Has Harvard “Divested”?
Interpreting President Bacow’s recent statement on climate change
Perhaps more than any other issue, questions about Harvard’s endowment investments in fossil-fuel production and advocacy in favor of divesting any such assets have dominated campus discussion during the past nine years, generating student activism and protests, engaging faculty debates and resolutions, and eliciting alumni opinions and contested Overseer elections. At times, all that activity can seem to shed more heat than light on the underlying stakes: global warming and the University’s role in addressing it. One such instance has arisen recently, in the response to a Harvard statement about its climate-related activity, when the rhetoric about divestment has perhaps decoupled from the reality of institutional investors’ responses to the challenge of climate change. Herewith, an analysis of what has transpired.
A State of the State Message
On September 9, President Lawrence S. Bacow addressed a message on “Climate Change: Update on Harvard Action” to the University community. In a section on “investment strategy” and Harvard Management Company’s (HMC) stewardship of the endowment, he wrote:
As we reported last February, HMC has no direct investments in companies that explore for or develop further reserves of fossil fuels. Moreover, HMC does not intend to make such investments in the future. Given the need to decarbonize the economy and our responsibility as fiduciaries to make long-term investment decisions that support our teaching and research mission, we do not believe such investments are prudent.
Further, he wrote:
HMC has legacy investments as a limited partner in a number of private equity funds with holdings in the fossil fuel industry. These indirect investments constitute less than two percent of the endowment, a number that continues to decline. HMC has not made any new commitments to these limited partnerships since 2019 and has no intention to do so going forward. These legacy investments are in runoff mode and will end as these partnerships are liquidated.
Looking ahead, he continued, “HMC is building a portfolio of investments in funds that support the transition to a green economy.”
In response, the advocates of divesting fossil-fuel-related investments held in the endowment—who had welcomed the fall semester by resuming public demonstrations advocating their cause two days earlier—took a victory lap, with Divest Harvard declaring:
It is with great pride and joy that Fossil Fuel Divest Harvard celebrates a momentous victory for our community, the climate and divestment movement, and our planet. After nearly a decade of organizing by students, faculty, alumni, and community members, we have succeeded in pushing one of the world’s richest and most powerful universities to divest from the fossil fuel industry.
Much of the news coverage followed suit, with the Harvard Crimson, New York Times, Boston Globe, and others reporting, generally, that the University had declared an end to fossil-fuel investments (as divestment is generally understood), and frequently attributing this new posture to student, faculty, and alumni advocacy during much of the past decade.
Hailing Old News?
Divestment advocates had to be pleased by the way Bacow framed the issues. His language on “decarbonizing” the economy, making investment decisions that are “prudent” in support of the teaching and research mission, and investing in “funds that support the transition to a green economy”—reasonably appealing to a broad swath of the Harvard community—all also echo various arguments made in support of divesting fossil-fuel assets and redeploying the funds, in the context of a higher-education institution’s endowment.
But in another sense, the response by divestment proponents and the terms of the news coverage came as a surprise. First, as Bacow noted, and as previously reported, HMC disclosed last February that it held “no direct exposure to companies that explore for or develop further reserves of fossil fuels” and that it had reduced its direct commodity and related investments progressively from the end of fiscal year 2008 to the end of fiscal 2020. Second, those changes were part of a concerted effort to overhaul the portfolio and HMC’s operations. In an attempt to improve investment returns, HMC has disposed of and otherwise deemphasized commitments to various commodities and real assets (presumably, fossil fuels, but also extensive holdings in timber and agricultural land), and to such asset classes as real estate. All of this was widely publicized as part of HMC’s stem-to-stern overhaul, driven by investment performance. (See this 2017 report on the overhaul at its inception, and this comprehensive update on actions and results through fiscal 2020.)
Moreover, as some advocates noted, Bacow’s statement does not talk about “divestment.” That suggests that his message merits further scrutiny.
What Constitutes Divestment?
An initial point of interest is the statement concerning the absence of any “direct investments” in companies that explore for or develop additional fossil-fuel reserves. Leaving aside hair-splitting about whether that includes companies that simply extract existing oil, natural gas, or coal reserves (without seeking to replenish them), it is worth noting that HMC has almost entirely quit managing its investments directly. The 2017 reorganization, now effected, aimed at outsourcing nearly all investment management, and thus ending the internal teams of HMC portfolio managers who oversaw about half the assets while external managers invested the rest. HMC’s recent quarterly SEC filing shows holdings of less than $2 billion—the directly held assets. As of June 30, 2020, the date of Harvard’s last annual financial statement, the University’s general investment account assets totaled $45.7 billion (including the $41.9 billion endowment). The overwhelming majority of those assets, under HMC’s purview, are managed indirectly, by external managers with whom HMC forms contracted partnerships.
Another point worth considering is those legacy “limited partnerships”—among the external investment relationships HMC has entered over the years. Other than the contractual capital calls the managing partners can make for funding from HMC—as scrupulously detailed in a footnote to Bacow’s message—Harvard “has not made any new commitments to these limited partnerships since 2019 and has no intention to do so going forward. These legacy investments are in runoff mode.”
When Harvard Magazine asked for clarification about possible limitations inherent in these phrasings, no comment beyond a direct reference back to the language of the September 9 statement was forthcoming.
