The value of fossil fuel investments in Harvard’s endowment ticked up during fiscal year 2022 as energy prices soared, according to a Harvard Management Company report released Thursday.
Harvard, which announced in fall 2021 that it would allow its remaining positions in the fossil fuel sector to expire, has an array of investments in external private equity funds with holdings in the industry. The school has pledged to discontinue such investments once its legal obligations are fulfilled. In the Thursday report, HMC — which manages Harvard’s endowment — attributed its investment gains in fossil fuel companies to global market conditions.
“The net year-over-year increase in fossil fuel exposure was due entirely to the appreciation of HMC’s existing assets,” the report states. “The energy sector was the highest performing sector in the S&P 500 during the fiscal year driven by higher commodity prices. This led to a significant markup of private assets in the sector.”
Fossil fuel investments now account for more than 2 percent of Harvard’s $50.9 billion endowment, up slightly from less than 2 percent at the end of fiscal year 2021. Harvard’s overall endowment value decreased by $2.3 billion in fiscal year 2022, marking the first year of negative returns since 2016.
Though the value of its fossil fuel holdings increased during the past fiscal year, HMC is on track to expand its investments in climate transition solutions in the coming years, according to the report. At the end of fiscal year 2022, HMC’s investments in climate solutions amounted to less than 1 percent of the endowment’s value — a figure the company expects to rise in the coming years.
“Should the current investment trends continue as expected, the endowment’s exposure to climate transition solutions will exceed those in fossil fuel related investments in the next few years,” the report states. “Having these curves cross will cause the portfolio’s net exposure to climate transition solutions to become positive and remain so into the future. This result will be highly dependent on the ongoing valuation of commodities, as demonstrated by fiscal year 2022 results.”
The report is part of the Harvard Management Company’s work to reduce greenhouse gas emissions associated with its investment portfolio to net-zero by 2050, a goal the Harvard Corporation — the University’s highest governing body — set for the endowment in 2020. As part of its commitment, HMC releases a report each February detailing its progress towards the net-zero goal.
Unlike other organizations that have made net-zero commitments, much of Harvard’s endowment is invested in private equity and hedge funds, an investment approach that makes it challenging to obtain an accurate measurement of greenhouse gas emissions in its portfolio, according to HMC.
“HMC has partnered with third-party data providers to develop a framework for calculating portfolio carbon metrics and estimating emissions,” the report states. “Additionally, HMC is engaging with its external managers to increase the reporting of direct emissions for portfolio assets and other climate-related information.”
HMC expects to report a “baseline emissions measurement for the endowment” as soon as next year, according to the report.
The initial estimate will include Scope 1 and 2 emissions of companies in HMC’s investment portfolio, defined as an organization’s direct greenhouse gas emissions and emissions coming from energy purchases. Notably, the estimate will not include Scope 3 emissions, which encompass all other indirect emissions in a company’s chain of production.
Last July, HMC Chief Compliance Officer Kathryn I. Murtagh wrote a letter to the Securities and Exchange Commission in support of a proposed requirement that public companies disclose Scope 1 and 2 emissions, but advocated against mandating Scope 3 emissions disclosures — citing difficulties corporations face in obtaining the requisite data.
The report also confirmed that HMC achieved carbon neutrality for its facilities and operations in fiscal year 2022 for the first time, a milestone the company announced it expected to achieve in its climate report last year.
HMC’s strategy to lower the endowment’s greenhouse gas emissions also includes engaging with companies via shareholder proxy voting. The report stated that at least 215 shareholder proposals addressing climate change were submitted, a sharp increase from the 84 in proxy voting season 2021. Of these 215 proposals, at least 103 were approved by April 2022.
Looking towards the future, the report states that HMC does not expect “linear” progress towards its net-zero goal, citing the interplay between the short term and long term results of investments to play into their strategy going forward.
“As a long-term investor, HMC will weigh investments’ short-term emissions against their potential to reduce emissions over the medium to long term,” the report states. “HMC is committed to meeting its net zero pledge and will continually seek opportunities to enhance knowledge of portfolio transition planning, carbon accounting standards for financed emissions, and best practices in disclosure.”