Yale University
PA-10: Sustainable Investment

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February 20, 2020
To: The Yale Community
From: David F. Swensen, Chief Investment Officer
Climate change 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.

Helpful Links
YaleNews Article on 2020 Update
2014 Letter on Climate Change
2016 Update on Climate Change
New York Times Article on 2014 Letter
New York Times Article on 2016 Update
ACIR Homepage
2014 CCIR Statement

As a premier research institution, Yale will have its greatest impact by doing what it does best: research, scholarship and education. With respect to its substantial operations, the University is committed to reduce its own carbon footprint and to encourage environmental stewardship among the tens of thousands of individuals within its community.

Yale’s Endowment provides critical support for all of the University’s endeavors. In fact, well more than half of the budget for the Faculty of Arts and Sciences comes from Endowment distributions. Prudent stewardship of the Endowment underpins substantial, stable financial support both for today’s scholars and for generations of scholars to come.

In 2014, I wrote to Yale’s active external investment managers, outlining Yale’s investment policy regarding climate change. In 2016, I updated the Yale community on the impact of Yale’s policies. Today, I am writing to provide a further update.

Yale’s Role as an Institutional Investor

In 2014, the Yale Investments Office developed a plan to address climate change risks in the Endowment portfolio. The plan has been implemented through Yale’s external managers, who collectively are responsible for managing nearly all of the University’s Endowment assets. Engagement with Yale’s managers is a powerful tool through which the University influences the character of the Endowment. Yale’s managers make critical decisions about what investments are selected for Yale’s portfolio and what issues are raised with company management teams. Given the nature of Yale’s investment strategy, direct dialogue with its managers is the most effective means of addressing climate change risks in the portfolio. [1]

Yale’s investment policy regarding climate change asks that external managers:

Assess:

the greenhouse gas (GHG) footprint of prospective investments

the direct costs of the consequences of climate change on expected returns

the financial costs of policies (such as a carbon tax) aimed at reducing GHG emissions on expected returns

Discuss with company managements:

the financial risks of climate change

the financial implications of prospective, well-crafted government policies to reduce GHG emissions

Encourage company managements:

to mitigate financial risks and increase financial returns by reducing GHG emissions

Avoid:

companies that refuse to acknowledge the social and financial costs of climate change and that fail to take economically sensible steps to reduce GHG emissions

Members of my staff speak with each manager about Yale’s policies and how they apply to the manager’s portfolio. This process communicates Yale’s position in a clear and consistent manner and gives Yale and the manager an opportunity to discuss the principles underpinning Yale’s policies. Investments Office staff regularly engage managers regarding the risks associated with climate change.

The Impact of Yale’s Approach

As I noted in 2016, when Investments Office staff first discussed my letter with Yale’s active investment managers, nearly all supported the approach described in the letter and appreciated the admonition to consider the economic impact of climate change on investments. I am pleased to report that the response to Yale’s policy continues to be positive and confirms ongoing alignment between Yale and its external managers on how to think about the risks of climate change.

Climate change risks regularly arise in the ordinary course of discussions between Yale staff and external managers. For example, my colleagues have discussed with managers: the carbon footprint of various sources of power; the fuel efficiency of companies’ fleets; the energy efficiency of buildings that managers are developing, renovating or leasing up; and the impact of potential sea level rise on a developer’s land bank. In a specific example, a manager contemplated making an investment in a services provider to the oil sands industry and reached out to discuss the potential investment because of my letter. My colleagues reiterated Yale’s concerns about climate change risks and questioned whether this investment would make sense after taking into account climate change externalities. The manager ultimately decided not to make the investment.

Our managers take a variety of approaches to addressing climate change issues. For example, managers have conducted environmental, social and governance (ESG) screens, employed state-of-the-art energy audits and developed their own carbon pricing analytics. [2] They may go above and beyond common sustainability certifications, leading to less environmental impact.

