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While the past few years have been business as usual for higher education institutions, fiscal year 2021 saw median endowment return to 36.8% – an exceptional year, at least by the narrow measure of return on investment.
For a sense of scale, the 30 largest US university endowments have approximately $291 billion in total assets. This figure is roughly halfway between the total assets of CalPERS and CalSTRS, the two largest public retirement plans in the United States. — current and future students and teachers — will it flourish?
In public discourse, we most often see details of university endowments cross our radar when calls for fossil fuel divestment are loud enough from the student body, although the effectiveness of such an approach is questionable. . And that comes from the perspective of your writer, who worked on UC Berkeley’s Fossil Free divestment campaign about a decade ago.
But there’s a lot more to this conversation than the perennial “divest or commit” question. And when talking about the future of sustainable finance, scale matters. Consider Harvard Management Company (HMC), the world’s largest university endowment, valued at $53.2 billion in June. It saw an increase of $10 billion in fiscal year 2021 and its total value is about $10 billion ahead of Yale University’s endowment, the second largest in the world.
I reached out to Samantha McCafferty, director of sustainable investing at HMC, where she has worked since 2011, to learn more about the intersection of crimson and green at Harvard, and to dig deeper into the sustainable investing policy of the influential asset owner and his broader approach to ESG. .
Read on to learn how HMC navigates the net-zero transition. If there is a voice in the sustainable finance and ESG investing space that you would like to see amplified in The GreenFin Interview, suggest me to [email protected].
Grant Harrison: You work on compliance and sustainable investing at the Harvard Management Company (HMC), which manages Harvard’s endowment. What do you focus on in your day-to-day role, especially when it comes to the second half of your title?
Samantha McAfferty: In my role at HMC, I support all three components of HMC’s Sustainable Investing program: ESG integration, net zero engagement, and prioritization of diversity, equity and inclusion (DEI). Although related, these initiatives are distinct and involve different projects and data, so every day is different. Some of my responsibilities include engaging with companies, collaborating with data providers, collaborating with other investors, and supporting the work of two university shareholder accountability committees.
Harrison: One of the pillars of HMC’s three-pillar approach to sustainable investing is ESG integration. Your Sustainable Investing Policy states: “Relevant ESG factors are those which, in HMC’s sole discretion, have or are likely to have a significant impact on the financial performance of an investment.” Could you tell us more about what this determination process looks like?
McCafferty: HMC takes a case-by-case approach to assessing ESG factors in its investment decision-making process. As HMC primarily invests through external managers, we depend on the expertise of our managers to identify relevant ESG factors that could materially impact the financial performance of the assets they manage. HMC’s investment team evaluates external managers on several factors, including a manager’s approach to ESG integration and willingness to engage in ongoing sustainability dialogue. HMC’s Sustainable Investing team supports the investment team, as needed, in proactive discussions with managers and in responding to ESG-related questions as they arise.
We are acutely aware that the largest long-term reductions in portfolio emissions are likely to come from changes in the real economy. Technological improvements, innovation and regulation will determine the emissions trajectories of many underlying assets.
In our partnership with external managers, an area of particular focus for HMC is elevating and prioritizing DEI best practices within the financial industry. HMC believes that companies should attract and retain top talent from the widest possible pool. Because we believe diverse teams make better decisions, we view DEI as a significant issue both at the manager level and in their portfolio companies. HMC is engaged in broad outreach to our US managers through self-directed conversations regarding their approach to DEI.
Harrison: HMC’s Sustainable Investing Policy emphasizes stewardship, stating, “Reflective engagement is an effective way to encourage companies to improve their ESG performance, thereby increasing investment value.” How does this commitment take shape in all the details you can share?
McCafferty: HMC primarily engages with companies through collaborative engagements with other investors. Most of the endowment is invested in externally managed mixed funds, which means that HMC is not a direct shareholder in many companies. This makes collaborative engagements the most effective way for HMC to engage with the real economy.
HMC met with companies on several topics including methane emissions reduction practices, net zero emissions strategies, corporate reporting and alignment with established standards such as TCFD [Task Force on Climate-related Financial Disclosures] and climate-related corporate governance.
As a collaborating investor in Climate Action 100+, we participate in corporate engagements with energy and utility companies. HMC participates in CDP’s annual non-disclosure campaign, which engages directly with high-impact companies to improve reporting related to climate change, forests and water security. We also participated in the 2021 CDP Science-Based Targets campaign and [Sustainability Accounting Standards Board] investor-company dialogues.
In June, HMC submitted a letter in response to the Security and Exchange Commission’s request for public comment on climate disclosures encouraging the SEC to take a principles-based approach to climate change-related disclosures. More recently, we submitted comments to the Environmental Protection Agency in support of strict methane regulations.
Harrison: HMC released its 2022 climate report last week. What stands out from this year’s report that you would like to highlight?
McCafferty: Since Harvard University announced the net zero commitment in April 2020, HMC has invested considerable effort and resources to put the endowment on a path to net zero GHGs by 2050.
I think some of the main highlights of the report include both where we have been successful and where we still have work to do. We have made substantial progress in our plans for HMC’s operations to achieve carbon neutrality by fiscal year 2022 and in our investment activity focused on climate transition.
HMC’s investment team evaluates external managers on several factors, including a manager’s approach to ESG integration and willingness to engage in ongoing sustainability dialogue.
The report also highlights the critical need for emissions-related data from our external managers and for the development of industry carbon accounting standards for alternative investment strategies.
Harrison: The third pillar of HMC’s sustainable investing strategy is to make the endowment portfolio net zero by 2050 – a first for higher education endowment in the United States. Can you say more about HMC’s net zero journey so far and what you see on the horizon, both opportunities and speed bumps?
McCafferty: We started our net zero journey by talking to other investors who have made similar pledges and external managers about their climate data, reviewing documents developed by the handful of net zero alliances, and researching standards for accounting for the existing carbon emissions for investment portfolios. We have thoroughly tested available emissions data and metrics and partnered with a leading data aggregator.
HMC has put staffing on a path to net zero. The first steps included creating a strategy to invest in and accelerate the climate transition. At the same time, avoid direct investment in fossil fuels and any new investment in private equity funds focused on exploration and production. We have been encouraged to observe the expansion of existing high quality managers into climate-related investing activities. Such activity validates the growing opportunity to invest in climate transition.
As we make HMC operations carbon neutral, we have gained more knowledge and insight into emissions calculations and understanding the offset market, especially for high carbon removal. quality. We can leverage this experience in our work to decarbonize the endowment portfolio.
The main challenges we face in calculating emissions from endowment portfolios, establishing a baseline and setting targets are access to data and emerging carbon accounting methodologies for investment portfolios. We are working with our external managers and data providers to address both of these challenges.
Finally, I would like to emphasize that we are fully aware that the most significant long-term reductions in portfolio emissions are likely to come from changes in the real economy. Technological improvements, innovation and regulation will determine the emissions trajectories of many underlying assets. This is where collaborative commitments, such as Climate Action 100+, and investments in transformative technologies will play a key role in achieving net zero.