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Why are Billionaire Universities Hedging Their Bets on Climate Change?

There was a time when Cambridge economist John Maynard Keynes, then the celebrated bursar of a burgeoning King’s College endowment, considered the purchase of equity in oil companies “a travesty of investment policy.”1 Keynes didn’t deny the enormous profit potential of the oil industry, but nevertheless deemed such “speculative attempts at capital profits […] within the area of hostilities” because he lacked adequate information on particular companies and judged the risks to be “clearly enormous.”2 Keynes was “aiming primarily at long-period results,” since he believed investors “should be solely judged by these,”3 regardless of any losses incurred in the short-term.

The Board of the National Mutual, a London-based insurance fund Keynes was simultaneously chairing at the time, renounced Keynes’ insistence that they retain their supremely depreciated holdings during the height of the Great Depression, leading to his eventual resignation in 1938.4 The less parochial Board at King’s, however, trusted Keynes’ intuition and long-term investment philosophy, which turned out to be lucrative. During his 22-year tenure as bursar, Keynes outperformed the market by an average of 8 percent and was almost single-handedly responsible for financially enriching King’s College in the 20th century.

Were he alive today, Keynes might still consider oil investments a travesty, not for lack of knowledge about specific companies or future risks, but because we now know too much.

In its annual executive summary released last November, the International Energy Agency (IEA) delivered a sobering prognosis on climate change: “No more than one-third of proven reserves of fossil fuels can be consumed” if the world is to mitigate “dangerous” warming and contain the average global temperature rise below 2° Celsius. Experts, like MIT climate scientist Kerry Emanuel, clarify that the internationally recognised 2° target is a “delicate compromise between what is desirable and what may be feasible,” and yet even this compromise now seems out of reach. Last year a flurry of notable studies – by the World Bank, IEA, PricewaterhouseCoopers, The Royal Society and Nature Climate Change – cautioned that with global energy consumption rising roughly 3 percent annually and insufficient government intervention in markets to curb CO2 emissions from energy supply, transport, deforestation and industrial production, we’re already practically certain to surpass the 2° threshold before 2050. Current trends indicate that the world is on the path to a 4° or even “catastrophic” 6° rise by the end of the century.

After the unprecedented melting of the Arctic ice sheet last summer, NASA climate scientist James Hansen called worsening climate change a “planetary emergency.” Nicholas Stern, author of the 2006 government-commissioned Stern Review on the Economics of Climate Change, recently conceded that his conclusions were too conservative: “I got it wrong on climate change—it’s far, far worse.” IMF Managing Director Christine Lagarde calls climate change “the greatest economic challenge of the 21st century” and World Bank President Jim Yong Kim warns that “if there is no action soon, the future will become bleak.” Since markets don’t factor in the future financial and social costs of global warming in the current price of fossil fuels, climate change is widely considered “the greatest market failure that the world has seen.” We’re on track to make large portions of the planet either unpleasant to live in or altogether uninhabitable by humans, a potential scenario that has prompted the creation of the Cambridge Project for Existential Risk.

John Fullerton of the Capital Institute estimates that the total value of all corporate-owned fossil fuel assets amounts to a $20 trillion financial bubble, dwarfing the housing bubble that precipitated the recent financial crisis. As MSNBC host Chris Hayes controversially put it, “the only historical analogue for the amount of money that’s on the line in terms of the fossil fuel industry is the sum total value that the slaves represented in the [American] Civil War.” And indeed, just as southern slave owners were reluctant to relinquish their nefarious source of wealth, voluntary fossil fuel abolition is similarly inconceivable. Managers of publicly traded oil, coal, and gas firms are contractually mandated to increase shareholder value on a quarterly basis. For them, resisting costly efforts to restructure the global economy for long-term sustainability is an institutional requirement.

Are higher education institutions obligated to hold the companies they invest in to a higher standard—one that values more than mere quarterly earnings? That’s precisely what student-led campaigns in over 252 US university campuses are demanding in an attempt to spur endowment managers to divest from the 200 largest publicly traded fossil fuel companies.

The “Do the Math” campaign, endorsed by activists Bill McKibben and Naomi Klein, is predicated on the principle that universities serve a social purpose and should therefore conform to socially responsible investment (SRI) policy. In the past student campaigns prompted college divestment from companies operating in apartheid South Africa, genocide-ridden Sudan, and tobacco companies, but only after hunger strikes, sit-ins in Presidents’ offices, and other tenacious tactics.

