New principles regarding fossil fuels to guide Yale’s endowment

The Yale Board of Trustees approved a new set of ethical investment principles to guide the university’s decisions concerning companies producing fossil fuels.
Spring flowers on Cross Campus.

(Photo credit: Courtney Smith)

The Yale Board of Trustees last week approved a new set of ethical investment principles (PDF) to guide the university’s decisions concerning companies producing fossil fuels.

The five principles, recommended by an expert faculty panel appointed in October by President Peter Salovey, create new standards for the activities, behaviors, and characteristics of fossil fuel companies that would warrant divestment.

The principles establish a framework through which Yale can encourage fossil fuel producers to adopt more sustainable practices and advance the shift to a decarbonized energy future — and to call out and make ineligible for investment by Yale those companies that do not.

Effective immediately, the principles will inform Yale’s Advisory Committee on Investor Responsibility (ACIR) in making specific divestment recommendations to the trustees. The principles were developed over the past six months by a multidisciplinary group of Yale experts that collected input from across the university community and engaged with a wide range of other authorities.

It is expected that a first set of divestment recommendations will be made by June of this year.

The adoption of these ethical investment principles exemplifies the university’s deep commitment to promoting the development and use of clean, sustainable, and renewable energy,” said Salovey. “Climate change is an imminent threat to the planet, and tackling it in an effective way requires difficult but necessary choices.

I am grateful to the members of the committee who carefully examined this complex issue, solicited input from our community, and established these principles. The committee’s work will help us to hold fossil fuel companies to a high standard.”

The new principles create requirements for fossil fuel producers to remain eligible for Yale investment. Companies must avoid exploration and production of fossil fuels that generate high levels of greenhouse gas emissions relative to energy supplied — as compared with feasible alternatives — and must follow best industry practices to minimize greenhouse gas emissions in their operations. They also must support meaningful and effective government policies that address the threat of climate change, and they must provide accurate information about climate science and climate change.

And, critically, fossil fuel companies must be transparent with Yale and its investment managers about their activities related to climate change.

Companies that run afoul of the principles will be placed on a list of firms in which the university may not invest. Yale will make that list — which will change over time — public.

The adoption of the new principles is the latest step by Yale to combat climate change as an institutional investor. In 2014, the university asked its external investment managers to incorporate the full cost of carbon emissions in all of their investment decisions. At the time, managers were told to avoid investing in companies that disregard the social and financial costs of climate change and that fail to take economically reasonable steps to reduce greenhouse gas emissions.

The Investments Office estimates that 2.6% of the endowment is presently invested in fossil fuel producers, a multi-decade low. The Office projects that holdings in fossil fuel producers will decline further (albeit not in a straight line) as time passes.

The call

Last October, with the benefit of suggestions from faculty and students at a forum hosted by the FAS Faculty Senate, President Salovey appointed the Committee on Fossil Fuel Investment Principles and asked it to recommend principles to guide the university in evaluating investments related to fossil fuel producers. The principles were to be developed within the framework of “The Ethical Investor,” the influential 1972 book by Yale professor John Simon, with co-authors Charles W. Powers, and Jon P. Gunnemann, that created general criteria by which universities could consider factors beyond economic return in making investment decisions and exercising shareholder rights. Those guidelines have served as the broad framework for Yale’s investments since 1972.

In particular, Salovey asked the committee to “identify the activities, behaviors, and/or characteristics of fossil fuel producers that constitute ‘social injury’ of such grave character that divestment is warranted.”

Chaired by Jonathan R. Macey, the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale Law School, the committee included Ruth Blake, professor of Earth & Planetary Sciences, Department of Earth & Planetary Sciences; Kenneth Gillingham, associate professor of environmental & energy economics, School of the Environment; Benjamin Polak, William C. Brainard Professor of Economics, School of Management, Department of Economics; Mary-Louise Timmermans, professor and director of undergraduate studies, Department of Earth & Planetary Sciences; and Xinchen Wang ’09, director, Yale Investments Office.

Over five months, the committee met more than 30 times, inviting input throughout the process from across Yale and conferring with outside experts in climate science, economics, law, environmental justice, and investment management. The group also met with undergraduate, graduate and professional school students, gathered written comments, and commissioned research. The committee’s report addresses issues brought to its attention by students, faculty, and others who provided input during the process.

In its report to the Yale Corporation Committee on Investor Responsibility (CCIR), the committee does not target specific fossil fuel companies, but rather urges the university to apply its ethical investment principles to any fossil fuel company for purposes of deciding on divestment.

