(The author is a Reuters columnist. The opinions expressed are his own)

By Gerard Wynn

LONDON, Oct 31 (Reuters) - Harvard's decision to keep buying into the fossil fuel industry through its $32.7 billion investment fund - the world's biggest - is a blow to a divestment campaign also navigating legal uncertainty among performance-driven fund managers.

Environmental groups driving the a divestment movement argue that most fossil fuels must not be burned if the world is to avoid the worst effects of climate change - a threat to the value of energy companies which own coal, oil and gas reserves.

The movement is trying to repeat the success of a divestment campaign which decades ago pushed South Africa to dismantle the apartheid system.

Fossil fuel divestment has gained some traction with U.S. city pension funds, but is running into legal uncertainty around the fund managers' responsibility to earn as high a return as possible, according to the City of Seattle.

Harvard's rejection of the campaign on additional grounds undermines momentum in the short term.

The university's president, Drew Faust, said fossil fuel divestment would not only cut fund returns - used to support budgets - but also undermine the institution's independence while failing to affect the energy companies.

"I do not believe, nor do my colleagues on the Corporation that university divestment from the fossil fuel industry is warranted or wise," she said in a statement this month.

"The endowment is a resource, not an instrument to impel social or political change."

The endowment contributes more than a third of the university's annual operating revenues.

TOO MUCH CARBON

Harvard graduate Bill McKibben is leading the divestment campaign under his broader leadership of the activist organisation 350.org.

In its report last month, the U.N.'s Intergovernmental Panel on Climate Change (IPCC) estimated the amount of carbon emissions which can keep global average surface warming below two degrees Celsius, widely seen as a rough safety threshold.

It estimated that to have a 50 percent chance or more of staying below the threshold humankind can burn no more than 309 billion tonnes of carbon in total.

The International Energy Agency last year estimated the amount of emissions locked up in current, proven fossil fuel reserves - including unconventional gas and oil - at 780 billion tonnes of carbon.

TRACTION AND HURDLES

The divestment movement has had some traction among local authority pension funds, and has mounted campus campaigns to pressure university endowments.

The City of Seattle reports that sixteen cities from across the country have committed to fossil fuel divestment.

Earlier this month, Seattle's Mayor Mike McGinn reported that the city was continuing to take action to divest from fossil fuels but faced hurdles.

A fiduciary duty is a legal duty to act in another party's interests, in this case for fund managers to safeguard university endowments and city pensions.

Abundant case law shows that investors must act in the best interests of their beneficiaries; the implications for investments in environmental, social and governance (ESG) issues are less clear cut.

Much hinges on the subjective view of the fund about whether taking ESG factors into account undermines returns.

"State and federal law on fiduciary responsibility requires board members to only invest funds to achieve a social or environmental objective when the resulting return on investment and related risk are comparable to other available investments," McGinn said in a statement this month.

"The market for fossil free investment tools is still new and the pension system's financial adviser believes that existing tools do not yet meet the legal requirements."

"I've also heard from other cities that have committed to divestment that they are finding similar challenges."

McGinn said he would continue to map out a divestment strategy "in a phased manner that protects our retirement system".

THIRD WAY?

Some academics have questioned the usefulness of activist campaigns in building popular support for climate policies which will raise energy prices, such as a nationwide U.S. carbon tax.

It may be that activist campaigns may further polarise the issue and turn off conservative voters, they argue.

Academics have also pointed out practical difficulties.

"Divestment of fossil fuel stocks would hurt, not help efforts to address global climate change," said Harvard political and environmental economist Robert Stavins, in a blog published last week.

He argued that divestment would conflict with natural gas, the least carbon-emitting fossil fuel which has helped cut U.S. emissions by displacing coal.

It could also undermine carbon capture and storage, a technology which could cut carbon emissions, and is most likely to be funded by the oil and gas industry.

One alternative approach may be to bring pressure to bear as shareholders, as suggested by Harvard's Drew.

That will resonate with fund managers which may want to pay attention to ESG issues but are unsure about the impact on returns.

"In the case of fossil fuel companies, we should think about how we might use our voice not to ostracize such companies but to encourage them to be a positive force both in meeting society's long-term energy needs while addressing pressing environmental imperatives," she said. (Editing by Louise Ireland)

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