FFI Perspectives

Harvard’s Carbon Footprint Based on Reserves

Measuring and disclosing the carbon footprint of investments is at the heart of efforts such as the Montreal Carbon Pledge and the Portfolio Decarbonization Coalition, supported by institutional investors representing trillions in assets. It is the first important step in managing the investment risks associated with climate change and carbon regulation.

One element of a carbon footprint relates to the current annual CO2 emissions of all companies whose securities are held by an investment portfolio. Another important aspect involves potential future CO2 emissions from the reserves of fossil fuel companies held by a portfolio. In fact, such financed reserve emissions are many times greater than the financed current emissions of a typical portfolio.

Harvard University’s $36 billion endowment provides a timely example. It reports direct holdings for less than $1 billion of its portfolio. Within this directly held portion, the endowment finances 2.3 million tons of potential CO2 emissions related to the reserves of fossil fuel companies.

Of this amount, 45% is financed through equity ownership of four companies on Fossil Free Indexes’ Carbon Underground 200TM (CU200) list, and 55% through seven exchange-traded fund (ETF) positions that are invested partly in CU200 stocks. The ETF positions totaled $133 million as of year-end 2014, and the four CU200 direct equity investments totaled $19.6 million.

In total, the 2.3 million tons of financed reserve emissions is about 20 times higher than current annual emissions across all of Harvard’s direct holdings. But these numbers reflect the emissions of just directly held securities, and a small fraction of the total carbon footprint of the overall Harvard endowment including indirect holdings.

Harvard’s strategic policy portfolio indicates that a third of the endowment may be invested in public equities through investment manager mandates. Assuming typical emissions intensities associated with major equity categories (domestic, international, and emerging), the Harvard endowment is estimated to finance more than 100 million tons of potential CO2 emissions from the reserves of fossil fuel companies through direct and indirect holdings of public equities.

This large number reflects a strategic policy with a relatively heavy allocation to emerging market equities, the most emissions intensive segment. Such a level of emissions would rank a company at #88 on The Carbon Underground Oil & Gas 100 list. Additional reserve emissions are likely financed through the holdings of the corporate bonds of fossil fuel companies.

Harvard was the first U.S. university endowment to sign up for the United Nations Principles for Responsible Investments (PRI), committing to invest in a more responsible and sustainable manner. It is also a signatory to the Carbon Disclosure Project, which encourages greater environmental disclosure from public companies. Thus we believe that Harvard also can show leadership in measuring and disclosing their reserves-based emissions and overall carbon footprint.

By measuring both current emissions and potential future reserve based emissions, Harvard and other institutional investors can more effectively target shareholder engagement efforts, better manage climate and carbon related investment risks, and optimize their carbon footprints.

To download the research report we’ve completed on the Harvard endowment portfolio, click here.

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