A New Divestment Focus: Fossil Fuels

In the 1980s, it was South Africa. In the 1990s, it was tobacco.

Now fossil fuels have become the focus of those who would change the world through the power of investing.

A student movement has gathered momentum at more than 300 campuses over the last year. Members have encouraged college and university endowments to divest themselves of their holdings of companies in the fossil fuel business to avoid profiting from the release of carbon associated with the risk of global warming.

While the efforts have gained some traction, they have also met strong opposition from critics who favor the traditional proxy-voting process of engagement, in which institutional investors try to prod corporations to change their practices, with divestiture a last resort.

The push also comes as some big institutional investors are paying more attention to broader programs devoted to environmental, social and corporate governance issues.

For example, the California Public Employees’ Retirement System has a sprawling program that includes 111 initiatives. They include proxy voting, investing in funds devoted to green energy or to urban and rural areas “underserved” by investment capital, and an annual list of underperforming companies. Calpers is working to integrate such issues throughout its $264 billion fund, including research to determine how such factors affect risk and return.

In July, Harvard’s endowment, the nation’s largest at $31 billion, hired the leader of that research initiative, Jameela Pedicini, as vice president for sustainable investing, becoming only the second top college after Stanford to have full-time endowment employees devoted to such issues.

Ms. Pedicini’s appointment was seen in part as a response to two student groups that have been calling for more action. The Responsible Investment at Harvard coalition has been pushing for “more transparent and comprehensive” environmental, social and governance efforts throughout the endowment. The other, Divest Harvard, said in April, “By sponsoring climate change through our investments, our university is threatening our generation’s future.”

The campus divestiture campaigns have been spurred by a group led by the environmental activist William McKibben, who has also battled the Keystone XL oil pipeline. The McKibben group has urged the sale of the 200 companies with biggest carbon reserves globally, including Exxon Mobil and Chevron.

The push to rid portfolios of fossil fuel stocks echoes earlier movements by endowments and pension funds in the 1980s to sell stocks of companies doing business with South Africa because of its apartheid policies and in the 1990s to sell tobacco stocks because of the health hazards posed by smoking. Harvard, Stanford and Calpers all sold their tobacco stocks around that time.

A few small colleges have chosen to divest themselves of their fossil fuel stocks. Unity College in Maine, which specializes in environmental science and has a small $14.5 million endowment, this spring completed a move to a lineup of 33 exchange-traded sector funds that minimize exposure to fossil fuel stocks. “If we don’t deal with climate change now, we consign our grandkids to an unlivable planet,” said Unity’s president, Stephen Mulkey.

But officials at Harvard and many other endowments are resisting the calls for full divestiture in favor of other means of persuasion.

When three student members of Divest Harvard met in February with Robert D. Reischauer and Nannerl O. Keohane, two members of Harvard’s governing board who serve on a shareholder responsibility panel, Mr. Reischauer cautioned that advanced economies were highly energy-dependent and that divestment would not change the basic supply-demand equation, according to the students.

Mr. Reischauer added that the companies were unlikely to respond because divestiture by Harvard would not affect the price of their stocks or their products, said another person briefed on his remarks. He acknowledged that Harvard could sell the few carbon stocks it owns directly without “a major impact” on its endowment performance; such stocks account for only $30 million of the fund’s $1 billion in direct United States stock holdings, the students estimate. But Mr. Reischauer warned that selling such stocks from the endowment’s large investments in hedge funds, mutual funds and other pooled vehicles could be costly, hurting returns.

At a meeting in April, Ms. Keohane argued that the primary purpose of the endowment was to maximize returns, that divestiture wasn’t effective and that a better way to hold fossil fuel companies accountable would be through Harvard’s proxy votes as a shareholder. Yet Harvard does not disclose the names of outside managers who run one-third of its money, so students do not know many of its holdings.