One private equity manager conducts an ESG survey of each portfolio company at an early stage of acquisition to take inventory of material issues. Together, the manager and the company come up with a way to measure ESG progress on a regular basis. This process has resulted in numerous management-led initiatives with regard to carbon footprints of various companies, including avoiding packaging waste, deploying energy management systems and increasing recycling volume.

A real estate manager developed a property that exceeds the standards set forth by the U.S. Green Building Council, resulting in 25% reduced energy use and 75% reduced water usage. This was achieved through thoughtful design and construction, including electrochromatic glass that is programmed to adjust shading to the path of the sun and a rain water capture system; the manager also built a multi-layer water filtration system to clean polluted runoff from a nearby highly trafficked roadway, resulting in over 400,000 gallons per year of water flowing into the watershed that is clean enough to drink.

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. A typical reaction from a manager is that Yale’s policy is consistent with the firm’s values, but the manager appreciates Yale’s viewpoint and strives to be more explicit in the implementation of the University’s principles. Following are a few quotes from our managers:

“The Yale letter on climate change continues to be a touchstone that we measure our actions against. Importantly, it has been a source of inspiration for our effort to deepen engagement with our portfolio companies. This has not only taken the form of tangible action, where we formally monitor the ESG issues that matter to our companies’ success, but also symbolic leadership, where, like the letter did for us, we can signal to our companies that environmental stewardship is a priority.”

“Shaped by our founder’s passion and concern for the environment, our company has a longstanding commitment to sustainability. Analyzing every possibility to reduce greenhouse gas emissions and to slow climate change while maximizing value for our investors remains at the forefront of our efforts. We remain focused on engaging with our employees, tenants, stakeholders and the communities in which we operate to advance our sustainability initiatives. To hear in clear and honest terms from Yale that we are all on the same page was liberating and inspirational, and energizes the efforts of our company to further our efforts.”

“Thank you so much for your letter detailing in a very thoughtful and sophisticated way Yale’s thinking on climate change and the ethical and investment implications that flow from it. Since this is obviously an issue of deep importance to Yale and you were so gracious to ask for comments, on behalf of my colleagues, I am grateful for the opportunity to respond. Having circulated your letter beforehand, we gathered this week for an all-hands discussion (we will have a follow-on meeting next week to agree and move ahead on the implementation details), and to the person, as individuals and investors, we support Yale’s policy 100%. We believe Yale’s policy will help us invest better, that it will support us in serving the needs of a planet at risk from climate change AND driving higher returns for Yale and its educational mission.”

Even as the world transitions to clean energy (which it must), in the near term we will rely on some significant measure of fossil fuels; thus, how fossil fuel companies behave will make a difference. [3] Yale’s external managers understand the need to minimize emissions in producing oil and gas. It might be helpful to highlight one manager’s example. Although we cannot describe in full detail the manager’s ESG processes, the manager is willing to let us share that it conducts a two-stage ESG pre-investment screening process, which includes GHG calculations. Once a company is acquired, the manager trains and works closely with the company’s board on ESG issues, requiring quarterly reporting; furthermore, it is currently in the process of implementing GHG accounting in an effort to reduce each company’s carbon footprint. Through a combination of operational improvements, electrification, wind power, carbon capture and storage, and advancing other technological solutions, this manager seeks to reduce the overall carbon intensity of its portfolio, which is already much lower than the world’s average for oil production. This manager had the following to say to Yale:

“The oil and gas industry must have two thoughts in mind - embracing the paramount energy transition, while at the same time producing oil and gas with the lowest possible emissions. For us, it is imperative that the companies we invest in are part of the solution and not part of the problem, as this will be their license to operate and futureproofs our investments. Climate considerations are a prerequisite for both our selection of new investments and our work with the current portfolio. In this, we believe we are aligned with the approach of Yale’s Investment Office.”

Yale’s Portfolio

The composition of Yale’s Endowment stems from many individual investment decisions made by a host of world-class external investment managers. As these managers incorporate the full costs of climate change into investment choices and, in the cases of corporate investments, engage the managements of portfolio companies in discussions about addressing climate change, the risks associated with climate change are reduced. The risk reduction may come from sales of offending investments, from avoiding offending investments or from influencing company managements to adopt climate-friendly policies. The accumulation of investment decisions that incorporate the full costs of climate change leads to a shift in flows of capital towards less carbon-intensive investments and away from more carbon-intensive investments.

