Swensen reaffirms climate change as a guiding factor in Yale’s investment policy

David Swensen, Yale University’s chief investment officer, this week underscored the importance of environmental sustainability in the university’s investment choices.

In a Feb. 20 letter to the university community, Swensen offered an update on Yale’s approach to incorporating the risks of climate change in investment decisions. The letter follows another letter Swensen wrote to the Yale community in 2016 offering a first progress report on an effort the Investments Office began in 2014 to give climate-change-related guidance to Yale’s external investment managers, who collectively manage nearly all of the endowment portfolio.

“Climate change,” Swensen writes in his latest letter, “poses a grave threat to human existence and society must transition to cleaner energy sources. This is a formidable task that requires swift and dramatic action on a global scale. The solution involves a combination of government policy, technological innovation and changes in individual behavior.”

Swensen writes that Yale’s greatest impact in fighting climate change will come through its research, scholarship and education, and notes that the university has committed to reducing its own carbon footprint. Yale President Peter Salovey has led an acceleration of these efforts: Provost Scott Strobel has been charged with convening relevant faculty leadership around a university-wide push for planetary solutions, and a committee charged with finding a way to get the campus to net-zero carbon emissions is due to issue a report soon. Meanwhile, Yale continues to be nearly unique in imposing a carbon charge on all of its buildings.

Yale was one of the first institutions to address formally the ethical responsibilities of institutional investors. In 1969, a small group of Yale faculty and graduate students conducted a seminar exploring the ethical, economic, and legal implications of institutional investments; this led to the publication in 1972 of “The Ethical Investor: Universities and Corporate Responsibility,” which established criteria and procedures by which a university could respond to requests from members of its community to consider factors in addition to economic return when making investment decisions and exercising rights as a shareholder. When in that year the Yale Corporation adopted the book’s guidelines, Yale became, according to The New York Times, “the first major university to resolve this issue by abandoning the role of passive institutional investor.” Swensen has been integral to this approach since his arrival at Yale in 1985.

Within the resulting procedural framework, the board of trustees’ Corporation Committee on Investor Responsibility (CCIR) is advised and supported by the Advisory Committee on Investor Responsibility (ACIR), which is composed of faculty, students, staff, and alumni. In 2014, the CCIR considered the request from some students for divestment from the fossil-fuel industry.  The CCIR decided against divestment, largely on the grounds that assigning blame to the supply side of the carbon problem would distract from the fundamental, and shared, problem of demand.

In response to President Salovey’s challenge to find a way to address climate change issues in Yale’s investments, the Investments Office conceived and executed a plan that would guide the endowment toward increasingly green investments. Beginning in 2014, the university has asked all investment managers to incorporate the full costs of carbon emissions in investment decisions. As Swensen notes in the current letter and in his 2016 letter, the university asks its investment managers to avoid investing in companies that disregard the social and financial costs of climate change and that fail to take economically sensible steps to reduce greenhouse gas emissions.

Yale further asks investment managers to assess the greenhouse gas footprint of prospective investments, as well as the costs to expected returns of climate change consequences and of possible future policies aimed at reducing greenhouse gases.

“Yale’s investment approach to climate change contributes to the broader societal goal of transitioning to clean energy,” Swensen writes.

In keeping with this approach, Yale has in recent years, through its investment managers, jettisoned holdings in thermal coal companies and oil sands producers, because they are inconsistent with the university’s investment principles, he reports.

“The remaining thermal coal private investments are on their way out of the portfolio,” Swensen writes. Yale’s investment in thermal coal and oil sands has dropped from 0.24% of the endowment’s market value in 2014 to about 0.02% today, according to the letter.

The letter provides examples of successful steps taken by Yale’s investment managers to improve the environmental sustainability of investments for which they are responsible.

“For many managers, Yale is often one of the more significant investment partners, placing the university in a strong position to influence a manager to incorporate the risks of climate change into investment decisions,” Swensen writes.

Ultimately, he writes, the result of Yale’s approach is that “investments with large greenhouse gas footprints are disadvantaged relative to investments with small greenhouse gas footprints. When taking into account the full costs of climate change, investment capital flows towards less carbon-intensive businesses and away from more carbon-intensive businesses.”

Swensen expanded on the points made in his letter at a panel convened today (Feb. 20) by the Yale Faculty of Arts and Sciences (FAS) Senate, which is composed of 22 elected faculty members from within FAS. The discussion, which was open to FAS faculty, included students who are leading a call for divestment, as well as faculty members holding differing views.

“I was honored to be invited to participate is the FAS Senate event, which turned out to be an excellent conversation,” Swensen said. “I differ with divestment proponents about the means to transition to a greener economy, but I emphatically share their belief in the importance of that goal and its urgency. The Yale Endowment will continue to work with its external managers to incorporate the costs of carbon emissions into investment decisions, and my team and I will continue to seek the strong financial returns necessary to support Yale’s research and teaching — which together hold tremendous potential to make a critical difference in this fight.”