our investments? Very little, because there are plenty of other people who will invest in those firms.” These positions have not changed. Period.

In fact, just last month, the university responded to pressure to divest from coal, stating “We agree that climate change is one of the world’s most urgent and serious issues, but we respectfully disagree with Divest Harvard on the means by which a university should confront it.”

  • Many of Harvard’s investments are in indirect funds.

According to Butterfield, “I doubt that we would ever make a direct investment with fossil fuels. But that’s more of an Investment Committee decision, and I cannot talk on their behalf.”

For starters, Butterfield is correct that those decisions lay with the Investment Committee and are not within his power to make. Secondly, the Harvard Management Company manages “money both on internal trading and direct investment platforms, as well as through investment arrangements with third-party managers.” Even if the university does hold off on additional direct investments in fossil fuels, it still holds these funds via indirect investments.

That’s a good thing for the endowment’s ability to diversify and invest in a sector critical to the economy.  According to a report from Prof. Fischel, “the energy sector has the lowest correlation with all other sectors, and therefore the largest potential diversification benefits relative to the other nine sectors.” In turn, there are “substantial diversification costs associated with fossil fuel divestment.”

  • Endowments are invested for the long term.

Harvard’s endowment, like many others, did struggle over the last year, and as described above the energy sector’s decline is a factor to consider. As Harvard’s 2016 endowment report notes, “S&P 500 earnings declined by 4.0% during the fiscal year, largely attributable to reduced earnings in the energy sector as commodity prices dropped to multi-decade lows.” These lows are a part of any cyclical commodity, and — after finishing in last place for two years in a row — S&P Energy was the best performing index in 2016, rising more than 25 percent. The point is that stocks go up and down, but large institutions like Harvard make investments for the long term, not based on market fluctuations.

  • Harvard’s natural resource investments go far beyond energy.

While it may be easy to assume Butterfield’s comments are simply focused on the energy sector, the reality is Harvard’s natural resource investments go far beyond energy. Just look at Butterfield’s background, described as a “farmland investor.” These investments weigh heavy towards things like timber and vineyards. As described in Harvard’s September 2016 endowment update:

“The macro environment for direct natural resources investments was challenging as commodity prices continued to decline for much of the fiscal year. Market transactions for timber and agricultural land in many regions were limited, impacting portfolio liquidity in the short term. The portfolio trailed its benchmark by over 1100 bps, primarily driven by unfavorable market and business conditions across two assets in South America.

“One asset experienced severe drought during the crop season as well as an unusually high cost of production. The valuation of the second asset declined as a result of a challenging economic and political environment that made it increasingly difficult to secure financing. As I detail in the Organizational Update, we have hired a new head of our natural resources portfolio and are optimistic we can improve performance in this asset class going forward.”

In fact, Harvard’s investments in these timber resources in South America have come under fire on campus, including calls to “stop Harvard’s Argentine mismanagement and exploitation.”

  • Divestment does nothing to help the environment, only hurts divesting organization.

Butterfield expresses concerns with the impact of natural resource development – and given his background in timber and agriculture he likely has seen how companies can have an impact on their environment. But the idea that giving up investments does anything to alter these companies or their practices – regardless of their industry – is false. As Prof. Fischel of the University of Chicago Law School states, “Every bit of economic and quantitative evidence available to us today shows that the only entities punished under a fossil-fuel divestment regime are the schools actually doing the divesting—with virtually no discernible impact on the targeted companies.”

Robert Stavins, the director of Harvard’s environmental economics program, also stated in June 2015 “The concerns of the students are understandable but the message from the divestment movement is fundamentally misguided. We should be focusing on actions that will make a real difference.”

  • That hurt is worth millions.

According a report Led by Dr. Bradford Cornell, a visiting professor of financial economics at Caltech and a senior consultant at Compass Lexecon, Harvard would experience a $107 million per year financial loss if the school chose to divest from fossil fuels. And that cost is regardless of the performance of fossil fuels.

A report from Prof. Hendrik Bessembinder, professor of finance at the Arizona State University’s Carey School of Business, finds the transaction and management costs related to divestment have the potential to rob endowments of as much as 12 percent of their total value over a 20-year time frame. This includes the immediate transactions costs, as well as ongoing management fees to stay in line with the changing definition of “fossil free.” Prof. Bessembinder estimates these frictional costs could cost a typical large endowment fund growing at a historically reasonable rate between $1.4 and $7.4 billion in value over a 20-year period.

Bottom Line: It is no wonder Harvard continues to say no to divestment. Worth over $30 billion, the university’s endowment serves as the school’s largest financial resource, “a perpetual source of support for the University and its mission of teaching and research” and a “financial foundation for the University for generations to come.” Harvard’s endowment ranks first in the nation among universities.

No symbolic action is worth risking this value.