Posted in GreenBiz
February 9, 2022

The GreenFin Interview: A conversation about Harvard’s endowment

Reprinted from GreenFin Weekly, a free newsletter. Subscribe here.

While the past few years have upended business as usual for institutions of higher education, the 2021 fiscal year saw the median endowment return 36.8 percent — a stellar year, at least per the narrow measure of ROI.

For a sense of scale, the 30 largest U.S. university endowments own roughly $291 billion in total assets. That figure sits just about halfway between the total assets of CalPERS and CalSTRS, the two largest public pension schemes in the U.S. And it begs the question: How are these university endowment assets being put to work to build the sustainable society and economy that their principals — current and future students and faculty — will thrive in?

In public discourse, we most often see details about university endowments cross our radar when calls for fossil fuels divestment grow loud enough from the student body, although the efficacy of such an approach is dubious. And that’s coming from the vantage point of your writer, who worked on UC Berkeley’s Fossil Free divestment campaign about a decade ago.

But there’s much more to this conversation than the perennial “to divest or to engage” question. And when talking about the future of sustainable finance, scale matters. Consider Harvard Management Company (HMC), the largest academic endowment in the world valued at $53.2 billion as of June. It saw a $10 billion increase in fiscal year 2021 and its total value is about $10 billion ahead of Yale University’s endowment, the next largest in the world.

I checked in with Samantha McCafferty, director, sustainable investing at HMC, where she’s been since 2011, to learn more about the intersection of crimson and green at Harvard, and to dig deeper into the influential asset owner’s Sustainable Investing Policy and broader approach to ESG.

Read on to learn how HMC is navigating the net-zero transition. If there’s a voice in the sustainable finance and ESG investing space you’d like to see amplified in The GreenFin Interview, suggest to me at [email protected].

Grant Harrison: You work on compliance and sustainable investing at the Harvard Management Company (HMC), which manages Harvard’s endowment. What are you focused on in your day-to-day role, especially as it pertains to the latter half of your title?

Samantha McCafferty: In my role at HMC, I support the three components of HMC’s sustainable investing program: ESG integration, the net-zero pledge and the prioritization of diversity, equity and inclusion (DEI). Although related, these initiatives are distinct and involve different projects and data, so each day looks different. Some of my responsibilities include engaging with companies, working with data providers, collaborating with other investors and supporting the work of a pair of university shareholder responsibility committees. 

Harrison: One pillar of HMC’s three-pillared approach to sustainable investing is ESG integration. Your Sustainable Investing Policy states, “Relevant ESG factors are those that HMC determines, in its sole discretion, have, or have the potential to have, a material 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 evaluating ESG factors in its investment decision-making process. Because HMC primarily invests through external managers, we depend on our managers’ expertise to identify relevant ESG factors that could have a material impact on the financial performance of the assets they manage. HMC’s investment staff assesses external managers on several factors, including a manager’s approach to ESG integration and willingness to engage in an ongoing dialogue on sustainability. HMC’s Sustainable Investing team supports the investment team, as needed, in proactive discussions with managers and in responding to ESG-related matters as they arise.

We are keenly aware the most material long-term reductions in portfolio emissions will likely 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, one area of particular focus for HMC is elevating and prioritizing best practices in DEI within the financial industry. HMC believes that firms must attract and retain the best talent from the broadest pool possible. Since we think diverse teams make better decisions, we take seriously DEI as an important issue at both the manager level and in their portfolio companies. HMC has been engaging in broad outreach to our U.S. managers through standalone conversations regarding their approach to DEI. 

Harrison: HMC’s Sustainable Investing Policy includes a focus on stewardship, stating, “Thoughtful engagement is an effective means of … encouraging companies to improve their ESG performance, thereby enhancing the value of the investment.” How does this engagement take shape in whatever detail you can share? 

McCafferty: HMC primarily engages with companies through collaborative engagements with other investors. Most of the endowment is invested through externally managed commingled funds, meaning HMC isn’t a direct shareholder in many companies. This makes collaborative engagements the most effective way for HMC to engage with the real economy.

HMC has met with companies on several topics, including methane emission-reducing practices, net-zero strategies, company reporting and alignment with established standards such as the TCFD [Task Force on Climate-related Financial Disclosures] and corporate climate-related governance.

As a collaborating investor in Climate Action 100+, we participate in company engagements with energy and utility companies. HMC participates in the CDP’s annual Non-Disclosure Campaign, which directly engages 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 adopt a principles-based approach to climate change-related disclosures. More recently, we submitted comments to the Environmental Protection Agency in support of strong methane regulation. 

Harrison: HMC released its 2022 Climate Report last week — what in this year’s report stands out that you’d like to highlight? 

McCafferty: Since Harvard University announced the net-zero pledge in April 2020, HMC has put significant effort and resources towards setting the endowment on a path to achieve net-zero GHG 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 for fiscal year 2022 and in our investment activity focused on climate transition.  

HMC’s investment staff assesses external managers on several factors, including a manager’s approach to ESG integration and willingness to engage in an ongoing dialogue on sustainability.

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 U.S. higher education endowment. Can you share more about HMC’s net-zero journey thus far, and what you see on the horizon, both opportunities and speed bumps? 

McCafferty: We started off our net-zero journey by speaking with other investors who made similar commitments and external managers regarding their climate data, reviewing materials developed by the handful of net-zero alliances, and researching existing carbon accounting standards for investment portfolios. We carefully tested available emissions data and metrics and partnered with a leading data aggregator. 

HMC has set the endowment on a path to net zero. First steps included creating a strategy to invest in, and accelerate, the climate transition. At the same time, avoiding direct investment in fossil fuels and any new investment in private equity funds focused on exploration and production. We’ve been encouraged to observe the expansion of existing high-quality managers into climate related investment activity. Such activity validates the growing opportunity in climate transition investing. 

As we make HMC’s operations carbon neutral, we have gained more insight and knowledge into emissions calculations and understanding the market for offsets, particularly for high quality carbon removal. We will be able to draw from this experience in our work to decarbonize the endowment portfolio. 

The key challenges we face in calculating endowment portfolio emissions, establishing a baseline and setting targets are data access and nascent carbon accounting methodologies for investment portfolios. We are working with our external managers and data providers to address both these two challenges.  

Lastly, I would note we are keenly aware the most material long-term reductions in portfolio emissions will likely 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 engagements, such as Climate Action 100+, and investment in transformative technologies will play a key part in achieving the net-zero goal. 

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February 9, 2022 at 04:21PM

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