Investing for the Long-Term
Integrating ESG factors
As a long-term investor, HMC is focused on environmental, social, and governance (ESG) factors that may affect the performance of our investments—now and in the future. Aligned with our mission to provide strong long-term investment results to Harvard University, we include material ESG criteria in our investment analysis and decision-making processes.
Our three-pronged approach to sustainable investment—grounded in the United Nations-supported Principles for Responsible Investment—guides our sustainable investment work and priorities.
1. ESG Integration—integrate material ESG factors into due diligence, investment analysis, monitoring,
and asset management.
2. Active Ownership—exercise our client’s shareholder voting rights and engage in private dialogue with
select portfolio companies on ESG risks.
3. Collaboration—work with global investors and endowments to develop and define sustainable
investment best practices.
HMC approaches ESG integration as a tailored asset-class process. One way we integrate ESG factors into our investment analysis is through our pre-investment operational due diligence, providing a framework to assess ESG risks of prospective fund and direct investments. When material ESG issues are identified, they are documented and considered, along with all relevant business factors, as part of the final investment decision. Throughout the life of the investment, we monitor the identified ESG risks and work with managers, as appropriate, to ensure effective oversight.
One area where ESG integration comes to the fore is in our natural resources investments in forestry. Our dedicated approach to the stewardship of these properties has had a significant and favorable impact on the value of our assets, as well as the communities in which the properties are held. Ultimately, we believe this approach to sustainable investment will only enhance the potential for future returns and value added to the endowment.
Exercising our clients voting rights is one of the most effective mechanisms we have to ensure the markets we invest in are aligned with our client’s interests. We also work closely with Harvard University’s Corporation Committee on Shareholder Responsibility and Advisory Committee on Shareholder Responsibility, as these committees each play an important role in determining how the University votes its proxies with respect to environmental and social issues.
As an investor, we recognize that a company’s ability to identify ESG risks, and to manage these risks effectively, may affect a company’s valuation. Therefore, engagement with companies held in our investment portfolio plays an important role in our approach to sustainable investment. We have an expanding focus on in-depth analysis and communication with select companies to bring about change on ESG issues of concern. HMC selects companies for engagement based on ESG risks identified as having a direct impact on business operations and shareholder value, risk management oversight and disclosure practices, and the value of our holdings.
We are focusing our efforts, in collaboration with other investors, on discussing with companies their lobbying efforts against climate policy. Specifically, we are calling for improvements in practice and transparency on companies’ governance processes for engaging with public policy makers on climate policy including their membership of, or support for, third-party organizations that lobby against strong climate regulation. As an initial step, we worked with other investors to outline expectations on company lobbying activities. These expectations were supported by more than 60 investors, representing over $3.8 trillion in assets under management.
We also seek to encourage better management and disclosure of climate risk among companies in the energy sector. We believe that such companies should report material ESG risks, including climate risk, in their existing public filings so that investors can make more informed long-term investment decisions. In this effort, we support the work of the Sustainability Accounting Standards Board (SASB) in developing industry-specific sustainability accounting standards, and are encouraging companies in our engagement efforts to incorporate SASB standards into existing public filings.
Collaborating with like-minded investors is important to our work. We have joined initiatives that are aligned
with—and help guide—our approach to sustainable investment, and we actively work with peers and investors to advance shared goals. One such example is this public letter to the G7 Finance Ministers, signed by HMC and more than 100 global investors, signaling to governments and the market that investors support a global agreement on climate change, and calling for a long-term global emissions reduction goal.
United Nations-supported Principles for Responsible Investment
HMC, with the support of Harvard University, is the first university endowment in the United States to become a signatory to the United Nations-supported Principles for Responsible Investment (PRI). The PRI is a network of international investors who are committed to integrating ESG issues into their investment practices and ownership policies. As a signatory, we commit to implementing the six Principles put forth by the organization in our management of the University's endowment and related financial assets.
Principles for Responsible Investment1
1. We will incorporate ESG issues into investment analysis and decision-making processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the Principles within the investment industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will each report on our activities and progress towards implementing the Principles.
We are also a signatory to the CDP's climate change program. The CDP, formerly known as the Carbon Disclosure Project, is an international non-profit organization that works with governments, public companies, and over 700 investors to drive environmental disclosure and performance of publicly listed companies. For more information: www.cdp.net