From the University’s standpoint, the language is self-evident: HMC doesn’t directly invest in fossil-fuel-related enterprises, as its SEC filings show; and it has not invested further in the natural-resources partnerships to which it was formerly committed, and which are now running off (with the exception of any additional capital calls the managing partner is entitled to make).
Clearly, there is a gray area here—perhaps several.
What of HMC’s other investments? As of June 30, 2020, the endowment allocated 18.9 percent of its assets to public equities, 23.0 percent to private equities, and 36.4 percent to hedge funds: nearly $33 billion of investments, almost all of which are managed indirectly, by external investment firms.
Does “divestment” mean that, for example, a hedge fund that specializes in rapid stock trading has been instructed never to own the shares of a fossil-fuel energy company? Or that a private-equity firm to which Harvard has committed funds will not finance or own a software or equipment supplier to the extractive energy industry? Or that a public equity (stock) portfolio cannot contain shares in any enterprise related to oil, natural gas, or coal production, refining, transportation, retailing, and so on? Can HMC own debt or short-term commercial paper that supports the sector (which is a voracious user of debt financing)?
If Harvard has issued instructions excluding such investments outright—in the past, or since last February—it has not said so. Clearly, its recent investment decisions have led it to progressively deemphasize its former natural-resources strategy, and its small direct investments eschew the fossil-fuel sector—as it has made evident since last winter. But it has not made a public announcement of any blanket prohibition. Nor are the mechanics simple, even for smaller, less diverse endowments. In its recent divestment announcement, for example, Macalester College hinted at the complexities: while it is prohibiting investments that are entirely in oil and gas companies, it has not precluded “underlying investments held by fund managers that are in oil and gas companies, as many of our fund managers hold portfolios that are broadly representative of the stock market, which would be inclusive” of such enterprises. Tufts recently banned direct investments in companies that produce coal or tar sands.
Deemphasizing fossil-fuel investments more generally can, perhaps, still mean taking a spectrum of actions. As a bit of context, at Yale (where the Daily News reported that “Harvard vows to pull investments from fossil fuel industry, leaving Yale behind”), a list of dozens of companies no longer eligible for endowment investment has been published, and the Yale Investments Office has since 2014 disseminated updates on its policies instructing external managers to address climate change with the managements of the companies in which they invest. Harvard, pursuing its “net-zero” strategy for the endowment, has emphasized data-gathering, creating emissions metrics, and building coalitions to set standards for the investing industry.
The New News
In other words, there is a considerable gap between the politicking about climate-attuned investment policy and practice, and the technical, even mundane, details of proceeding. Here, the University, without addressing its actions in terms of “divestment,” has apparently made a very straightforward announcement reiterating that HMC doesn’t directly own investments in fossil-fuel enterprises, and it is not making new commitments in its natural-resources partnerships that owned such commodities or sought to find and produce more of them. Divestment advocates have declared a broader victory (and claimed plenty of credit for bringing it about).
In the heat of the moment, little public attention is being paid to what other near-term policies, covering the vast majority of the endowment assets, have been put in place (or ought to be) to effect more encompassing changes in investment policy. HMC and the Corporation may have undertaken such steps (they are typically opaque on such matters), but if so, for whatever reason, they have not sought credit for doing so. Rather, they are focusing on the considerable mechanics of implementing the “net-zero” goal, which divestment advocates have mostly ridiculed. Perhaps a sort of mutual détente might be arranged to consider next steps on the embattled investing front.
Nor was significant attention focused on the news that may be of the greatest long-term importance: the appointment of economics professor James Stock as Harvard’s first vice provost for climate and sustainability. He will “work across University boundaries to accelerate and coordinate research and education,” Bacow wrote: the coin of the realm for a research institution like this one. The goal is to “transform Harvard’s capacity to produce crucial new knowledge on climate and sustainability,” backed by “significant resources” from the president’s office and the promise to “raise substantial incremental resources to support our work on climate change”—the other coin of the realm these days. Look for a report on Stock’s brief, and his early perspectives on what he hopes to do, in the November-December issue of this magazine.
Harvard’s Actions in Context
As Harvard organizes itself to better use its intellectual capital to address climate change, and to augment that capital, the clock is ticking. On September 10, amid the news reports suggesting that divestment advocacy had overcome Harvard’s resistance and transformed its investing, crude oil futures rose 2.3 percent, reflecting rising demand from a recovering world economy and Gulf of Mexico supplies temporarily shut in by Hurricane Ida. Shares of ExxonMobil, divestment advocates’ favorite target, outperformed a down market.
In its fiscal year 2021 annual report, the University of Virginia Investment Management Company noted that real assets produced a 49 percent investment return—and mentioned that oil prices had rebounded more than 80 percent during the year, recovering from the pandemic low: a source of huge profit for some traders, if not necessarily Virginia itself. And on September 13, the Organization of Petroleum Exporting Countries raised its forecast for world oil consumption in 2022 to nearly 101 million barrels per day: more than pre-pandemic use, and up 4.2 million barrels daily (about 175 million gallons) from this year. Between the demand and the supply, plenty of incentives still exist for fossil-fuel consumption. The world is going to continue to heat up.