College endowment managers get schooled on climate change
College endowment managers get schooled on climate change
A positive trend in higher education has been the development of robust strategies to embrace sustainability education through campus operations and community outreach. One of the most significant examples of this is the American College & University Presidents' Climate Commitment, involving more than 675 member institutions.
However, there hasn't been much focus on the impact of the $400 billion in endowment funds held by the nation's higher-education institutions. Many argue that institutional sustainability strategies are not comprehensive if they exclude endowment-investing practices. Moreover, some of those assets are at risk as a result of a changing climate, threatening the financial health and viability of campuses.
Second Nature guides the way
Second Nature, the supporting organization of the American College and University Presidents' Climate Commitment, has released a guide aimed at individuals with fiduciary responsibility for college and university endowments, arguing that climate change presents investment challenges due to a variety of risks that are unprecedented and poorly understood. These individuals, including governing boards and trustees, presidents, chief financial officers and chief investment officers, should be assessing and addressing climate risk and opportunity in their portfolios. Doing so is consistent with being a prudent investor and exercising responsibility.
"Assessing climate change as an investment risk is not about taking a position on the science of climate change," noted David Hales, president of Second Nature, "but rather an important aspect of any fiduciary's responsibility to the institution's endowment." Given that more than 70 percent of colleges and universities do not include environmental considerations (including climate) in their current investment portfolios, more college leaders seek balanced guidance that will help support decisions in the short-term, while forming the basis for further guidance for the higher-education sector.
Second Nature's new report provides basic steps fiduciaries can take to minimize climate change investment risks and seize industry opportunities.
As a first step in exercising fiduciary responsibility, endowment managers should come up with measures to understand risks, clarify governance and develop initial policy statements. They can do this by:
• Identifying who in the endowment governance structure has responsibility for considering climate risks and ensure that they are educated on those risks. For example, the University of Vermont has created a Socially Responsible Investing Advisory Council that "supports the Vice President for Finance and University Treasurer in fulfilling his/her responsibility as liaison to the Investment Subcommittee of the Board of Trustees."
• Developing a clear statement outlining the endowment's policy on climate risk. Many institutions address climate risk under the broader rubric of environmental, social and governance (ESG) risks in their portfolios. Hampshire College's policy on ESG investing says that "poor business practices related to human rights, the workplace, and the environment pose reputational, financial, operation, and legal risks to the College's investments and therefore the future financial security of the College."
• Assessing risks and opportunities across all asset classes, including stocks (equities), bonds (fixed income), real estate and commodities.
• Encouraging college and university leaders to communicate transparently any climate risk in their portfolios through publicly available annual reports. For example, The New School's Advisory Committee on Investor Responsibility publishes an annual report about its yearly achievements.
Next, endowment managers should change their investment policies to lessen risks and seize opportunities. These steps include:
• Engaging with companies to identify climate risks
• Improving the energy performance of real estate portfolios and investments
• Investing in clean, high-performing technology
Engaging with investors and public policy
Many investors have joined with other investors to, among other things, develop and share best practices on climate risks and raise awareness. Brown University, Swarthmore College, Temple University and the University of Vermont are members of the Investor Network on Climate Risk, which has engaged institutional investors in a wide array of practices on climate risk.
Additionally, many investors encouraged the Securities and Exchange Commission (SEC) to guide companies on how to disclose financial risks in their financial statements, which the SEC agreed to do in January 2010.
Higher education's leadership opportunity
Many higher-education institutions are grappling with the question of whether and how to align institutional investment policies with educational values. For most institutions, this is uncharted territory. Second Nature has teamed with Hampshire College, a leader in aligning its investment portfolio with its educational mission and values, on a project to work with higher education institutions to explore how endowments should consider ESG factors -- and how they relate to risk and fiduciary responsibility.
The invitation-only Intentionally Designed Endowment Conference, scheduled for April 3-4 in Boston, will help senior higher education leaders appropriately respond to growing scrutiny about endowment policies and practices. It also will enable leaders to identify the most effective strategies to ensure investment strategies align with each institution's values. And it will encourage a pragmatic focus on the need for maintaining strong financial returns.
The event is intended to provide a venue to examine the issues and develop new strategies, not to advocate any specific action or approach. Determining how to include ESG criteria has many benefits, including reducing risks associated with regulation, litigation, resource scarcity and costs, as well as consumer preference that can threaten companies with sub-optimal sustainability performance.
To learn more about the event, please contact Michele Madia at [email protected].
Graduation photo by sippakorn via Shutterstock