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John Maynard Keynes, the British economist widely considered the father of modern macroeconomics, wrote in 1935 that “the social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future.” His words of John Maynard Keynes may be equally relevant today. We have just emerged from one of the largest financial crises in our country’s history, where the “dark forces of time and ignorance,” as applied to financial instruments like mortgage-backed securities, contributed to the excessive financial leveraging that necessitated “Too Big to Fail” measures and a taxpayer bail-out of $85 billion for one company alone. As a result, the ethics of investment practices have since been the subject of increased scrutiny.
Despite the costly financial and ethical lessons learned since 2008, have we really changed the way we think about and make investment decisions?
By some measures, yes. At Harvard, at least, post-crisis resolutions have focused on reducing risk and exposure in our endowment portfolio. Such reduction has been accomplished through increasing in-house asset management, the appointment of a designated chief risk officer in 2009 to perform restructuring, and the sale of illiquid assets like private equity vehicles to facilitate immediate access to cash that could be used towards the purchase of sub-market priced securities.
Yet, one area in which Harvard has been conspicuously silent is whether its investment practices can and should be informed by fundamental social and environmental values. In its submission to the College Sustainability Report Card, Harvard received “A”s across the board, with the notable exception of one “C” in endowment transparency. So why doesn’t Harvard engage in responsible investing?
Responsible investing—also known as socially responsible investing, or SRI—is the practice of investing for the purpose of reaping not only financial returns, but also social benefits. SRI can take many forms, including divestment from undesirable investments, community investing, and social screening, i.e. integration of environmental, social and governance concerns to inform investment choices. The adoption of responsible investing has proliferated over the last two decades, rising from $639 billion in 1995 to $2.71 trillion in 2007, and major institutional investors such as CalPERS, with over $218 billion under management, have pledged to incorporate environmental, social, and governance criteria across all of its asset classes.
Persistent critiques of responsible investing brand it a violation of central tenets of Modern Portfolio Theory, or a breach of fiduciary duty because it constrains optimal portfolio. Thus, due to responsible investment’s added focus on social gains, many believe that portfolios engaging in RI strategies must make sacrifices in financial returns.
This assumption is false.
Recent research has demonstrated that responsible investing can provide market rate returns—and, sometimes, perform even better than conventional investing strategies. In the close to twenty years since its creation, the Domini 400 Social Index—an index of 400 largely U.S.-based companies that are filtered by social impact criteria—has always either matched or surpassed the performance of the S&P 500. Applied to Harvard’s own investing strategy, responsible investing is an opportunity to allow the university to represent its values in its investment choices without sacrificing the portfolio’s financial gains.
Harvard’s history shows a precedent of responsible investing. In 1972, under President Derek C. Bok’s leadership, Harvard created the Advisory Committee on Shareholder Responsibility and the Corporation Committee on Shareholder Responsibility to provide recommendations on how the school should cast its proxy votes. In that same year, Harvard also helped found the Investor Responsibility Research Center under Institutional Shareholder Services, which researches corporate governance and social responsibility for institutional investors. Forty years ago, Harvard was in the vanguard of responsible investment.
But university leadership did not take action by themselves: students, alumni, and faculty played a crucial role in advocating for change. For example, during the 1980s, students and alumni protested Harvard’s investments in companies that operated in apartheid South Africa. As a result, Harvard Management Company partially divested. More recently, in 2005 and 2006, Harvard sold its stake in the PetroChina and Sinopec companies in response to student protests over links between these firms and genocide in Darfur.
In the wake of the most recent financial crisis and reflecting on the 40th anniversary of the ACSR and the IRRC, it is high time for Harvard to once again become a leader in the area of responsible investment. There are a number of options available to Harvard: it can enlarge the mandates of the ACSR and CCSR beyond proxy voting on directly held investments, establish a social choice fund to allow donors more control over how their gift is managed, create a time-delayed mechanism for transparency to allow more oversight from members of the University community, and start a new unit at the Harvard Management Company dedicated to the integration of RI principles across all asset classes.
Harvard should take steps to implement any or all of these measures as the HMC continues the process of restructuring; indeed, some—like creating a social choice fund—could be implemented fairly easily and quickly, in a matter of months rather than years. By taking action in these areas, Harvard can break new ground in the realm of responsible university endowment management and better protect itself from extra-financial risk factors that have proven so devastating in recent years. More importantly, though, Harvard has the opportunity to use RI to bring our investments, a key component of our global influence, in line with the values of the university.
Nicole Granath ’15 lives in Hurlbut Hall. Ben Collins ’06 is a student at HKS ’12. They are both members of the coalition for Responsible Investment at Harvard.
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