Investment in a Sustainable Future
Every day, more and more people take shorter showers, use more efficient lightbulbs, and carry reusable water bottles in an effort to lessen their own environmental impact and respond to the dangers of climate change. We live in a society that encourages personal responsibility for the planet—an increasingly important mindset as sea levels and temperatures rise, erratic weather patterns become more common, and life on Earth tries to accommodate the burden that human actions have put on it.
However, individual efforts will never be enough to slow or reverse the rapidly changing climate. Private institutions, including universities like Princeton, must also take responsibility for their environmental impact, including in the investment process. By failing to do so, they counteract all of the personal efforts made to reduce environmental harms and inadequately address climate change with the necessary immediacy. Princeton pursues many sustainable on-campus policies, but if it wants to invest in a sustainable future it should focus on its endowment as well as its campus. It is time to start attacking the threat of climate change from every possible angle, including through our investments.
To encourage a transition to a sustainable financial system, fundamental changes will be necessary. Capitalism often works in opposition to progressive goals, but we have an opportunity to make it work in favor of environmental protection. Companies like Halliburton certainly make more money in the immediate future with poor fracking practices when they lobby successfully for weaker regulations on drinking water purity, but everyone else must eventually bear these costs. The long-term impacts of these actions should be factored into the value of a company’s products and assets. The system must hold them accountable by correctly accounting for those costs in pricing and valuation. By considering environmental impacts when we invest, we can reduce the incentives to fund environmentally damaging companies. One out of every six dollars professionally invested by asset managers already incorporates considerations of environmental, social, and governance factors. It is time for all institutions, including Princeton, to do so.
Across college campuses and in other large private endowments, the environmental impacts of investments are under discussion. Often, the campus debates focus on fossil fuel companies, especially the 200 that possess the largest fossil fuel reserves. Student divestment movements on campuses across the world have pushed their universities to remove money from these companies, which represent the problems caused by the entire sector. At some schools, like Harvard and Yale, students have been turned down by their universities or handed pathetic substitutes for real divestment. Even at Stanford, which did agree to divestment, direct investments have only been removed from coal, which is a tiny fraction of their endowment.
The issue isn’t just limited to those 200 companies, or even just to fossil fuels. The scope of unsustainable investment practices is much larger. It is inherent to the investment process itself. To really address this systemic problem, institutions must not only remove themselves from certain problematic investments, but also develop a new way to screen assets for the hidden costs of their endowments. This reassessment of costs will almost certainly require divesting from many kinds of companies hurting the environment through high carbon emissions, deforestation, or funding for climate change denial. It must also include a process for keeping future investments out of similarly harmful companies, to gradually and permanently reduce the carbon footprint of institutional endowments. This is where divestment movements have not reached their full potential: there is no plan to retain the gains made from divestment as the market shifts, new companies arise, or existing ones change.
The Princeton Sustainable Investment Initiative (PSII) seeks to build upon and broaden the scope of previous divestment efforts. It begins by calling for a few introductory steps, including signing onto both the United Nations’ Principles for Responsible Investment and the Carbon Disclosure Project, which encourages companies to disclose information about their emissions. These first steps are simple ways for the University to demonstrate its commitment to more long-term, systemic change, particularly since the remainder of the proposal will take several years to achieve its full impact.
To monitor that impact, as well as assess the initial size of the endowment’s environmental harms, the proposal requests that the University release an annual report detailing the carbon footprint of the endowment. This is part of the Initiative’s broader goal of challenging the current perception of the endowment as a wholly separate entity, removed from the rest of campus. All too often, students and the administration focus solely on the environmental impacts of on-campus initiatives, but the endowment is just as much a part of Princeton as its buildings. When our money funds global environmental degradation and the acceleration of climate change, we are responsible for a share of those harms. We have understood this in the past, and divested from companies involved in apartheid South Africa and genocide in Darfur. Climate change deserves this type of strong response. Even as Princeton seeks to reduce its on-campus emissions by installing solar panels and constructing efficient new academic buildings, it undermines these gains with every dollar the Princeton Investment Company (PRINCO) invests in companies that hurt the environment. By publicly acknowledging the carbon footprint of the endowment, the University would recognize the positive impact its investments can make and partially quantify the progress being made towards more sustainable financial practices and lower carbon emissions funded by the endowment.
