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One might be forgiven for thinking that the world’s top universities should be at the forefront of the environmental agenda, with typically left-leaning students likely to push for change. Yet when it comes to sustainable investing, university endowment funds have been slower than many other investors to take part.
US university endowments decreased their so-called environmental, social and governance (ESG) investments last year, according to an annual survey by the National Association of College and University Business Officers (Nacubo). The study found that just 16 per cent of the 809 participants included investments in their portfolios with high ESG rankings, down from 17 per cent the previous year. The report said that while the adoption of responsible investing was “growing gradually”, it was uneven from year to year.
That is despite a major movement that started in 2012 for university endowment funds across the world, and other institutions, to stop investing in fossil fuels. Many of the world’s top endowment funds have been pressed by students to divest their portfolios and many have taken action. The University of Edinburgh, whose endowment fund is about £1bn, the third largest in the UK, said only in February that it was divesting of fossil fuels.
However, some of world’s most venerable institutions, including Harvard, Cambridge and Oxford, have stopped short of divesting their portfolios of fossil fuels despite student pressure.
Harvard’s endowment, managed by the Harvard Management Company, focuses instead on developing the ESG values of assets in the portfolio. For example, by making property assets more energy-efficient.
Meanwhile a campaign to demand that Cambridge University’s £6.3bn endowment fund sell out of fossil fuels escalated in April when 300 academics signed an open letter urging swift action on divestment.
Sometimes the caution shown by university endowment funds is due to a perceived fiduciary duty.
The Nacubo study cites comments by institutions on the reluctance to embrace responsible investment practices more fully. One university states that its fiduciary responsibility is to maximise total returns over the long term. Another says that its investment decisions are made solely on performance expectations.
Yet a report by Wilshire Consulting argues that while some investors may believe ESG criteria are in conflict with their fiduciary obligations, the US Department of Labor states they “may have a direct relationship to the economic value of the plan’s investment” and hence need to be taken into account.
“There’s a perception this is value-based and not financial so this would interfere with their fiduciary duties. But increasingly . . . people say ‘if you’re not doing this you may be violating [your fiduciary duties]’,” says Georges Dyer, principal of the Intentional Endowments Network, which mainly works with US institutions.
Some argue that US universities are playing catch-up with the rest of the world.
“I think that this has become much more of a mainstream topic, particularly in the US. Sustainable investing is probably 15-20 years ahead in Europe compared with the US,” notes Kate Murtagh, managing director for sustainable investing at HMC. “Five years ago . . . this topic was not really well understood. Sustainability in the US was seen as more of a trade-off for returns.” She adds, however, that there is more understanding in the market “that identifying ESG opportunities can improve returns”.
There is general agreement among advisers to endowment funds that things are moving in the right direction. While Yale University decided not to divest its portfolio of fossil fuels in 2014, the endowment fund’s highly influential chief investment officer, David Swensen, wrote an open letter to the fund’s external managers urging them to take greenhouse gas emissions very seriously.
Swensen said that by 2016 his letter had led to real changes in the portfolio and that discussing climate change risks with external managers had led to “higher quality and lower risk portfolios for Yale”. In 2014, the University of California promised to profitably invest $1bn over the following five years in solutions to global warming.
In what it billed as “a significant decision”, University College London appointed CCLA as its new ethical investment manager in October for its £160m endowment funds.
However, it is not only the largest institutions that can effect change.
Tom Mitchell at Cambridge Associates, which advises endowment funds, points to smaller colleges that adopt “greener” investment decision-making in order to lure more students with an interest in sustainability.
“Some, when you mention sustainability, will dismiss it out of hand as they think it’s exclusionary or limiting,” reports Mitchell.
“But those who pay close attention are gaining an informational edge. It gives you a different limb to view investment opportunities and risk and return.”