As I mentioned in 2016, at the time we articulated our policy, a few freely tradable investments in our portfolio were inconsistent with the principles of my letter, namely holdings in thermal coal miners and oil sands producers, two of the industries that would suffer if regulation imposed the social cost of carbon emissions on producers. Working with our external investment managers, we successfully exited three of those positions, as I reported at the time. Subsequently, we identified two other public holdings, which have been liquidated.

Private investments take much longer to exit than public investments. Since 2016, one thermal coal investment held by a private partnership has been fully liquidated. Although the process has been slower than we would have liked, the good news is that the remaining thermal coal private investments are on the way out of the portfolio. [4]

Since 2014, Yale’s exposure to thermal coal and oil sands has declined from roughly 0.24% of the Endowment’s market value to roughly 0.02% of the Endowment’s market value today.

Conclusion

Yale’s investment approach to climate change contributes to the broader societal goal of transitioning to clean energy. Under Yale’s approach, which asks managers to incorporate the costs of carbon emissions in investment decisions, 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.

Yale’s investment policy regarding climate change reduces portfolio risk and supports our fiduciary responsibility – to provide substantial, stable financial support for current and future scholars through the prudent management of Yale’s Endowment. This support enables Yale to pursue its mission and to contribute to climate change solutions through its greatest areas of strength: research, scholarship and education. I am grateful to the Yale community for its support and engagement on this important issue.



[1] In 2014, the Corporation Committee on Investor Responsibility (CCIR) adopted proxy voting guidelines regarding climate change. In recent years Yale has held relatively few securities directly. When the University holds shares directly, Yale will vote for resolutions that support: disclosure of greenhouse gas emissions, analyses of the impact of climate change on business activities, strategies designed to reduce the long-term impact on the global climate, and sound and effective governmental policies on climate change.

[2] All examples of manager behavior in this letter are shared with manager consent.

[3] For example, there is a wide range of carbon intensity for oil and gas production from various causes, such as gas flaring, methane leaks and venting. Thus, there is a need for oil and gas companies to manage their carbon footprint with respect to their operations, which may have a material environmental impact. At least one recent study suggests that the total petroleum well-to-refinery GHG emissions in 2015 are estimated to be ~1.7 Gt CO2 equivalent, or approximately 5% of total 2015 global fuel combustion CO2 emissions. See Masnadi, Mohammed, et. al. “Global carbon intensity of crude oil production.” Science, vol. 361, no. 6405, pp. 851-853, https://science.sciencemag.org/content/sci/361/6405/851.full.pdf. Accessed 17 February 2020.

[4] With respect to one firm that is no longer a manager in good standing with Yale, we took the unusual step of banding together with like-minded investors to vote against extending the terms of their partnerships in order to accelerate their liquidation of positions that do not meet Yale’s standards. The majority of Yale’s non-compliant investments are held through these funds."


Background
Yale was one of the first institutions to address formally the ethical responsibilities of institutional investors. In 1969 Professors John Simon, James Tobin, William Brainard, and Charles Lindblom along with Yale graduate students Charles Powers and Jon Gunnemann conducted a seminar entitled ""Yale's Investments,"" which explored the ethical, economic, and legal implications of institutional investments. Subsequently, Yale became, according to The New York Times, ""the first major university to resolve this issue by abandoning the role of passive institutional investor."" Read more about the history of Yale’s ethical investing policy here.

Governance
The Corporation Committee on Investor Responsibility (CCIR) considers and makes recommendations to the board of trustees on policy matters related to ethical investing. It is supported by the work of the Advisory Committee on Investor Responsibility (ACIR), whose membership consists of Yale alumni, staff, faculty, and students. The Investments Office works with the ACIR and CCIR to implement policies adopted by the board of trustees. Learn more about Yale’s ethical investment policies here.

