US university and college endowments control more than $600bn (€517bn) of investments. Their policies often influence the behaviour of public pensions. So it is interesting to see whether Harvard’s recent decision to end its investments in fossil fuels will be followed not only by other universities but also by retirement systems. 

So far, the $400bn California Public Employees’ Retirement System (CalPERS), the largest pension fund in the US, has been the advocate for another approach – to use ownership in oil and gas companies to drive change from within. Also another prestigious university, Yale, has recently reaffirmed its position against simple divesting.

Harvard’s $41.9bn endowment has less than 2% invested in the fossil fuel industry, already down by more than 80% since the 2008 fiscal year. 

None of those investments are direct. They are all partnerships with private equity funds that have holdings in the sector. They will not be renewed when current obligations expire, while the endowment does not intend to make direct future investments in this industry. “Given the need to decarbonise 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,” said Lawrence Bacow, the Harvard president, in an email to Harvard affiliates, in September. 

It is “the first step toward a just transition to a greener future,” said Naomi Oreskes, professor of the history of science at Harvard, and Sofia Andrade, an organiser with Fossil Fuel Divest Harvard, in an opinion piece in the New York Times. It was, indeed, an important victory for Fossil Fuel Divest Harvard, which has been pushing the university in this direction since it was founded in 2012. In August 2020, the activist group had won three of the five seats on the college’s Board of Overseers up for election. The board takes part in appointing members to the Harvard Corporation, which oversees managers of the endowment.

Lawrence Bacow

After Harvard’s announcement, two other universities followed the same policy. After voting in 2016 to divest its holdings of coal and tar sands, Boston University will now divest from fossil fuels entirely, starting immediately. “Divestment is one vehicle to hasten fossil fuel extractors to transition to renewable energy,” said Richard Reidy, one of the university’s trustees. 

The University of Minnesota plans to withdraw all of its investments in fossil fuel-related companies over the next five to seven years. 

Last year, Cornell University promised to abstain from new direct investments in oil and gas, and George Washington University and Georgetown University decided to divest from the industry entirely. 

In contrast, Yale has a more complex, multi-faceted approach addressing climate change. Only 2.6% of its $31.2bn endowment is invested in fossil fuels, and that figure would decline over time without adopting a wholesale divestment. A Yale committee of experts across many disciplines – law, economics, the environment, geology and corporate governance – elaborated ethical investing principles that led to a list of fossil fuel companies now ineligible for investment by the endowment. 

Donald Heller

“Our approach is designed to cast a light on bad actors in this industry,” said Jonathan Macey, a professor at Yale Law School and the chair of that committee. “And from the standpoint of using divestment in order to incentivise good behaviour, the approach we’re taking is the most effective way to do that. It is more effective than using a blanket divestment strategy that doesn’t mention companies or show recognition that there is diversity, and that some are better citizens and that some are worse citizens.” 

CalPERS has adopted a similar policy. To sell all shares in oil and gas companies means losing an opportunity to have an influence and drive change in this industry, according to Anne Simpson, managing investment director, board governance and sustainability at CalPERS. In line with this philosophy, last May CalPERS helped the activist investor fund Engine No 1 get three new directors onto the board of ExxonMobil to press the company to take the climate crisis seriously.

“All endowments are very diversified, not dependent on one industry, so they are not worried about a possible negative impact of the divestment policy on their portfolio’s performance,” says expert in higher education finance Donald Heller, vice-president of operations and Professor of Education at the University of San Francisco. 

“Our approach is designed to cast a light on bad actors in this industry” - Jonathan Macey

For the 12 months to June, US college endowments posted their strongest performance since 1986. The median return before fees was 27%; funds with assets of at least $500m had a median gain of 34%. “Now they are under pressure to keep up with those very high returns, and at the same time they are under more pressure from activists to divest from other industries or countries, for example from Israel. Every endowment feels this tension and must find a balance between its fiduciary duty and political pressure,” says Heller.