In the debate over whether or not to divest from fossil fuels, the written word may speak louder than protests.
Two weeks ago, when the Yale Corporation’s Committee on Investor Responsibility (CCIR) voted not to divest the University’s holdings from fossil fuel companies, Chief Investment Officer David Swensen sent a letter to all of Yale’s active external investment managers. The letter, obtained by the News, asks these money managers to consider the consequences of climate change and greenhouse gas emissions when making investment decisions. But while Swensen emphasized the letter’s potential for substantive impact, student members of Fossil Free Yale criticized it as a “show tactic.”
Swensen said he believes the letter is based on economic principles and will affect the University’s portfolio in a much more nuanced way than divesting from fossil fuels would.
“It was motivated from the right thing to do from an investment perspective,” he said. “The bottom line is that if Yale’s managers do not act in a manner that is consistent with the University’s goals, Yale will terminate the relationship.”
Over the long run, Swensen added, the letter will help move the University’s assets away from firms with higher greenhouse gas emissions. While not promoting divestment in name, Swensen said the letter may have a similar effect on the endowment.
“Yale asks [its investment managers] to avoid companies that refuse to acknowledge the social and financial costs of climate change and that fail to take economically sensible steps to reduce greenhouse gas emissions,” the letter said.
Still, finance professors interviewed cautioned against the effectiveness or necessity of action on the part of shareholders.
The economy is so interconnected that it is virtually impossible to link climate change to fossil fuel company shareholders any more than to coffee drinkers or electricity users, said School of Management professor Shyam Sunder.
SOM professor Roger Ibbotson said that writing letters will be more beneficial to the University than divesting, but added that divestment ultimately could hurt the University’s endowment. The process of removing one’s assets from a firm may reduce its stock price, Ibbotson noted, which would raise the return of future investors. If Yale’s money managers remove investments from fossil fuel companies, the endowment would be hurt because it would miss higher returns, he said.
“I think it’s fine that Yale wants to support environmental matters — I do too,” Ibbotson said. “But I’d rather not do it through the investment process. It’s not going to help our returns, it constrains us and makes it more difficult to manage our money. I don’t think it’s going to have too much impact on the environment.”
But still, he said, it is an effective way to raise one’s voice.
In his letter, Swensen wrote that the Investments Office bases its approach to global warming on the conclusion that greenhouse gas emissions pose a grave threat to human existence.
Swensen added that a portfolio that fully considers the externalities of greenhouse gas emissions and the possibility of a carbon-pricing scheme could be “well-positioned to deal with a more enlightened regulatory environment.”
However, Ibbotson questioned whether the letter would benefit the University’s returns.
“Although I favor the environmental aspects of this, it seems like a stretch to say that the Yale endowment will benefit from this,” he said. “I guess they want to deliver our message, but it’s not likely to benefit Yale.” Still, he added that it may ultimately benefit the world in some way.
But in the wake of Yale’s decision on Aug. 27 to not divest the University’s assets from fossil fuels, members of Fossil Free Yale are unsatisfied. They expressed discontent that Swensen’s letter recommending environmentally conscious business practices is effectively the only move the University has made on the issue.
Mitch Barrows ’16, project manager of Fossil Free Yale, criticized Swensen’s letter, saying that research shows that shareholder engagement with the issue of environmental investment does not make a difference.
Gabe Rissman ’17, policy coordinator of the group, added that the letter has “no bite” because there are no explicitly articulated consequences for failing to do what the letter instructs. He added that there are no real metrics included in the letter to measure any tangible change.
But despite his criticisms, Rissman applauded Swensen’s decision to publicize the letter.
“It’s a public proclamation of the financial risks of climate change,” Rissman said. “In making this letter public, he is demonstrating his views on climate risk.”
Swensen noted that follow-up conversations with money managers after the release of the letter have been constructive and several have been quite enthusiastic.
The letter has attracted significant attention beyond Yale’s campus gates. Swensen said that he has received several inquiries from peers at other institutions who are intrigued by the ideas penned in his letter.
As of June 2013, Yale had the second largest university endowment in the world, valued at $20.8 billion.