Let me start by saying that I’m extremely concerned about climate change. Personally, I’m convinced that this is the great issue of our time, and finding ways to fundamentally change our energy economy in time to prevent a complete ecological disaster for mankind should be at the front of everyone’s minds.
That said, this movement to pressure Harvard to divest from fossil fuel stocks is a bunch of hot air (and not because of global warming). I can certainly understand the sentiment, but there’s just no reason to believe that Harvard selling off its holdings in oil, gas, and coal companies will mean anything in the long run.
Arguments for Divestment Tend to Focus on the Wrong Thing
If you head to the websites dedicated to the divestment cause, you tend to get a lot of fiery rhetoric about global warming…all of which is warranted. What you won’t get is a ton of focus on whether or not divestment is an effective strategy for doing anything about that. It sounds great in concept, but what it lacks is actual concrete evidence that a sector as large as energy could be meaningfully affected by this campaign.
I understand the feeling that we have to do something about climate change, but if you argue we should try to counter our climate issues without concern for how effective the method is, that’s an argument for doing, well, anything. Why not a rain dance? Maybe we could try and organize a day where everyone in America holds their breath for a full minute at noon? Or, God forbid, focusing on political organizing to make elected representatives take note.
You Might Find this Hard to Believe, Harvard…but No One Will Care
Harvard has an endowment of about $36.4 billion, by far the largest of any American university. Of that, it’s holdings in various oil and/or coal companies represent about $80 million worth of investments. Granted, that sounds like a lot. However, if you look at the numbers with reference to the scale of the issue, it should be clear that, in the grand scheme of things, it’s really not.
For starters, the $80 million represents all of 0.2% of Harvard’s endowment. However, if the size of the investment is pretty small in relation to Harvard’s total holdings, it’s positively miniscule when taken in the context of the entire fossil fuels industry. Take Exxon Mobil (XOM) , the biggest oil company out there. Exxon alone has a value of over $360 billion...or more than 10 times Harvard’s entire endowment. That would mean that, even if Harvard’s entire stake were just in Exxon, it would represent about 0.02% of the company’s total float.
Try calling Exxon CEO Rex Tillerson to tell him that a shareholder is planning on divesting from 0.02% of his company’s stock – I would guess that he’s not exactly going to alter any major company policies in reaction to that news. In fact, I’ll bet he wouldn’t even take that call.
Push comes to shove, all of the stock owned by Harvard, and every other university out there, taken collectively, still isn’t enough to be even a blip on the radar of a man like Tillerson.
Divestment Doesn’t Really Acknowledge the Realities of the Stock Market
Selling stock in a company doesn’t actually affect its profitability, or even the demand for its product. It just means that someone else now owns it. In order to divest, you need someone else who’s willing to invest.
And there will be PLENTY of buyers out there, folks. Harvard may be ready to take a principled stand where they eschew investment returns in favor of the public good, but, unless the entire market joins them, it’s not going to mean much. Someone else will happily buy the stock, collect the dividends, and watch their investment grow.
Ultimately, the sort of divestment movement that might actually create a real effect on the share price for these companies would have to be truly, outrageously massive. As long as at least a few investment banks and hedge funds continue to value money, Harvard’s gesture is going to be meaningless.
By the way, in the event that you genuinely believe that there’s a future scenario where every major investment bank stops caring about money long enough to create a truly effective divestment strategy, be sure to message me once you’re done reading, because I’ve got a bridge I’d like to sell you.
Look, it doesn’t take a Harvard economics course to understand the simple fact that, if the money’s out there, someone will take advantage of it. Divestment won’t hinder the profits for oil companies, and as long as those profits are there, the investors will follow. Believing otherwise is just naïve.
Don’t Divest Oil Stocks to Affect Climate Change...Invest in Them
That may read as cynical, but, to be clear, I’m not saying that it’s naïve to try do something about climate change. It’s naïve to think this particular strategy is the way to do it. If the end goal is really altering the energy economy to shift it away from using fossil fuels, there’s plenty of better options.
Investment, for instance. Publicly traded companies are beholden to their shareholders. Each share comes with voting rights, and holding enough shares means you can wield actual influence at the company. Divestment is essentially a decision to actively give up what influence one can wield over these companies and their operations.
If we’re going to rally pensions, mutual funds, and endowments to a common cause, why focus on divestment? Buying up as many shares as possible in these companies could allow organizations to share in those profits while also creating the potential for building a voting bloc that could actually elect board members to push the climate change agenda in a meaningful way.
Harvard is Already Using Big Oil Profits to Fund Climate Change Research
“Harvard is an academic institution. It exists to serve an academic mission — to carry out the best possible programs of education and research. We hold our endowment funds in trust to advance that mission, which is the University’s distinctive way of serving society.”
That comes from Harvard president Drew Faust’s letter in response to the divestment movement, and it highlights the other fact: Harvard’s already doing a lot to combat climate change. The university arguably has dozens of better ways to impact actual change than a short-sighted divestment strategy. The profits of oil companies, filtered through the endowment and into Harvard’s research and education efforts, are doing a lot more good than simply lining the pockets of some other investor who pounced on some newly available shares.
Harvard is a premier research institution, with much of that research focused on science and technology that would represent real solutions. It’s also a thought leader, employing some of the strongest voices for change and rational discourse on the subject of climate change out there. Not to mention, it’s educating class after class of students destined for the research laboratories and halls of power that actually hold the keys to our future.
At the end of the day, Harvard is an educational institution, and the work it does in that capacity is what really matters.
What’s more, if Harvard is really intent on using its endowment to combat climate change, it’s arguably much more effective to do so by selectively investing. For instance, pushing the university to pursue more small-cap companies or venture capital firms, focusing on companies that work to monetize technologies oriented around reducing carbon emissions.
If you’re looking for the end of coal-fired power plants, it’s not going to come about due to a lack of investors. Elon Musk’s anticipated announcement regarding battery systems marketed to home-owners is likely going to do a lot more to combat climate change than any organized divestment strategy. If Harvard is going to do anything with its endowment, why not use it to fund the next Elon Musk or Tesla (TSLA) rather than selling a marginal holding in fossil fuel stocks?
Investing in Climate Change Solutions…without Divesting from Logic
If there were reason to think that divestment would matter in the battle against climate change, I’d be right there with the students of Harvard in pushing hard for it. It won’t, though.
In the end, the time and energy we spend seeking meaningful solutions to climate change can’t involve the rejection of the basics of economics and finance. Understanding capital markets and leveraging them to your cause is much more likely to produce real change than a well-meaning but ill-informed push for an entirely symbolic move. After all, Harvard, if you divest your stake in fossil fuels, it might just be picked up by Yale…and what could be worse than that?
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