Harvard’s Investment in Fossil Fuels: Neither Warranted nor Wise

Thinking Capital ℠ – Matthew W. Patsky, CFA
Spring 2015:  Students at more than 400 colleges and universities across the country are calling on their institutions to divest from the fossil fuel Matt-Patsky-Trillium-Asset-Managementindustry. These students have read and listened to the overwhelming scientific evidence that climate-warming trends over the past century are very likely due to human activities. They recognize that the effects of climate change, including increasing sea levels, persistent droughts, and retreating glaciers are serious problems that will affect their lives and livelihoods. They are engaging their universities in honest conversations about the drawbacks of placing new fossil fuel investments in a carbon constrained world.
Some schools — from larger institutions like Stanford and Syracuse University to smaller liberal arts colleges — have engaged in a careful, research-based evaluation of the issues and have demonstrated leadership as they more closely align their schools’ investments with their values.
Others, notably Harvard University, have rejected the premise of fossil fuel divestment, as presented by thousands of students, faculty and alumni — nearly from the outset. In an October 2013 letter, Harvard’s President, Drew Faust, rejected calls for divestment on grounds that divestment was not in the best interest of the “endowment’s financial strength”.
This stance is Harvard’s loss — literally. In a review of publicly disclosed material, we have found Harvard Management Company has lost an estimated $21 million dollars over the past three years by ignoring calls to divest and continuing to hold the world’s largest owners of coal, oil and gas reserves. The losses have accelerated recently with an estimated $14 million drop in just the past six months ending March 31st. Three years is, of course, a relatively short time frame for evaluating an investment portfolio. Nevertheless, Harvard’s continued investment in fossil fuels during that time has diminished the financial strength of the endowment – contrary to the goal of President Faust’s misguided edict.
Specifically, Harvard’s SEC filings display seven companies that student’s have called for divestment from, based on the Carbon Underground 200 list. These are Anadarko Petroleum, Chesapeake Energy, CNOOC, Pioneer Natural Resources, Petrobras, Range Resources and Vale. Six of these seven companies produced losses for Harvard over the past 3 years. Gains and losses were calculated using each positions quarterly starting value and its subsequent return.
While these calculations use all publicly available information, I suspect that Harvard’s actual loss was considerably greater than $21 million. What makes further analysis so difficult is that Harvard publicly discloses less than $1 billion of its $36 billion portfolio. Their annual report does tell us that approximately $12 billion is invested in stocks. Assuming (given the dearth of public information) that these undisclosed investments fared about the same as the disclosed investments, that would put the total loss estimate at hundreds of millions of dollars over the past three years.
But even this staggering potential loss is only half of the story. Opportunity cost is the other half. If Harvard had sold off its fossil fuel holdings it would have reinvested the proceeds, presumably with broad market exposure.
At the moment, Harvard University’s decision to blindly continue their support of the industry that is principally responsible for causing a changing climate appears to be neither warranted nor wise.
Editor’s Note: This column originally appeared in the Spring 2015 issue of Trillium’s newsletter, Investing For a Better World.