Conceding to democratic pressure, Unity College and Hampshire College in the US have agreed to divest their portfolios from fossil fuels. Harvard students passed a divestment resolution with 72 percent of the vote last November, which prompted President Faust to agree to further discussion this semester. Similar dialogue has started elsewhere, but still no university with an endowment exceeding $1 billion has followed suit.

Staunch resistance to SRI is ubiquitous on university campuses. Admittedly, it would be rather inefficient if endowment managers had to answer for the ethical purity or financial soundness of every potentially contentious investment, especially since many financial flows go through third parties, like hedge funds and private equity firms. Oxford University’s investment chief made precisely this point in 2010; pressured by students to divest from arms companies equipping dubious wars in Iraq and Afghanistan, she told the FT Mandate that she “[tries] to avoid having a debate over SRI as it’s hard enough discussing ethics with Oxford dons at the best of times.” Hard enough indeed, but antipathy to serious ethical debate is not just an Oxonian – or even British – phenomenon.

A comprehensive 2012 study by the Investor Responsibility Research Center Institute documents the historical decline of socially responsible investments by US universities—coffers with more than $415 billion in combined assets. The report finds that university investments are reducing reliance on traditional bonds and publicly traded securities, opting instead for “commingled vehicles and more opaque, illiquid investments in alternative asset classes.” Yet in these alternative investments, “very little consideration has been made by endowments of environmental, social and corporate-governance issues, despite growing opportunities to do so.” Data from the National Association of College and University Business Officers (NACUBO) reveals that alternative assets – hedge funds, private equity, real estate, and commodities like oil and coal – now account for more than 50 percent of aggregate college investments. This is a stark departure from norms of the 1960s and 1970s, when “endowments were among the pioneering institutional investors to adopt new policies and institutions to address social and environmental considerations.”

A study by the Harvard Business School reveals that, among educational institutions, there’s a “rich getting richer” phenomenon mirroring the massively unequal distribution of wealth in the broader economy. Today many observers are discomfited by endowments like Harvard’s $32 billion enterprise, which is beginning to resemble a tax-exempt hedge fund that happens to finance education on the side. At Harvard, approximately 450 full-time professors make roughly the same combined annual salary as the top 5 endowment managers. Skilled endowment managers at the top 20 US universities are so highly valued because they’ve grown their respective funds by 9 percent annually and outperformed the market by 8 percent; over the past two decades, they’ve been in the top percentile among all institutional investors. In 1993, “the median Ivy League endowment was about 40 times larger than the median public endowment,” but was up to “70 times [larger] by 2005.”

Even so, Keynes wouldn’t be impressed. University investments in oil, coal, and gas companies are financially unsound in the long-term because they’re fueling a $20 trillion bubble that is bound to eventually burst once markets recognise the massive overvaluation of unburnable carbon. Institutional investors like Portfolio 21 have already realized this and manage their portfolio without any fossil fuel stocks. Any countervailing risks of decarbonising an investment portfolio, Aperio Group argues, would be “so minor as to be virtually irrelevant.”

The problem, however, is more than just long-term financial peril – it’s a matter of integrity. Universities producing leading climate science research are especially vulnerable to naming and shaming. While Cambridge houses the Centre for Climate Change Mitigation Research, the London School of Economics hosts the Grantham Research Institute on Climate Change and the Environment, Oxford houses the Environmental Change Institute, and MIT supports the Lorenz Center, all of these universities are simultaneously hedging their bets by investing in the companies and commodities enabling environmental ruin. Does it make any sense whatsoever for universities to finance academics producing world-leading research that urges expeditious decarbonisation of the economy, and then to go behind closed doors and invest in the corporations that are lobbying government for climate inaction and funding studies that intentionally misrepresent climate science?

University divestment from fossil fuel companies will not, by any means, solve the climate crisis; only coordinated and steadfast government policies—comparable to ones being pursued in Germany, Denmark, and Sweden—can force the scale of change needed in the private sector and the way we consume. But the fact remains that universities, especially ones with the largest endowments, are implicated in the climate crisis in a particularly self-contradictory way. To better understand the contradiction, it’s worth considering the core purpose of a university endowment.

