Divesting Common Sense

Sometimes, when I fall asleep reading Ayn Rand, my mind slips into a Libertarian Wonderland. In that world, rational people ask two simple questions before trying to impose a rule that would restrict the actions of others. First, will this rule be a headache to follow? Second, will it actually do any good? If the answer to the first question is yes and to the second question is no, then the rule is not implemented. When I wake up, I realize that these principles aren’t even necessarily libertarian; they are just common sense.

Unfortunately for us all, the Divest Harvard movement does not exist in a Libertarian Wonderland. It takes a laudable goal, fighting climate change, and pursues it by one of the least efficient means possible. The result is a massive headache for the administration with no hope of having a real effect on climate change. I say this with a heavy heart, counting friends and section mates among the movement’s staunchest supporters.

The Divest Harvard movement’s stated goals are for the Harvard Endowment to immediately freeze any new investment in fossil fuel companies, immediately divest direct holdings in the top 200 publicly traded fossil fuel companies, and divest indirect holdings in the top 200 fossil fuel companies within 5 years while reinvesting in “socially responsible funds.” Let’s look at what the practical implications of this would be:

What would be the immediate impact on fossil fuel companies? None. If Harvard divests from fossil fuel securities, the only change will be on the ownership of the security itself, not on the underlying finances of the company. Exxon, Chevron, and BP will have the exact same capital to work with, only their bonds and equity will now be owned by J.P, Morgan rather than Harvard. Progress!

What would be the long-term impact on fossil fuel companies? Negligible, if any. Even Divest Harvard’s staunchest supporters know that Harvard’s holdings are too small to make a meaningful difference—Harvard owns $11.5 million in direct holdings according to the Divest Harvard website, whereas America’s oil, gas, and combustible fuels sector is worth over $3.5 trillion.

Of course, Divest Harvard’s leaders must recognize this. Their only chance in effecting meaningful change is a symbolic victory. The hope is that this snowball’s into a broader movement, convincing more and more institutions to give up their fossil fuel holdings until enough money is pulled out of the fossil fuel companies to make a meaningful impact.

But even if Divest Harvard were to succeed in its broader goal of getting all universities to divest from fossil fuel companies, the effect would still be minimal. Total university endowment funds equal 1% of the value of total private securities in the United States. [1] Even were the divest movement successful in persuading all universities to follow suit, the result would be a mere drop in the ocean that would be quickly filled by other investors (hedge funds, life insurance companies, and the like) that are guaranteed to care little about the environmental impact of fossil fuel companies.

There is another flaw in Divest Harvard’s logic. Fossil fuel companies are not the caricatured evildoers that they are sometimes made out to be, and hurting them does little in the fight against climate change. Unless you believe that all fossil fuel consumption should cease immediately, resulting in millions of deaths and untold damage to the world economy, then fossil fuels are a necessary evil until an alternative energy source can be found. Fossil fuel companies fill this need.

Finally, to the very first question I posed, would Divest Harvard’s goals be a headache to implement? Yes. It would be a relatively simple matter to divest the direct investments. More difficult, however, would be to divest from the roughly $21.8 billion of Harvard’s endowment that is managed externally. [2] Every time Harvard would seek to open an account with a new external manager, careful procedures would have to be taken to ensure that no money would go into fossil fuel projects. These procedures translate into time and money, value lost in paperwork that could have instead gone to funding the university’s primary objectives.

Combating climate change is a goal worth fighting for. Given the stakes of climate change, it is understandable that advocates want to use any means at their disposal. But that does not mean that we should disregard the effectiveness of those means. Let’s focus our attention on changes that will make a substantive difference, instead of divesting ourselves of common sense.

[1] http://nces.ed.gov/fastfacts/display.asp?id=73, http://www.census.gov/compendia/statab/2012/tables/12s1201.pdf. Divide the net worth of all university endowment assets in 2010 ($356 billion) by the total value of all securities in 2010 ($34.7 trillion).
[2] http://www.hmc.harvard.edu/docs/Final_Annual_Report_2014.pdf. Multiply Harvard total’s endowment ($36.4 billion) by the amount managed externally (60%) to get this result.