A Harvard spokesman, Kevin Galvin, added, “The university has traditionally maintained a strong presumption against divesting stock for reasons unrelated to investment purposes,” preferring that the college make its “distinctive contributions to society” through its “research and educational activities.”

Christianna Wood, a trustee of Vassar College who advocates pursuing social and governance goals through engagement and proxy voting, said that when she oversaw global stock investments at Calpers from 2002 to 2007, outside consultants estimated the costs of the fund’s South Africa and tobacco stock sales at $1 billion each. She said by divesting, colleges will “not only lose money, they will lose their voice” on such issues. She predicted that the movement would fail at most schools.

Administrators at Bowdoin and Swarthmore have cited such potential costs in responding to calls for divesting, and Middlebury and Vassar have decided not to divest. Middlebury cited the difficulty, costs and risks. Vassar’s president, Catharine Bond Hill, said students “have lots of proactive ways to engage policy makers” on climate change, and divesting themselves of certain stocks could hurt endowment returns without addressing the causes of climate change.

Ms. Wood said the proxy process had produced gains over the last decade in shareholder voting rights and the election of directors. For example, she said there was a big victory this year when shareholders successfully urged Continental Resources, an Oklahoma oil and gas company, to curb its gas emissions in North Dakota. But she acknowledged that getting the oil giants to respond to proxy proposals on greenhouse gas limits would be more difficult.

Stanford’s investment responsibility policy, adopted in 1971, addresses the risk of “substantial social injury” in categories including diversity, environmental sustainability and human rights. For example, Stanford has voted for proxy resolutions asking companies to report on their efforts to avoid using minerals whose sale finances human rights abuses in Africa. Nevertheless, Stanford does not routinely disclose specific proxy votes as Harvard does.

John F. Powers, chief executive of Stanford Management, which runs the endowment, said the school’s process for evaluating the call for fossil fuel divestiture might take the better part of the coming academic year. He said selling tobacco stocks did not hurt Stanford’s performance much because they were “a narrow universe” and “plenty of other stocks went up.”

Harvard, Stanford and the other universities whose endowments pursue environmental and social goals are in the minority. John S. Griswold of Commonfund, which tracks endowments, says one-fifth or less of endowments have such programs. He says some endowment managers prefer to “focus on producing the best returns they can,” and “don’t want to be distracted” by other issues.

Even the proxy route may be losing some of its influence.

Jon Lukomnik, a corporate governance consultant, said college endowments’ ability to use the proxy process had been curtailed by their increased holdings in alternatives like private equity, venture capital, real estate and hedge funds. That trend has left “an ever decreasing portion of their assets” in publicly traded stocks.

At Harvard, the number of proxy proposals on social issues that its shareholder responsibility committee has considered has fallen from a recent peak of 157 in 2004 to 41 in 2012. And the committee’s most recent annual report shows the limits of the tactics against some energy giants.

In 2012, Harvard voted in favor of a climate change call for ConocoPhillips to set targets for reducing its greenhouse gas emissions. But the proposal, which this year received a 29 percent vote, has failed repeatedly since 2008. “They have basically brushed it aside,” said the Rev. William Somplatsky-Jarman of the Presbyterian Church (USA), the measure’s sponsor. Harvard has also voted for such a proposal at Exxon Mobil, which this year received a 27 percent vote.

While a 20 percent vote is considered significant, “the current approach where we see incremental progress is clearly insufficient,” said Andrew Logan, an oil and gas specialist at Ceres, a sustainability advocacy group.

At Calpers, Anne Simpson, director of an 18-member global governance team, says she is “flattered” that Harvard recruited one of them. She said Calpers, which manages 80 percent of its assets internally, also prefers engagement to divesting.

“We’re such a big owner, we can’t find a tidy corner of the market of complete purity and virtue,” she said. “You’ve got to get down and dirty to deal with this. We visit companies. We meet with directors. They know we’re not going away. Walking away from that table is really not going to help.”