Richest Universities Are Too Quiet on Sustainable Investing
Aerial view of Stanford University campus including Hoover Tower, Main Quad, the Oval and Memorial Church in Stanford, Calif. Photographer: Nancy Nehring
In its mission statement, Harvard University says it “expects that the scholarship and collegiality it fosters in its students will lead them in their later lives to advance knowledge, to promote understanding, and to serve society.” Similar aspirations can be found at Yale, Stanford, the University of Chicago, Emory University, and probably all of their peers. These missions are similar and laudable — for their graduates to contribute to society as a whole.
These five schools share another thing: None of their endowments is a member of the U.N.-backed Principles for Responsible Investment (PRI). The PRI initiative encourages major investors to begin future-proofing their portfolios. They agree to embed analysis of environmental, social and corporate-governance (ESG) risks into their practices and decisions. They seek better risk disclosure from companies they invest in. They promote PRI-backed practices within the investment industry. They also each report every year on their own progress.
In short, the mission of the PRI is to push the investment community to reward companies that are orienting their strategies toward long-term success -- sustainable companies.
The group speaks with a loud voice. PRI signatories today represent $32 trillion in assets, up by a factor of eight since the initiative was founded in 2006. Becoming a signatory is not limited to a “radical fringe” of renegade investors, unless you consider asset managers, including BlackRock, Goldman Sachs Asset Management, and PIMCO, and asset owners, such as CalPERS, CalSTRS, Fidelity Worldwide Investment, and the New York City Retirement System, to be renegades. The longer that university endowments wait, the likelier they are to become the renegades.
The PRI Initiative has 270 asset owners and 692 asset managers as signatories, including more than 150 private equity investors. More than 70 percent of PRI signatories have requested that companies integrate information on their sustainability performance within their financial reporting. Through the Sustainable Stock Exchanges Initiative, 28 signatories are nudging 30 stock exchanges to encourage their listed companies to “enhance corporate transparency, and ultimately performance, on ESG (environmental, social and corporate governance) issues and encourage responsible long-term approaches to investment.”
The mismatch between the mission statements of universities and their endowments’ investing practices mirrors another inconsistency we have written about, that between companies’ commitments to sustainability and the failure of their pension funds to do the same. If anything, the universities’ disconnect is even more surprising. It persists despite extensive efforts of the PRI to encourage their endowments to join. Independent groups, such as the Responsible Endowments Coalition and the Fair Harvard Fund, have formed to persuade universities to change, too.
There are approximately 840 U.S. colleges and universities that have endowments, most of them quite small, with a total of about $415 billion in assets. (Globally, very few universities have endowments.) The top five schools represent one-quarter of the total. The top 10 represent one-third, and the top 25 represent one-half of the total. If a small number of large university endowments were to take the lead, the rest would be sure to quickly follow. Admittedly, the $200 billion in assets held by the largest 25 endowments is a fraction of the current assets of PRI signatories. A sustainable society doesn’t depend on university endowments becoming PRI signatories.
The real issue is the credibility of the universities themselves. How long will their students, faculty and alumni ignore the fact that university endowments are not living up to the values the universities themselves espouse? How long can university presidents let this mismatch persist?
Universities should expect the same from their endowments as they do from their students. Historically, university endowments have been subject to calls from student groups to not invest in companies in certain industries or that do business in certain countries. The 1980s’ movement to divest endowment assets from companies that did business in apartheid South Africa is only the most famous example. In recent weeks, student climate-change groups have begun to pressure universities to divest from fossil fuel companies. To be sure, university endowments have a complicated set of asset allocation decisions to make. Joining the PRI is a tangible way to acknowledge the broad range of ESG issues that must be taken into account in order to sustain long-term investment performance.
To that end, we call on the 10 universities with the largest endowments to join the PRI in 2013. They are Harvard, Yale, the University of Texas system, Princeton, Stanford, the Massachusetts Institute of Technology, the University of Michigan, Columbia, Northwestern and the Texas A&M University System and Foundation. As professors at Harvard Business School, we would be pleased to see Harvard be the first university to do so. More important is that one of these universities shows leadership and matches its money to its mission.
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