Choosing Not to Divest is Not Value-Free

by Fran Sussman

In his DOT Earth column in the NYT on October 4, 2013, A Closer Look at Harvard’s Choice on Fossil Fuels, Andrew Revkin wrote about the issue of Harvard University President Drew Gilpin Faust’s statement on the university’s decision not to divest itself of fossil fuels, despite student efforts. Reading the column raised some interesting parallels in my mind between the way economists separate fact from judgments about welfare, and President Faust’s justification of the university’s decision.

The Blog did an excellent job of describing and discussing the issue of divestment.   It nicely raised all the expected points, drawing on the well-reasoned statement released by Faust in support of Harvard’s decision, and on observations from Robert Stavins,  a noted environmental economist at Harvard.

In conversations with Revkin, Stavins pointed out that divesting investments that promote fossil fuels is not necessarily in the best interests of the future, since all fossil fuels are not created equal (some are less harmful than others), and we cannot transition away from fossil fuels instantaneously.

The statement released by Faust  suggests that, even if divestment could claim the climatic-moral-high ground,  investment decisions should be made, first and foremost,  using financial investment criteria; those in charge of the university’s endowment should make intelligent decisions that protect the endowment, and not make political statements.

[As an aside:  No one seems to have asked the students whether they (and their parents) would be willing to pay the price of divestment, if it reduced financial aid and led to larger school loans or higher tuition.  And no one pointed out that—with a whopping $32 billion in 2012 (according to the National Association of College and University Business Officers)—Harvard’s endowment is more than 50% larger than the next in line—Yale—suggesting that there might be a little wiggle room;  if any institution of higher learning can afford to make a few decisions on ethical grounds, this one can.]

Stavins and Revkin both approach the question from the perspective of whether the decision is the right one, if we are concerned about the future.  Revkin’s  takeaway message is that the best chance we have of making progress is if the younger generation works “within the corporate system and become . . . the trustees . . . of humanity’s broader set of assets.”  Stavins’ message is that there are better ways to address the climate change problem than by divesting investments in fossil fuels.

But these perspectives don’t address the issue of whether it is even possible to make a decision about investment without taking an ethical stand—at least implicitly—on how to balance competing criteria. Further,   where you choose to invest by definition makes a political statement.

Perhaps  part of what the Harvard students were trying to impress upon their university is that no decision is value free.   If we choose not to make a political statement in one direction, we are implicitly accepting a political statement in another.  If we choose not to apply one framework for ethical decision making to our investment choices, we are applying a different framework.

Most social and physical scientists pride ourselves on our capacity for objectivity, that is, being able to evaluate the facts, and only the facts.  Economists have developed a unique vocabulary to describe the distinction between the analysis of “what is” and statements about “what should be.”  We use the term “positive economics”  or “descriptive economics” to describe the study of propositions about the economy and human behavior that can be verified by observation.  We contrast this with “prescriptive” or “normative” economics, which makes statements about what ought to happen, that is, what would be good for society and the economy.

But metrics that are fully descriptive and objective, and do not rely on judgment, are rare.

One of the terms that economists frequently use is “efficiency.”  Without using too much economic jargon, society’s resources are being used efficiently if they are allocated to produce the largest output with the highest value to consumers.  Economists recognize, however, that measurement of efficiency is not fully objective, since we have choices in what we outputs we choose to include and how we measure value. Economists are also well aware that efficiency is—at best—only one goal among many, such as promoting an equitable distribution of income, or ensuring that everyone has access to minimum levels of health and security. If we choose to pursue efficiency, and ignore other goals, we are making an ethical decision that efficiency is more important.

As both Stavins and Revkin suggest, stewardship over our future  is a responsibility we all share. We can argue about the best path to take to get there, but it is not a responsibility we can ignore. The criteria used to guide a portfolio represent an ethical judgment about how these criteria should be balanced.  And  the final content of  a portfolio—for  Harvard or another university, or a private citizen—has political ramifications, as well as financial ones, whether or not you intend them.

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