When Nobel Prize-winning Yale economist James Tobin wrote his classic paper on endowments in 1974, he wanted to articulate an optimal investment policy capable of funding ongoing university operations—professorial and administrative salaries, building and energy costs, new projects and institutes, etc.—while also preserving the university’s inflation-adjusted purchasing power over time. Tobin believed in intergenerational equity, or the principle that the quality of education a Cambridge Natural Sciences undergraduate receives in 2013 should be approximately the same that a student receives in 2100. Remaining mindful of the need to constantly invest in state-of-the-art resources to ensure the university retains its reputational capital long into the future, the Cambridge investment board might rightly spend only about 5 percent of the endowment on operating costs each year, relying on tuition fees and government and institutional grants to cover remaining expenses. Cambridge investment chief Nick Cavalla currently adheres to the conventional 5 percent standard, cautioning that “just a bit more than that would risk imprudence.” As Mr. Tobin adroitly put it: “The trustees of an endowed institution are the guardians of the future against the claims of the present. Their task is to preserve equity among generations. The trustees of an endowed university like my own assume the institution to be immortal.”

Assuming an educational institution is immortal means caring about the future standard of living on the planet that students and future generations will inherit. A Cambridge Natural Sciences student in 2100 surely won’t receive a comparable quality of education to Stephen Hawking if the global economy is crippled by climate calamities and insolvency. If the 2008 financial crisis is any indication, average spending per student would decline as budget stringency and supreme depreciation set in. Last year alone the global economy incurred $140 billion in losses from climate-related damages. While estimating the precise costs of climate inaction is no easy feat, the IEA has said that for every year the international community fails to pursue bold action to decarbonise the global economy, we add roughly $500 billion to the cost of getting the atmospheric concentration of CO2 back down to safe levels—i.e. below 350 parts per million.

Despite the fact that university divestment from fossil fuel companies won’t directly reduce emissions and hardly threaten the industry’s bottom line, continuing with business as usual is both financially unsound in the long-term and ethically dubious in the present. Just as the London School of Economics taught principles of democracy in its government and philosophy lectures while financially allying with Gaddafi’s murderous kleptocracy in Libya, the universities decrying climate change while financing its culprits are floundering in hypocrisy.

Public credulity is wearing thin. Only democratic pressure will spur a sea change in market thinking about environmental sustainability and socially responsible investment; the question is whether it’ll be soon enough. The demands are uncomplicated and uncontroversial: have some honour and consistency of purpose, “put your money where your mouth is.” Universities can start by formally endorsing the UN Principles for Responsible Investment, something that the University of Ottowa and even Goldman Sachs Asset Management have already done. But the UN principles are merely aspirational; formal deliberative procedures will have to be adopted to ensure investments are appropriately screened for environmental, social and corporate-governance concerns. In the meantime, the student-led divestment campaigns are a formidable cause and source of hope. It appears that restoring the institutional integrity of higher education depends on taking them, our climate scientists and (at least some) academic economists seriously.


  1. The Collected Writings of John Maynard Keynes, Volume XII, Economic Articles and Correspondence: Investment and Editorial. p. 82. Cambridge: Cambridge University Press.
  2. Ibid.
  3. Skidelsky, Robert. 2004. John Maynard Keynes: 1883-1946: Economist, Philosopher, Statesman. p. 565. London: Pan Macmillan.
  4. Ibid. Keynes: “It is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself. Any other policy is anti-social, destructive of confidence, and incompatible with the working of the economic system.”

Ryan Rafaty is a PhD candidate in political science at University of Cambridge. He is writing a comparative history of political initiatives to mitigate climate change and reduce fossil fuel dependence in the advanced industrial countries.

  • The confederal structure of Oxford and Cambridge Universities, and therefore the distributed nature of their investment portfolios, offers particular opportunities for divestment campaigns. Big centralised endowments like Harvard´s internalise the values of investment bankers, which are the problem. Kings and Trinity at Cambridge, or Christ Church at Oxford, are rich enough for their actions to make a splash, and small enough for local campaigns to be feasible. Locate and convince one or two Fellows in each – climate scientists or environmental economists or moral philosophers perhaps – , and your campaign has traction.

    Apropos of Tobin. The long-term view of the endowment´s purpose means that even in strictly financial terms fossil fuels are a risky bet. Universities have lower rates of discount than individuals or the market average, because their intrinsic time preference is zero. As with governments, discounting only arises because of expected productivity growth – about 2% in real terms. (See Stern Report). Following the investment herd is therefore incompatible with the university´s mandate. Think of Shell and Exxon in 2063: either they will be on course to blow up the world or they will have been displaced by cheap solar energy. In any case their shares won´t be worth much.