A special MIT issue committee charged with ensuring the prestigious school remains a leader in the fight to address climate change released a report earlier this summer rejecting blanket fossil fuel divestment, finding divestment to be a “polarizing” and unnecessarily complicated approach to dealing with the issue. The report, “MIT and the Climate Challenge” is a product of the MIT Climate Change Conversation Committee, a group of professors and students that came together in 2014 to discuss “pathways to effective climate change mitigation” for MIT and the nation.
While the report does recommend partial divestment from coal and oil sands, it emphasizes that “[m]embers of the MIT community hold a wide spectrum of views about divestment” and that other avenues for tackling the issue have more support and a greater likelihood of achieving actual climate goals. Further, the report states “the committee did not achieve consensus on every suggestion, especially those pertaining to divestment, but we believe this lack of consensus is reflective of the conversation being held among the MIT community at large on this topic.”
The committee assessed a number of different ways to pursue various climate-related goals, including a campus carbon tax, and continued research into new technologies. In the lead-up to the report, MIT also hosted a number of “listening tour” events, including forums that specifically considered a divestment policy, during which MIT professor Brad Hager expressed his concern that “divestment would indiscriminately alienate fossil fuel companies, not all of which have an irresponsible attitude toward climate change, and would jeopardize the millions of dollars in research funding that MIT receives in industry donations.” Stanford professor Frank Wolak also noted that divestment is “a symbolic action” and an institute such as MIT can “do much more by using its position as a research and education center.”
These concerns were also reflected in the report and the committee’s decision to reject divestment as an “effective” measure to address climate change. According to the report:
“The committee rejected the idea of a blanket divestment from all fossil fuel companies, primarily because of (i) a view that any positive effect could be diluted by lumping together firms that differ dramatically in their roles in the climate issue, and (ii) a concern that such action could cause significant loss of engagement opportunities with companies (including research funding and opportunities to influence corporate behavior).”
The committee also suggests that the impact of divestment on the value of targeted companies is “negligible” and that full divestment would lead to a loss of engagement opportunity with these companies, an opinion shared by many in the academic and investor community. Meanwhile, divestment has been found to be an ineffective tool to combat climate change.
The MIT report does miss a few key points on divestment, suggesting in one section that the “impact of divestment on endowment returns is not likely to be large,” a point that is contradicted by recent economic reports and one that is never analyzed or defended in much depth later on in the report.
As Prof. Daniel Fischel of the Univ. of Chicago School of Law found in his research, divestment would significantly handicap an investment portfolio – or in this instance, MIT’s $12.4 billion endowment – through new costs and fees. New trading costs, which include payments to investment professionals for managing and facilitating trades as well as the exchange fees and taxes involved in trading securities, and compliance costs, would be considerable as divestiture strategies typically require an ongoing effort to maintain. The MIT paper also fails to consider the costs associated with the loss of diversification that divested portfolios must endure to comply with the policy. In fact, according the Fischel report, portfolios divested of energy equities produced returns 0.7 percentage points lower than ones that invested in energy on an absolute basis. For MIT, that would mean a loss of over $8.6 million every year from its endowment.
The MIT report also states that while the committee is divided on the question of divestment, two thirds of the panel believes that partial divestment represents a sensible compromise. Interestingly, the report provides both arguments for and against partial divestment. The committee concludes that additional oversight of investments is needed, but the current extent of divestment activity is questionable, noting:
“In general, the committee agreed that MIT should exercise more ethical oversight of its investments and do so in a transparent and community‑backed manner, and that divestment of particular businesses may be one outcome of such oversight (see the suggestion of an Ethics Advisory Council, section 3A.1). Even if divestment is not pursued, addressing the issues at the heart of the divestment request – that MIT should play a bolder role in combating disinformation and the climate threat – presents a positive and exciting way forward, which has the chance to garner broad support from the MIT community if executed with visibility, timeliness, strength and unwavering ambition.”
Not mentioned however, is that partial divestment has been recently called in to question. Bloomberg, for example, recently took a closer look at schools that have pursued either full divestment or partial divestment noting that pledges to divest are largely “empty gestures.” As Bloomberg reports:
“The 10 wealthiest schools announcing commitments to divest since last April oversee a total of more than $30 billion of assets. Excluding Stanford and Georgetown, which declined to provide exact amounts, the institutions have committed to sell a total of about $25 million of fossil-fuel stocks, according to a review by Bloomberg. Many of the schools aren’t doing anything more than Harvard, Yale and others that have declined to sell any fossil-fuel holdings at all.”
In the end, it’s clear that the Climate Change Conversation Committee did its homework over the past year looking at divestment and the “negligible” impact it would have in mitigating climate change. The group’s report will next be reviewed by the Conversation Leadership, which will present recommendations to President Reif in advance of his expected announcement for a community-wide MIT action plan on climate change this fall. Yet as MIT explores “effective” tools to impact climate change, it is clear that divestment would be a purely symbolic act with little impact on MIT’s overall goal of creating a path towards effective mitigation. Clearly fossil fuel divestment is not the best use of time or considerable resources.
All quotes featured by professors and school leaders on this website are public statements made by individuals and are not necessarily representative of the institution of which they are associated. Said schools and universities are also not affiliated with IPAA or DivestmentFacts.com.