These principles allow Yale to do more to address the urgent crisis of climate change by drawing attention to the large number of fossil fuel companies that, though capable of doing so, are not transitioning to renewables; not acting consistently with best industry practices; or are denying climate change,” said Macey, the committee chair.  

Into action

The application of the principles will likely be dynamic, Macey said. It will play out in different ways for different fossil fuel producers over time based on changes in technology — including the emergence of cleaner energy sources and advances in carbon capture and storage — and based on changing industry or market practices.

In addition to showing a commitment to reducing greenhouse gas emissions and following best industry practices, the committee said, companies must demonstrate a recognition of the urgency of addressing climate change and a commitment to supporting climate solutions.

We believe that fossil fuel companies should support and not undermine meaningful and effective government policy to combat climate change, refrain from supporting climate change denial, and provide accurate information about climate science and climate change,” the committee wrote.

Some companies, Macey said, can be expected to be immediate subjects of divestment.

Macey said Yale’s investment principles represent a more useful approach than categorical divestment from the fossil fuel sector. Within the sector, companies use a variety of fuel sources and extraction methods, he said, some more acceptable than others, and some firms do a better job than others of limiting their carbon footprint.

The committee noted that if responsible institutional investors were to withdraw en masse from the fossil fuel sector, including from the most responsible firms, less environmentally conscious producers and investors would fill the void.

Our approach is designed to cast a light on bad actors in this industry,” he said. “And from the standpoint of using divestment in order to call out [bad behavior] and incentivize good behavior, the approach we’re taking is the most effective way to do that. It is more effective than using a blanket divestment strategy that doesn’t mention companies or show recognition that there is diversity, and that some are better citizens and that some are worse citizens.”

Since adopting the guidelines of “The Ethical Investor,” Yale has engaged in discussions about how they apply to a host of controversial issues, including U.S. corporate presence in apartheid South Africa, tobacco, and genocide in the Darfur region of Sudan. The creation of more specific ethical principles related to climate change will open the door to important conversations within the Yale community, Macey said.

There will be inevitable challenges associated with implementing these principles, but I view that as a virtue and not a vice,” he said. “We are an educational institution, and the process of implementing these principles will be educational for the students, who will be very involved in providing feedback to the [Advisory Committee on Investor Responsibility].”

Members of the Yale community who are interested in sharing information about specific fossil fuel companies with the ACIR and Macey are invited to do so through this online form.

We want community input,” said Macey, who plans to meet with student and alumni groups as soon as possible.

The bigger picture: Yale’s rising commitment

The application of the new investment principles will complement other environmental sustainability commitments made by the university in recent years. Last year, Provost Scott Strobel convened the Yale Planetary Solutions Project, bringing together faculty members from the arts, humanities, social sciences, sciences, and engineering to identify strategies for addressing threats facing the local and global environment.

Yale also has been a leader in achieving clean energy goals in its own campus facilities and operations. In 2016, Yale committed to becoming carbon neutral by 2050. A year ago, the university formed a task force to review and propose ambitious goals for reducing emissions, with a specific charge to explore how Yale could achieve net zero carbon emissions — a target consistent with the 2015 Paris Agreement. The university will announce its carbon plan in the coming weeks.

In 2019, the university created a new multidisciplinary laboratory, the Yale University Carbon Containment Lab, which is developing and supporting innovative, scalable solutions to the climate challenge. And Yale’s new Center for Natural Carbon Capture, recently established with a $100 million gift from FedEx, will focus on developing interventions that enhance the Earth’s natural abilities to store carbon through biological and geological processes, and other methods that model natural processes. The interdisciplinary center is part of the university’s broader Planetary Solutions Project.

Universities are a vital source of knowledge and leadership in addressing our collective challenges, and there is no doubt that, today, the climate emergency is the biggest threat we are facing,” said Ingrid C. “Indy” Burke, the Carl W. Knobloch, Jr. Dean of the Yale School of the Environment. “It’s our responsibility as a university, and as an environmental school, to both set an example and commit ourselves to achieving a sustainable future.” 

Taken together, Yale’s efforts are designed to have impact.

Yale is addressing the profound challenge of climate change on three fronts — through our research and teaching, through the innovative strategies we’ve adopted to reduce emissions on our own campus, and through the reexamination of our investment policies,” said Salovey. “This university is continually evolving, and so will our ongoing efforts to address this global crisis. Until the crisis is solved, Yale must be in a mode of permanent action.”

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