Despite the growing urgency of the climate crisis, many of the world’s most powerful financial players 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 responsible.

CAMBRIDGE – This summer, the Intergovernmental Panel on Climate Change released its latest report and the scariest part is how unsurprising it is. The report made clear that the worst can still be avoided, but only if humanity adopts a carbon-neutral economy as quickly as possible. “This report,” declared United Nations Secretary-General António Guterres, “must be a death sentence for coal and fossil fuels before they destroy our planet.”

And yet, with the planet ablaze, institutional finance continues to fuel the fire. Many of the world’s most powerful financial players continue to invest in the fossil fuel industry, even as their actions predictably lead to massive economic disruption, ecological catastrophe, and deepening social injustice. So far, they have gotten away with it. But a new trend in the law is forcing institutional investors to decarbonize their portfolios, or to hold themselves legally responsible.

Harvard University is a good example. For a decade, its authorities ignored pressure from students, academics and alumni to divest the university’s $ 53 billion endowment funds into the fossil fuel industry. But, acknowledging the scientific and financial reality, in September Harvard finally promised to divest from companies whose business models, by relying on constant carbon mining, 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 mission of teaching and research,” wrote Larry Bacow, president of the university, “we do not consider such investments to be prudent” (emphasis is added).

Prudence, in the statute governing Harvard endowment funds and various other institutional funds, is a fundamental legal concept that establishes the care, skill, and care with which a fund’s investments must be managed. Prudence guides how a fund should be managed to serve the interests of its beneficiaries, and there are significant penalties for violating it. The Harvard declaration recognizes the impossibility of fulfilling that duty if, at the same time, it is invested in fossil fuels.

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There are a multitude of reasons why this could be the case. To begin with, fossil fuel companies face existential uncertainty. A tidal wave of market changes, regulations and litigation poses fundamental risks to the interests of this industry, as many of the carbon assets from which it derives its value will become impossible to burn and will be prevented from meeting international climate targets. Furthermore, the idea of ​​seeking to profit from companies whose dependence on carbon dioxide emissions serves to accelerate climate change is repugnant to the notions of the public good and social duty that responsible investors claim to abide by, and would seem all the more reason. than enough to seek extensive decarbonization.

In other words, the business model of the fossil fuel industry is now so poorly aligned with scientific and financial reality that betting on these companies (or, more generally, on the type of companies that materially depend on carbon emissions). CO2) is not just inappropriate. It is negligently wrong as a matter of law. Furthermore, the concept of prudence applies in a similar way to any investor subject to the fiduciary standard, which in essence is binding on any public or private academic endowment fund, charitable fund and pension fund. That means trillions of dollars may be affected by Harvard’s recent divestment precedent.

In fact, Harvard’s decision is already having repercussions. In the weeks since the announcement, a number of other influential investors – ranging from the endowment funds of Boston University, the University of Minnesota and the MacArthur Foundation to the ABP public pension fund of the Netherlands (the largest of Europe) – have followed suit, taking steps to align their money with the demands of exercising prudence and not damaging the planetary climate. In doing so, they join investors worth more than $ 39 trillion, many of whom, market evidence suggests, are already profiting financially from divesting fossil fuel stocks.

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By basing Harvard’s decision on prudence, Bacow may well have intended to generate the broad impact that the university’s divestment from fossil fuels is expected to have. When he announced it, the Massachusetts attorney general was weighing whether to act on a lawsuit brought by students and other members of the Harvard community, along with the nonprofit Climate Defense Project, which claimed that investments in fuels fossils from the university represented a violation of their charitable obligations.

Whatever its reasons, Harvard has given voice to a doctrine that, responding to the urgency of the climate crisis, should spread rapidly around the world and accelerate similar decarbonization decisions by fiduciaries around the globe. It took a decade to get Harvard to this point, but now that it is finally taking steps to live up to its reputation as a leader, other institutional investors must follow suit. In an age of climate crisis, the mandate of these actors is to embrace the future, or else risk not only ending up 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 Harvard’s Fossil Fuel Divest campaign.

Translated from English by David Meléndez Tormen

Copyright: Project Syndicate, 2020

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