Harvard Management Company (HMC), which manages the University’s endowment, released its third annual climate report February 9. This series of reports began in 2021, a year after Harvard announced a “net-zero” target for carbon emissions in endowment operations and investments by 2050—the first U.S.-based endowment to make such a commitment. The new report, based on data current as of June 30, 2022 (the end of the most recent fiscal year), identified four components of its efforts, including:
- maintaining carbon-neutral operations;
- investing in the transition to a sustainable economy;
- measuring emissions of assets in the portfolio; and
- engaging in collaborations with like-minded investors
As anticipated in the prior year’s report, HMC’s own operations were for the first time carbon-neutral in fiscal 2022. Offsetting a carbon footprint of 1,864 tons of carbon dioxide-equivalent emissions—attributable to “professional services, research and data, business travel, energy (including heating and cooling), and IT services,” according to the report—were credits purchased from “high-quality carbon dioxide-removal companies.” These companies remove atmospheric carbon by several means, including through the creation of biochar (a carbon-rich solid formed from the slow burning of biomass in an oxygen-limited environment that is stable in soil for thousands of years), biomass carbon removal and storage, direct air capture, and mineralization. Once removed from the atmosphere, the carbon is sequestered in geological formations, in soil, and in concrete. Because it regards these offsets as a short- and medium-term means of achieving carbon neutrality, HMC is “identifying pathways to reduce its operational emissions over the long term.” The report noted that, because the pandemic had the effect of lowering overall operational emissions, fiscal year 2023’s numbers will be higher, and better reflect HMC’s typical annual carbon footprint.
Most significant, however, were steps taken in regard to the portfolio. As previously reported, investments in climate-transition solutions (including in high-emitting sectors such as power generation, transportation, agriculture, and industrial processes) now represent nearly one percent of endowment assets and are expected to grow. At the same time, exposure to the fossil-fuel industry will decline. While HMC itself has no direct exposure to companies that explore for or develop reserves of fossil fuels, much of the portfolio is managed externally under existing contractual commitments. HMC’s exposure to private equity funds focused on the exploration and development of fossil fuels rose to slightly more than two percent of the endowment in FY22 (up from slightly less than two percent as of June 30, 2021), an increase caused by rising commodity prices (energy, the report noted, was the best-performing sector in the S&P 500 during the fiscal year). “Excluding appreciation,” the report noted, “HMC’s exposure to fossil fuel holdings during the fiscal year would have declined.”
The measurement of portfolio emissions across the investment industry remains difficult, and HMC faces additional challenges, given the way its investments are structured. (For more on this subject, see Harvard Magazine’s coverage of HMC’s first climate report.) “Unlike most other asset owners and managers that have made net-zero commitments,” the report emphasizes, “a significant majority of HMC’s portfolio consists of private equity and hedge-fund exposures. As a result, HMC is in the uniquely challenging position—among its net-zero peers—of needing to prioritize the identification of solutions to measure emissions in alternative assets.” To that end, HMC has begun working with two third-party data providers, one focused on private equity and the other on hedge-fund investments, aiming to establish a baseline estimate of endowment portfolio emissions sometime in 2024.
The final area of focus highlighted in this year’s report is collaboration with like-minded investors. Since Harvard’s net-zero goal was announced in 2020, a number of other U.S.-based institutions have made similar commitments, including Stanford (June 2020), the David Rockefeller Fund (August 2020), Arizona State University (February 2021), the University of Michigan (March 2021), the University of Pennsylvania (April 2021), Princeton (May 2021), the McKnight Foundation (October 2021), Northwestern University (June 2022), Rice University (February 2022), San Francisco State University (September 2022), and the University of Virginia (March 2022). As more endowments, domestically and around the globe, require emissions data as part of the investment disclosure process, the scaled up demand for such metrics will lead to better and more widespread reporting. To that end, HMC is signatory to organizations such as the ESG Data Convergence Initiative, which encourages companies to assess environmental, social, and governance risk factors associated with their business.
Encapsulating the climate problem, the report notes that the Intergovernmental Panel on Climate Change (IPCC) determined in 2020 that the world could emit an estimated 500 additional gigatons of carbon dioxide to maintain a 50 percent chance of limiting warming to one and a half degrees Celsius by 2050, and 1,350 gigatons to limit warming to two degrees Celsius. But, HMC observes, “At current global emission rates, the world is not on track to limit warming to 1.5 degrees and the 2.0 degrees goal is under ever-increasing threat. Without serious efforts to rein in global [greenhouse gas] emissions, the effects of climate change will intensify. These developments have profound implications for investors. Forward-looking risk and impact analysis is now just as imperative as measuring current emissions.”
Read the full report here.