John Campbell.

Economist John Campbell served on the board of the Harvard Management Company from 2004 to 2011.

Photo by Tony Rinaldo

Campus & Community

Want us to invest? Or to keep our investment? Get greener

8 min read

Economist John Campbell details how new endowment strategy could foster wider environmental change than simple divestment

Harvard announced the goal on Tuesday to have investments in its endowment reflect net-zero greenhouse-gas emissions by 2050, part of an expanded effort to reduce the University’s carbon footprint and address the urgent threat of climate change. Economist John Campbell, who served on the board of the Harvard Management Company from 2004 to 2011, says the shift is a major step for the University, one that could “push the whole asset-management industry toward carbon awareness.” The Gazette spoke with Campbell, the Morton L. and Carole S. Olshan Professor of Economics and former director of the Program in Asset Pricing at the National Bureau of Economic Research, about Harvard’s new strategy.


John Campbell

GAZETTE: What does this shift in investing mean for the University?

CAMPBELL: I think it is a huge step. This is Harvard recognizing that climate change is such an important issue that it makes sense to orient everything the University does to respond to climate change, including investing the endowment. Traditionally, the endowment has focused solely on financial returns, with a few exceptions now and again. So, to state this goal in such an ambitious way, albeit at a distant future date, really puts the University on a path to very strongly change how the endowment is managed. I think it’s a major step.

When I spoke to the faculty meeting in December I was pushing for this because I felt that the focus of the faculty on divestment of fossil-fuel producers was much too narrow, that what we need to do is encourage the users of fossil fuels to economize and to think of better ways to do things that reduce carbon use. It’s not just about the people who pump the oil. It’s also about industries like the airlines that fly planes that use the oil.

GAZETTE: Could this move mean a drop in returns for the endowment?

CAMPBELL: To the extent that the University expresses moral views about carbon emissions in its investment policy at a time when the overall market includes carbon-emitting companies, there will be some cost because you won’t be able to hold the whole market. And in fact, the more aggressively you do this and the more others join Harvard, as we certainly hope they will, if there’s a large group of investors who refuse to hold carbon-emitting stocks, that will drive down the prices of the stocks by raising the cost of capital for carbon-emitting companies. That means that those companies, as long as they’re still in business and still in the market, will be offering higher returns to investors who are willing to swallow their principles and invest in them.

So I think that, in all honesty, one should go into a policy like this expecting to pay some cost in return. Now, there are two caveats to that. First, steps can be taken at a very modest cost in return by being clever about this and strategic and approaching it in a very systemic way. I don’t think that the early steps need to impose a very significant cost.

“I think what Harvard is trying to do is set an example and take the lead as a major investor to encourage, first of all, measurement. Then once you can measure, you can manage.”

The second point is that if Harvard is effective as part of a coalition with other investors and other players in society at changing the carbon profile of the whole economy, then the goal is that by 2050, the U.S. economy is net-zero. At that point, Harvard will no longer need to tilt its portfolio and only hold a subset of carbon-leading companies because all companies will be in the right place by 2050. That’s the goal. Along the way, there may be periods where Harvard is taking a stand on its principles and refusing to hold certain companies that remain in business that emit carbon, and those companies may have depressed prices and in a certain sense be bargains from a purely financial point of view. But that is the point of this type of portfolio tilt, to penalize companies that continue to be heavy carbon emitters in order to give them an incentive to change and to move toward the net-zero world that we hope to reach.

GAZETTE: Given the current state of the economy, do you think this is a risky financial move for the University?

CAMPBELL: These are indeed very hard times economically. The pandemic has had huge economic effects, and indeed it is going to be a period of very tight budgets for the University. Again, Harvard is not proposing to do anything immediately. It’s going to take a steady systematic approach. The management company has to make a plan and report back to the Harvard Corporation by the end of the year on what they’re going to do and how they’re going to do it. But I think the climate issue is big enough and important enough that we can’t put things off. We can’t be distracted by even an event as large as the coronavirus crisis. We have to work on our short-term problems and our long-term problems at the same time, and I think it’s to Harvard’s credit that we can do that.

GAZETTE: How quickly will this shift begin to happen?

CAMPBELL: It’s very important that the management company should start to do some things in the near future. This should not be a license to do nothing until 2040. And the policy encourages Harvard Management Co. to make a plan and begin to work on this now. There are many steps that will be required. In the world of public equity investing, where you’re buying listed companies on the stock market, there are already people selling data on the carbon emissions of companies. There are asset managers who are holding portfolios that include constraints on how much carbon footprint the portfolio can have. This is being done already, and HMC could begin to do that quite quickly. Where it will take longer is in direct investments and in private equity. Measuring carbon footprint in that world of private investments is harder. But again, I think what Harvard is trying to do is set an example and take the lead as a major investor to encourage, first of all, measurement. Then once you can measure, you can manage.

GAZETTE: Can you talk a little bit more about how the process will actually work?

CAMPBELL: Initially, they will try to evaluate the carbon-footprint measurements that different data vendors provide. There are profit-making vendors and nonprofits that produce data like this. What that will tell you is that if you own so many shares of IBM, the carbon footprint of IBM is this much per dollar of market capitalization and thus you can calculate the carbon footprint of your investment. If you have a big portfolio of stocks, it’s just a matter of adding that up across all the stocks you own. Now, some of Harvard’s managers may invest in a way in which Harvard knows exactly what they own, in which case HMC can do the calculation. In other cases, Harvard will have to ask the asset manager to do the calculation and report it back so that Harvard can understand what’s in the portfolio now. The next natural step would be for HMC to say to its managers, “We want to hire managers who will buy stocks that meet our return goals while also reducing the carbon footprint of the portfolio over time.” There are asset managers who have the capacity to do that. This is already being done. So that’s the world of publicly traded companies.

But of course, a lot of the portfolio is invested in private companies through private equity firms. HMC will have to go to those private equity managers and go through the same process. The data sources that are available on carbon for public companies may not yet be available for private companies, but HMC can push for this to be developed, for this to be made available. And that is actually part of the value that Harvard will create. By taking a lead and by asking managers to do this, Harvard can hopefully push the whole asset-management industry toward carbon awareness. And then that’ll make it easier and cheaper for other investors to hop on the bandwagon.

GAZETTE: Do you think this move will inspire other universities to take similar steps?

CAMPBELL: I know that a lot of universities are under pressure from their communities, students, faculty, alumni, to do more on the climate issue, and to use their endowments to do it. Harvard is not unique in this respect. But for better or worse, Harvard is very much in the public eye, people notice what Harvard does. And I would not be at all surprised if other universities adopt similar policies — not necessarily identical, but with a similar spirit.

Interview was edited for clarity and length.