Detailing endowment’s steps toward being ‘net zero’ on greenhouse gas emissions

Harvard Management Company today released a 2023 climate report, detailing progress it has made toward meeting the University’s goal of transitioning its endowment portfolio to “net zero” greenhouse gas emissions by 2050. The pledge, made in 2020, was a first among university endowments and is one of several actions Harvard has taken in recent years to address climate change, a challenge President Larry Bacow calls “a defining issue of our time.” The Gazette spoke with Michael Cappucci, managing director for compliance and sustainable investing at HMC, to learn more about the steps taken and the path ahead.

Q&A

Michael Cappucci

GAZETTE: Can you talk a bit about how HMC is mapping out its strategy?

CAPPUCCI: After Harvard made the pledge, the first thing we did was study what others were doing to meet similar goals. It became clear that as a large endowment we faced unique challenges due to the types of investments in our portfolio, and we were going to need to develop solutions quickly. That said, we also recognized that our work would allow others to follow suit in de-carbonizing their portfolios, so we needed to be rigorous in our approach.

Our efforts to date are probably most easily viewed as falling into four categories: making our own operations carbon-neutral, advocating for industry-wide standards and changes, working with our external asset managers and data providers to measure the greenhouse gas (GHG) emissions of our investments, and increasing activity in climate transition investments.

HMC made its operations carbon-neutral for the first time this past fiscal year. The report dives into the details of what it took to get there, but in addition to the environmental benefits, it also meets the standard that the University set for itself and that we’re encouraging our external managers to work toward.

We have been outspoken on the need to develop appropriate standards for calculating portfolio emissions, for hedge funds, in particular. That’s involved participation in industry working groups, trade associations, and joining international initiatives. The industry still isn’t moving with enough urgency, in our opinion, but we are seeing progress.

At the moment, most of our efforts are focused on engaging with people who manage and provide data for the funds we are invested in, so that we can gain greater transparency into their underlying portfolios. This is a critical step to be able to calculate the endowment’s financed emissions as accurately as possible.

We believe we have a framework that will get us there, but these things take time. It’s important to note that it’s not just one process we’re developing, but four different processes to deal with the underlying data challenges across different asset classes — public equities, private equity, hedge funds, and real assets.

GAZETTE: The report notes that HMC is developing interim targets to measure progress. Where does development of those benchmarks stand?

CAPPUCCI: To be able to measure progress, over the last few years we have been focused on getting a clear picture of where we currently stand.

First, we need to complete the work to calculate a baseline of our portfolio emissions. Then, we will be able to work closely with the Harvard Corporation to identify and set appropriate interim targets, which are benchmarks for us to meet on our way to net zero.

In addition to quantitative emissions reduction targets, I expect we will consider qualitative targets as well, such as meeting certain milestones, engagement targets with external managers and corporations, and portfolio GHG data quality goals.

Whatever form the targets take, it’s fair to say that they’ll look to address real-world GHG emissions and not simply employ financial engineering to check a box.

“We believe that, in the long term, these investments will perform as well as or maybe even better than similar commitments in other strategies. And the ones that work will put an enormous dent in the climate change problem.”

GAZETTE: The report also highlights how HMC is investing in efforts to address the climate crisis in addition to drawing down on heavy-emitting funds. How has that shifted your investment strategy?

CAPPUCCI: Of all the work we’re doing to address the threat of climate change, this is what I and others at HMC are most excited about. Our investment team is seeing a steady stream of interesting investments — opportunities that just didn’t exist four or five years ago.

Not only have a number of new investment managers entered the climate impact space, but some of our longest-standing, most trusted generalist managers are either evolving their focus to include climate transition or launching new, dedicated thematic funds that are focused on climate. The ramp-up in committed capital will take time due to the investment cycle in private markets, but the early results have been very promising.

We’re also investing directly in companies that are bringing climate solutions to the market, in areas like reducing emissions and improving overall climate trajectory. Those companies are focused on improving products and processes that could potentially have large impacts.

It’s important to note that the investing we have done so far in this space has been in line with our long-term, risk-adjusted return targets. These are not investments with a double bottom line. We believe that, in the long term, these investments will perform as well as or maybe even better than similar commitments in other strategies. And the ones that work will put an enormous dent in the climate change problem.

GAZETTE: Since Harvard was the first university endowment to make this commitment in 2020, there have been a number of universities that have made similar net zero commitments. How has that affected the broader investment landscape, and do all institutions face the same challenges in getting to net zero?

CAPPUCCI: You are absolutely right, and this is one of the developments that we believe best indicates that we are on the right track. If it were still just Harvard making this commitment, we might wonder, what are we missing? But more and more institutions and investors are making net zero commitments too.

It has definitely made conversations with our managers easier. Sometimes they reach out to us to get our thoughts on questions they are fielding from their other limited partners. In the private equity space, the ESG Data Convergence Initiative — which we signed onto last year — has catapulted GHG emissions to the top of many investment firms’ investment assessments. In only a couple of years, it has signed up supporters managing over $24 trillion in assets, covering more than 2,000 privately held portfolio companies.

But we are constantly reminded that, as an endowment-style investor, our challenge is greater than most. It is going to take time for asset managers to collect and report all this information. And we are still working through methodological questions on the accounting for certain complex hedge fund strategies.

GAZETTE: Is it too early to tell if HMC is on track to meet the 2050 goal? Are you feeling optimistic?

CAPPUCCI: It is still early, but we’re off to a good start.

As investors, our job is to stay on top of developments along the way to ensure that the ultimate goal remains attainable. This means adapting to regulatory changes, industry trends, and capital flows. As we have said from the start, an effective net zero effort needs everyone — governments, other investors, scientists, corporations, consumers — to play a role for the world to transition to net zero by 2050.

I do remain optimistic. While it is never easy being the first to take the leap, the talent and innovation at HMC is second to none. I am confident that we are on the right path.