How to Make a Responsible Endowment

Last month, the students, alumni, and workers in the Responsible Investment at Harvard Coalition won a great victory: President Drew G. Faust announced that Harvard would, for the first time, create a Social Choice Fund to invest designated alumni donations in a socially responsible manner. This is certainly an important step—and the fact that more than 450 people donated to the Fair Harvard Fund last spring indicates how many alums want Harvard to invest its money for social good. Harvard’s speedy acknowledgement of this interest bodes well for the future of student activism.

Yet, one important detail of Harvard’s announcement has thus far been largely overlooked. Although Harvard will create a Social Choice fund on July 1, this fund will not be part of Harvard’s $31 billion endowment and the Harvard Management Company will not manage it. Instead, Harvard has cleverly maintained the position of its endowment as removed from moral or ethical considerations. Members of the Harvard community must keep working if they truly want our university to use its money responsibly.

Harvard invests its endowment with principles generally in accordance with modern portfolio theory, which requires that no limitations be placed on the investments a fund can make in order to maximize returns. Although environmental, social, and governance considerations may come into play when the university considers the long-term sustainability of an investment, the Harvard Management Company fundamentally makes investment decisions simply based on what it thinks will earn it the most profit.

For example, Harvard declared last year that it would not reinvest in HEI Hotels and Resorts, a hotel company accussed of labor rights violations (for example, HEI owns the Le Meridien Cambridge hotel in Central Square, currently involved in a labor dispute and under boycott by its own workers). However, although Brown University condemned HEI’s labor practices in its own decision not to reinvest, the Harvard Gazette reported that Harvard’s decision was simply based on “portfolio” reasons.

Of course, this should not be discouraging to student activists, like those in the Student Labor Action Movement who advocated for non-reinvestment in HEI and those in Students for a Just and Stable Future currently advocating for Harvard to divest its endowment from corporations with large fossil fuel holdings. One of the factors taken into consideration when deciding the usefulness of an investment is undoubtedly public image. If students, alumni, and other community members can make a university look poor enough for continuing to invest in a destructive industry or company, the threat of decreased alumni donations and poor public relations may encourage the university to cede to student demands—whether or not they market their decision as a move towards social responsibility or a “portfolio” decision. If we cannot appeal to the ethics of the university, at least we can appeal to the ethics of its community.

But more fundamentally, it is time to question the relevance of modern portfolio theory to the Harvard Management Company’s endowment. After all, it is ridiculous to think that HMC could possibly select the “best” investments from the entire field of possible investments. Any choices of what to invest in are subjective, dependent upon human choice. This became obvious in 2008, when Harvard’s endowment plummeted 27 percent, much more than the 18 percent median drop that large endowments faced. This suggests that the Harvard Management Company had invested its endowment disproportionately in financial corporations like Goldman Sachs, which suffered much more in the financial crisis than the average company.

Proponents of socially responsible investment often cite studies demonstrating that funds that engage in socially responsible investing, especially when they employ only negative screens to screen out a few egregiously irresponsible companies, have comparable returns to funds that do not specifically do socially responsible investment. While this may be true, this rhetoric ignores the moral motivation behind socially responsible investing: to actually do significant good for the world. If Harvard wants to act like the non-profit that it is, it must abandon the idea that its endowment’s investments are entirely separate from its moral purview as a university—and it must stop insisting that the endowment is now invested in accordance to some perfectly balanced formula to maximize returns.

Creating a social choice fund that exists outside of the endowment is an important first step. But ultimately, if students and other Harvard community members truly want their university to act responsibly, they must demand that Harvard invest its entire endowment in a socially responsible manner—and give up on the myth of modern portfolio theory.

Sandra Y. L. Korn ’14, a Crimson editorial writer, is a joint history of science and studies of women, gender, and sexuality concentrator in Eliot House. Her column appears on alternate Tuesdays.