A little less than a year ago, Harvard University committed to make the investments in its endowment portfolio net-zero of all greenhouse gas emissions by 2050, in line with the Paris Agreement that the US government recently rejoined. While many corporations and financial institutions have made similar pledges — both before and since — Harvard went into this fully aware of the unique challenges that we face.
Large endowments, for the most part, follow a similar investment model: Seek appropriate risk-adjusted returns by allocating funds to a variety of external asset managers. The advantage is that you can seek out the best investors for each asset class while prioritizing stable returns on which universities are increasingly reliant. However, the challenge, in the case of a net-zero pledge, is that this model inserts layers between Harvard Management Company and the underlying investments in the endowment.
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For example, when Harvard Management Company invests in a public equities manager or hedge fund we do so based on that manager’s organizational strength, performance track record, and investment edge. Most often, we do not see the day-to-day transactions that the manager makes. Measuring the greenhouse gas emissions of an investment is difficult if you can’t see the specific holdings.
Conversely, when Harvard Management Company invests in private funds (venture capital, private equity, real estate, etc.), there is a great deal more transparency in the investments. However, the managers of these assets, for the most part, lack established protocols for greenhouse gas emissions reporting — and if protocols exist, there is little uniformity.
Given these realities, our first priority is collecting the data and developing the measurements to get the most accurate picture of where the investments in our portfolio stand in terms of greenhouse gas emissions.
We are fortunate to have strong allies in this fight. Large institutional investors and financial institutions are grappling with the same issues of consistent and reliable data. With more investors asking for the same information, access to it is usually not too far behind. Additionally, affiliated organizations like Climate Action 100+ and the Task Force on Climate-related Financial Disclosures are pushing the world’s largest corporations toward emissions reduction and standardized reporting.
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At Harvard Management Company, we are not simply waiting for asset managers to wake up to the threat of climate change. We understand that time and effort are required to collect the data and establish reporting protocols for greenhouse gas emissions, but we also recognize the urgency of this work. If investment managers continue to come up short on this, are they truly taking climate risk seriously? Failure to give sufficient attention to the threat that climate change inevitably poses to our investments would be simply reckless.
And that gets to the heart of what a net-zero commitment allows us to do. It provides an opportunity to take a crucial look at the allocation of our entire portfolio — not simply exposure to fossil fuels, but to greenhouse emissions in the broadest sense — and to the asset managers and companies that are failing to account for the associated risk.
While the calls for divestment from fossil fuels are well intentioned, they fail to address the demand side of the equation. Harvard could, theoretically, commit to not owning shares of fossil fuel companies (we don’t currently own any), but that would not reduce greenhouse gas emissions in the real economy. In fact, while fossil fuels investments have decreased from 11 percent of our portfolio in 2008 to currently less than 2 percent (indirect investments), the US government projects emissions from fossil fuels to, at best, remain stagnant through 2050.
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Just as allies in this undertaking make near-term data collection and measurement more accessible, the efforts of those that signed the Paris Agreement, with its corresponding commitment to net-zero GHG by 2050, make our long-term goals more achievable. Governments, corporations, and technological innovations will all play a vital role in accelerating the pathway to achieving this commitment. And, through our work to achieve a net-zero endowment, Harvard University will contribute meaningfully to this crucial global effort.
Endowments are intended to serve as a perpetual source of funding for their universities. This makes us think in terms of decades (or even centuries) as we manage Harvard’s financial assets. However, the need to address the existential threat of climate change requires far more urgency. These early steps, working to aggregate and measure greenhouse gas emissions data will take time and much effort, but it will also forge a path for the endowment that both reflects the risks inherent in climate change and contributes to addressing the crisis.
Kate Murtagh is managing director of Sustainable Investing at Harvard Management Company Inc.
