Climate-Solutions Investments Near 1 Percent of Endowment Assets
Harvard Management Company (HMC) disclosed today that endowment investments in “climate solutions”—such as carbon-capture and sequestration enterprises—are approaching 1 percent of total endowment assets, and growing rapidly. HMC, which oversees investment of endowment and other University financial assets, issued its second annual “Climate Report” today outlining its progress toward a 2050 target of “net-zero” greenhouse-gas (GHG) emissions associated with endowment investments and operations.
The 2050 net-zero target date, announced the day before the fiftieth anniversary of Earth Day in April 2020, was chosen because it aligns with the aims outlined in the Paris Agreement, an international treaty on climate change adopted in 2015. The relatively long-term horizon, criticized by faculty members as well as alumni divestment advocates, reflects the society-wide challenge of effecting a transition to renewable sources of energy. It also reflects the difficulties in establishing standards and data-gathering methodologies within the investment and accounting fields that will permit HMC and other investors to assess the climate impact of their investment decisions.
Within HMC’s overarching net-zero goal are several granular objectives:
- engagement with the external managers who handle investment of the bulk of the endowment to “encourage better disclosure and practices to improve data availability” (as today’s report put it);
- engagement with industry groups to help establish GHG accounting methodologies for alternative investment strategies such as hedge funds (which account for as much as one-third of endowment assets, and which often use high-frequency trading strategies making it difficult to track individual holdings as they pass in and out of the portfolio) to “enable HMC to better assess the climate-related performance and risks of investments in our portfolio”;
- Identification of and investment in “opportunities that support the transition to a green economy”; and
- attainment of carbon neutrality in HMC’s own operations
Carbon-Neutral Operations, Climate-Solutions Investments
The report identifies gains small and large toward these goals. First, it states that HMC’s own facilities and operations will be carbon neutral for fiscal year 2022, ending this June 30. Although the carbon footprint of an investment office, even one overseeing tens of billions in assets, is quite small, the step is symbolically significant and, the report notes, is a “first among higher-education endowment offices.” The effort parallels University emissions reductions that began across Harvard campuses in Boston and Cambridge starting in 2006. “By making our operations carbon neutral,” the report states, “HMC aims to combat climate change and develop a deeper understanding of carbon footprinting and carbon-removal projects.”
More significant is the revelation that nearly 1 percent of the endowment is now invested in climate solutions, a doubling of the capital allocated to such assets since the prior year’s report. Although investments in renewable-energy production, such as wind and solar installations, fall into this category, HMC has moved into “externally managed funds and direct investments that support the transition to a green economy.” It has achieved this through venture capital and growth equity investments in technologies such as direct carbon capture from the atmosphere, and underground sequestration of carbon dioxide. States the report:
We believe these investments provide the greatest opportunity to provide catalytic capital to bridge potentially transformational technologies from early commercialization to at-scale deployment to maximize impact. These climate transition investments seek to accelerate the changes required to reduce carbon emissions in the real economy while positively impacting our portfolio-wide net-zero goals. Importantly, HMC sees these investments as capable of achieving outsized financial returns in line with other outstanding opportunities in these asset classes. One of the more encouraging emerging sources of investment opportunity in the landscape has been the expansion of existing high-quality managers into climate-related activity as part of their regular investment efforts. Such activity validates the opportunity in climate transition investing in these areas.
Information and Accounting Challenges
Two challenges highlighted in the prior year’s climate report—improving data access and developing investment-industry consensus about the methods for calculating portfolio GHG emissions—remain central to achieving HMC’s net-zero goals. (For a detailed discussion, see Harvard Magazine’s coverage of HMC’s first climate report.) Addressing those priorities is the responsibility of Kate Murtagh, HMC’s chief compliance officer and its managing director for sustainable investing. “While both challenges require systemic solutions not wholly within our control,” the report states, HMC made meaningful contributions to these issues during the past year by contributing to “several initiatives organized by the Principles for Responsible Investment (PRI), Initiative Climate International (iCI), and Ceres that focused on improving environmental, social, and governance (ESG) reporting, including on GHG emissions, by private-equity general partners.” In addition, HMC partnered with a major data vendor to assist with continuing analysis of constituent parts of its portfolio.
Hedge-fund holdings are an important asset class for HMC and peer investors, and so the fact that their GHG impacts remain relatively opaque poses special problems for measuring and monitoring progress toward any net-zero goal. As the report explains, “a significant portion of HMC’s portfolio is invested in hedge funds that pursue strategies uncorrelated to the broader markets. These strategies include long/short equity, systematic trading, the use of complex derivatives, and the short selling of securities. Currently, no industry consensus exists regarding the best way to calculate the emissions of investments by these uncorrelated hedge fund strategies and the GHG accounting protocols developed so far do not address these questions.”
The Climate Context for Investment Decisions
HMC’s new climate report also sketches some of the larger context behind its investment decisions, identifying three categories of climate-change risks:
- physical risks of such change itself, from rising seas to crop damage, and wildfires;
- transition risks to high-GHG-emitting sectors such as power generation and transportation as a result of changing government policies, consumer attitudes, and disruptive technological innovation; and
- systemic risks to the productive capacity of the economy and the financial system, caused by events such as “disorderly price adjustments.”
Such context presages the possibility that achieving the net-zero goal, both for Harvard and global society, could involve a bumpy ride.
Read the report here.