Despite the increasing urgency of the climate crisis, many of the world’s most powerful financial actors have continued to invest in the fossil-fuel industry. But a new trend in the law is forcing institutional investors to decarbonize their portfolios – or be held legally accountable.
This summer, the Intergovernmental Panel on Climate Change released its latest report, and the scariest part is just how unsurprising its contents were. Avoiding the worst, the report made clear, is still possible, but only if humanity moves to a carbon-neutral economy as quickly as possible. “This report,” said United Nations Secretary-General António Guterres, “must sound a death knell for coal and fossil fuels, before they destroy our planet.”
And yet, with the planet on fire, institutional finance is fanning the flames. Many of the world’s most powerful financial actors continue to invest in the fossil-fuel industry, even as its actions predictably lead to massive economic disruption, ecological catastrophe, and social injustice. Until now, they have gotten away with it. But a new trend in the law is forcing institutional investors to decarbonize their portfolios – or be held legally accountable.
Harvard University is a case in point. For a decade, Harvard’s leaders had ignored calls from students, faculty, and alumni to divest the university’s $53 billion endowment from the fossil-fuel industry. But, recognizing scientific and financial reality, in September Harvard finally pledged to divest from companies whose business models, by relying on sustained carbon extraction, are incompatible with a livable future. “Given the need to decarbonize the economy and our responsibility as fiduciaries to make long-term investment decisions that support our teaching and research mission,” wrote university President Larry Bacow, “we do not believe such investments are prudent” (emphasis added).
Prudence, in the statute governing Harvard’s endowment and many other institutional funds, is a fundamental legal concept that establishes the care, skill, and caution with which a fund’s investments must be administered. Prudence guides how a fund must be managed in order to serve its beneficiaries’ interests, and there are significant penalties for violating it. Harvard’s statement acknowledges the impossibility of complying with such a duty while investing in fossil fuels.
There are plenty of reasons why this might be the case. For starters, fossil-fuel companies face existential uncertainty. A tide of market shifts, regulations, and litigation poses fundamental risks to the industry’s interests, while many of the carbon assets from which it derives its value will be rendered unburnable and stranded to meet international climate goals. In addition, the idea of seeking to profit from businesses whose dependence on carbon dioxide emissions serves to hasten climate change is repugnant to the notions of public purpose and social duty that responsible investors claim to uphold, and would seem reason enough to seek broad decarbonization.
In other words, the fossil-fuel industry’s business model is now so misaligned with scientific and financial reality that betting on these companies (or, more broadly, on the sort of businesses that materially depend on CO2 emissions) is not just misguided. It is negligently wrong as a matter of law. Moreover, the concept of prudence applies in similar form to any investor subject to the fiduciary standard, thus binding essentially every academic endowment, charitable fund, and public and private pension fund. That means trillions of dollars stand to be affected by Harvard’s recent divestment precedent.
In fact, Harvard’s decision is already having ripple effects. In the weeks since the announcement, a number of other influential investors – ranging from the endowments of Boston University, the University of Minnesota, and the MacArthur Foundation to the ABP public pension fund in the Netherlands (Europe’s largest) – have likewise acted to align their money with the demands of prudence and climate action. In doing so, they join investors worth over $39 trillion – many of whom, evidence from markets suggests, are already reaping financial gains from shedding fossil-fuel stocks.
By basing Harvard’s decision on prudence, Bacow may well have intended to generate the sweeping impact that the university’s divestment from fossil fuels predictably will achieve. Or perhaps it was a timely defensive move. When Bacow announced the decision, the Massachusetts attorney general was weighing whether to act on a legal complaint filed by students and other members of the Harvard community, along with the nonprofit Climate Defense Project, asserting that the university’s fossil-fuel investments represented a breach of its charitable obligations.
Whatever the reason, Harvard has given voice to a doctrine that, befitting the urgency of the climate crisis, should spread swiftly around the world and hasten similar decarbonization decisions by fiduciaries everywhere. It took a decade of struggle to get Harvard to this point. But now that it is finally taking steps toward living up to its global reputation as a leader, other institutional investors must take notice. In an age of climate crisis, these actors’ mandate is to stand with the future, or else risk ending up not just on the wrong side of history, but also on the wrong side of the law.
Bevis Longstreth, a former member of the US Securities and Exchange Commission (1981-84), is a former partner at Debevoise & Plimpton and taught financial law at Columbia Law School.
Connor Chung is a member of the Fossil Fuel Divest Harvard campaign.
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