The centerpiece of the proposal is the formation of a democratically elected committee, composed of faculty, students, and administrators, including members of PRINCO. This committee would be tasked with doing in-depth research into all possible options that would lead to more environmentally sustainable investment practices while still maintaining high returns on the endowment. Experts in the field, including investors who already manage green portfolios and other universities that have begun this process are only a few of the many resources this committee could obtain valuable information from. They would also be responsible for deciding which companies are most harmful and what are acceptable investments. The guidelines developed by this committee would then be put through a trial period to gather information about which processes are too difficult to implement and which are ineffective, as well as what works. This would only be applied for a limited time to a few asset managers and would help determine how to best maintain the valuable relationships PRINCO has developed with its managers over the years. This information would be used to adjust the guidelines, which would then be implemented across the endowment.
Environmentally sustainable investment is, of course, an incredibly complicated issue, and divestment alone is not a complete solution. Do we want to divest from companies committing massive amounts of deforestation? Should we file shareholder resolutions against funding the denial of climate change? Do we want to continue to invest in fossil fuel companies that are working hard to be part of an energy transition to a renewable future? How do we set long-term goals for the reduction of our endowment’s environmental footprint, like those we set for our physical campus? Do we want to invest more in renewable energy companies and green alternatives to carbon-intensive industries? Are we willing to make some economic sacrifices in order to minimize our financial support of environmental destruction? All of these are important questions that require in-depth research. Our project is large in scope, which is why we need a committee dedicated to investigating this issue’s many nuances.
Princeton is well suited to lead on the issue of sustainable investment by adopting our plan. Princeton has a massive $21 billion endowment, the largest endowment per capita of any university. While many reports, including the study by the Aperio Group called “Do the Investment Math: Building a Carbon Free Portfolio,” say that sustainable investment processes are unlikely to have a significant impact on the incredible returns Princeton gets, our unique position means that we have room to be less worried than other universities about the financial impact. It is also part of our responsibility as an institution with incredible intellectual resources to participate in this critical process. We have some of the best financial minds working for PRINCO and on our faculty who could contribute to innovative and sustainable solutions.
As a leading research institution, we should lead a comprehensive evaluation of the problem of investment impacts on the environment and its potential solutions. Other recognizable institutions, including the Rockefeller Foundation and Stanford University, have taken major steps forward and divested some or all of their holdings from fossil fuels. It is time for us to take the next step and devise an endowment-wide process to implement the changes that these other institutions have started to make.
Princeton stands as a role model, both for other institutions and for its own students. Each year, graduates are funneled directly into the finance industry, having come from a supposedly ethical institution that still invests heavily in unsustainable practices. Maybe they recognize that solar panels for their roofs or motion sensors for their lights are important personal steps to take, but they do not see the importance of using every possible method to combat climate change and protect the environment. Princeton students across all disciplines will continue to neglect the long-term costs of environmental degradation and the rapid growth of this problem as they go about their work. This institution has a chance to shape the next generation of investors, policy-makers, and educators by setting an example. Princeton lists sustainability as one of its core values—students should see their University live up to its own ideals.
Without a doubt, this process will take a lot of work. Many hours will go into the research and construction of guidelines, but the tangible impact that follows will be well worth it. There are a number of asset managers that have environmentally friendly portfolios and green options for investors, but an industry-wide shift to these kinds of practices is necessary to make a real difference on climate change and its systemic causes. This can only happen if the demand is there; Princeton can play an important role in creating that demand.
The Princeton Sustainable Investment Initiative has already gathered almost 1,600 signatures from students, faculty, alumni, and staff. There is an incredible amount of support for this movement on Princeton’s campus. PSII has also met with the Resources Committee for dialogue and discussion with the administration, with the hopes that they will respond positively and pass the proposal on to the Board of Trustees for approval to start this process. If a leading educational institution like Princeton steps up and publicly announces its commitment to the transition and follows through with it, other Universities and endowments are likely to follow suit. Once the ball starts rolling, a massive and much-needed change can sweep through financial institutions and our market system can stop standing in the way of a holistic response to the incredible dangers of climate change.