Investing for the Long-Term
As a long-term investor, HMC focuses on environmental, social, and governance (ESG) factors that may impact the performance of our investments. ESG factors are conditions, circumstances, or issues that can be found in areas such as energy consumption, greenhouse gas emissions, climate change, resource scarcity, water use, waste management, health and safety, employee productivity, diversity and inclusion, supply chain risk management, human rights (including workers’ rights), and effective board oversight.
We believe that considering ESG risk factors in our investment analysis and decision-making processes is aligned with our mission to help ensure that Harvard University has the financial resources to confidently maintain and expand its leadership in education and research for future generations.
Approach to Sustainable Investing
A three-pronged approach guides HMC’s sustainable investment work and priorities:
Incorporate environmental, social, and governance factors into manager selection, underwriting, analysis, and monitoring.
Environmental, Social, and Governance Integration
ESG integration is a term used to describe the incorporation of environmental, social, and governance factors—both risk factors and opportunity sets—into the investment underwriting process. In particular, investors should consider ESG factors that, when relevant, may have a material impact on the financial performance of an investment. ESG factors could include: energy consumption, greenhouse gas emissions, climate change, resource scarcity, water use, waste management, health and safety, employee productivity, diversity and inclusion, supply chain risk management, human rights, and effective board oversight.
HMC strongly believes that considering all data is not only in line with our fiduciary duty, but simply something that thoughtful investors do.
The degree to which ESG factors are relevant to an investment depends on the company or asset, the industry in which it operates, and the type of investment strategy and vehicle. For example, ESG factors may have a direct impact on a company’s profitability: increased regulation, such as changes to environmental laws or governance codes, may lead to rising operating costs; health or safety violations may lead to fines or legal liability; and issues around emissions, such as methane management for natural gas and oil operations, may equate to lost product and lead to reputational damage. These factors may also have an indirect financial impact by affecting a company’s long-term performance, such as its ability to attract talented employees, retain customer loyalty, and protect its brand.
As a long-term investor, HMC aims to be a good steward of the land we own and manage. We believe that ethical conduct, responsible stewardship of the environment, and respect for those with whom we do business are essential to the performance of our farmland and forestry investments. We work closely with our managers and operators to support sound agricultural/forestry practices and look to meet or exceed all environmental standards and labor regulations. Learn more about our priorities in the Natural Resources Sustainable Investing Guidelines.
As stewards of Harvard’s largest financial asset, we believe that our managers should adopt and promote best practices in corporate governance. This means engaging with portfolio companies where appropriate and responsibly exercising voting rights.
Since 1972, Harvard University has maintained a pair of committees that together play a central role in the University’s consideration of matters of shareholder responsibility. Each year, the Advisory Committee on Shareholder Responsibility (ACSR)—a group of Harvard students, faculty, and alumni—carefully consider a range of shareholder resolutions raising issues of corporate social responsibility, in regard to publicly traded companies in which Harvard owns shares. It formulates its recommendations in light of what is now a wide and deep body of precedent, in areas that range from human rights to environmental practices, from equal employment opportunity to corporate political contributions, and beyond.
The ACSR presents its recommendations, along with its reasoning, to the Corporation Committee on Shareholder Responsibility (CCSR)—a committee comprised of members from the Harvard Corporation (President & Fellows of Harvard College). In light of the ACSR’s analysis of issues and consideration of precedent, the CCSR exercises the Harvard Corporation’s fiduciary duty to determine how Harvard votes on social responsibility proxies each year.
Recent reports and further background on the committees’ work may be found on the University’s Shareholder Responsibility Committees website.
While we do not require our external managers to follow these recommendations, or even necessarily expect them to share our views on every issue, we do expect our managers to have a general approach to shareholder responsibility and to make informed decisions in their voting activity.
Harvard University was the first U.S. endowment to become a signatory to the United Nations-sponsored Principles for Responsible Investment (PRI). Accordingly, we are committed to considering ESG factors in the course of our underwriting, analysis, and monitoring process.
We have joined initiatives that align with—and help guide—our approach to sustainable investment, and we actively work with peers and investors to advance shared goals. For example, HMC is an active member of the PRI Investor Working Group on Corporate Climate Change Lobbying. This initiative urges businesses to take action on climate change, including through lobbying actions that are consistent with the goal of preventing climate change. As a lead investor of this working group, the Harvard endowment is a signatory to the Investor Expectations on Corporate Climate Lobbying, setting out expectations for company practice and disclosure on climate change related policy activity.
Harvard is also a signatory to the PRI’s Global Statement on Investor Obligations and Duties. This statement calls for policymakers to clarify investors’ obligations and duties, in particular, in relation to the integration of ESG issues into investment practice. In turn, the statement calls for investors to take account of environmental, social, and governance issues in their investment processes and decision-making, encourage high standards of environmental, social, and governance performance in the companies or other entities in which they are invested, and support the stability and resilience of the financial system.
Members of HMC’s Compliance team have joined the PRI’s Hedge Fund Advisory Committee. This Committee aims to develop tools to facilitate the implementation of environmental, social, and governance factors in the investment process across the hedge fund industry. Current projects include a responsible investment due diligence questionnaire for hedge funds, as well as an industry guide for asset owners.
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 800 institutional investors to drive environmental disclosure and performance of publicly listed companies.
When we engage with new external managers, we look for a knowledge of ESG factors that could have a material impact on the financial performance of their portfolios, a willingness to engage in a dialogue on sustainability, and a shared desire to see continuous improvement in this arena. For existing managers, we hope that this information will serve to clarify our sustainable investing practices and add value to our ongoing collaboration.
We expect our managers to report to us on a regular basis and in sufficient detail regarding their investment activities, including ESG integration, shareholder engagement, proxy voting activities, and the relevant outcomes. Through disclosure and dialogue, we can evaluate the full performance of our investment.