Climate Change
Climate change poses a grave threat to human existence and society must transition to cleaner energy sources. Recognizing that greenhouse gas emissions must be addressed, the Investments Office asks Yale’s Endowment managers to incorporate the costs of carbon emissions in investment decisions, and not to hold companies that refuse to acknowledge the social and financial costs of climate change and that fail to take economically sensible steps to reduce greenhouse gas emissions. Under Yale’s approach, investments with large greenhouse gas footprints are disadvantaged relative to investments with small greenhouse gas footprints, and investment capital flows towards less carbon-intensive businesses and away from more carbon-intensive businesses. Read the Chief Investment Officer’s latest update on climate change here.

Assault Weapons
The Yale board of trustees has adopted a policy prohibiting investment in assault weapon retailers. Specifically, Yale will not invest in any retail outlets that market and sell assault weapons to the general public. Read the full statement here.

Private Prisons
Based on the recommendation of the Advisory Committee on Investor Responsibility, the Yale board of trustees adopted a policy making ineligible for investment CoreCivic and GEO Group, the two largest private prison companies, which dominate the industry. Read the board’s statement here. Yale does not have any investments in these two companies (or in any other private prison company), and this policy makes investment in these two companies impermissible.
Puerto Rico
After decades of depressed economic activity and unsuccessful policy initiatives, Puerto Rico’s debt levels rose to unsustainable levels, leading the Commonwealth to default on July 1, 2016. In September 2017 – while Puerto Rico was in the midst of restructuring its finances – Hurricane Maria caused widespread destruction and plunged the island into a severe humanitarian and economic crisis. As Puerto Rico’s plight grew, a coalition of activists directed their energy towards Puerto Rico’s creditors – in particular, hedge fund managers – calling on them to divest or forgive holdings of Puerto Rican debt. When campus groups at Yale, as well as other state and local organizations, demanded that the University disclose all investments in Puerto Rican bonds, cancel all those held by Yale, and fire investment managers who refuse to sell or forgive the debt, the matter was referred to the ACIR. The ACIR concluded in January 2018 that divestment from Puerto Rican debt is not warranted when an investor is abiding by the applicable legal framework in a process in which the debtor’s interests are appropriately represented. Read more here.

Implementation
Yale’s Endowment holds a wide variety of investments, generally managed by external parties. Various legal structures and a range of asset types require the Investments Office to carry out Yale’s ethical investment policies in different ways. Distinct approaches are required for marketable (publicly traded) securities and privately held investments. Read more about implementation of our policies here.

Yale's Wind Farm
Investments in wind can provide substantial economic returns to the University, while helping achieve sustainability goals. Beginning in 2007, Yale's managers, in conjunction with local wind power development firms, identified several sites with attractive capacity factors. The University's partners initiated development on a handful of sites. One site in particular, Record Hill Wind, is fully operational and was transferred from the Endowment to the University, and its management is now overseen by the Yale Office of Facilities.

As noted in the sustainable investment letter linked above, "The Investments Office plans to continue its engagement with managers on the issue of climate change. Since the distribution of my letter in 2014, Yale initiated a number of new investment relationships with external partners and provided each of them a copy of the letter. The Investments Office engaged in conversations with each manager about the University’s objectives in considering climate change. A number of managers called attention to the alignment that exists between Yale’s policy and their current investment processes, highlighting specific actions their organizations had undertaken to address climate change. For example, Yale’s new real estate managers noted that reduced energy consumption benefits their bottom lines as well as the environment. In one instance, Yale had traveled very far down the path of hiring a new energy manager. Discussions with the manager about the contents of the letter revealed a divergence of views and attitude between Yale and that manager towards the risk of climate change, including whether and how to incorporate those risks in its investment process.
In part as a result of those conversations, the Investments Office decided not to pursue that investment relationship."

University policy does not allow sharing this information publicly

University policy does not allow us to share this information publicly.

University policy does not allow us to share this information publicly.