'Hard Lines to Draw': Harvard Balances Roles as University, Investor

UPDATED: February 22, 2018 at 7:25 p.m.

Harvard’s investment decisions often grab headlines. Protesters have blockaded administrative buildings and staged sit-ins in downtown Boston to oppose the University’s investments in fossil fuels and private prisons. And University President Drew G. Faust has publicly opined on whether or not it is wise to divest from controversial assets.

Meanwhile, two University committees routinely make a set of less visible—yet ethically challenging—decisions about how to act as a shareholder in its existing investments. At the meetings of these committees, Harvard takes public stances on issues ranging from climate change to the rights of indigenous people in its capacity as a shareholder.

Like any investor in a public company, Harvard must decide how to vote in shareholder elections, which advise a corporation how to act with respect to a certain issue. In 2017, the two committees took up 44 widely different proposals—ranging from a suggestion PepsiCo should curtail pesticide use in order to protect bees to a suggestion Verizon should create a human rights committee to a suggestion Home Depot should be more transparent about equal employment information.

As an educational institution, though, Harvard shies away from taking political stances. Considering ethical responsibilities while remaining apolitical is a difficult balance to strike, according to William F. Lee ’72, the senior fellow of the Harvard Corporation, the University’s highest governing body.

“The line between responsible financial investing, having the University take political positions, and having things that are so antithetical to what we do that we don’t want to be involved, they are hard lines to draw,” Lee said in an interview in fall 2017.

‘Relatively Progressive’

Harvard Management Company, which is responsible for Harvard’s $37.1 billion endowment, works in tandem with two committees on shareholder responsibility issues: the Corporation Committee on Shareholder Responsibility, made up of four members of the Harvard Corporation, and the Advisory Committee on Shareholder Responsibility, comprising four faculty members, four students, and four alumni.

The ACSR deliberates during a compressed “proxy season” in the spring, after proposals are released for consideration by shareholders. The group considers social and environmental issues and gives its recommendations to the CCSR, which makes a final decision on how Harvard should vote. The CCSR is also responsible for monitoring HMC’s implementation of University investment policy—including any decision to divest from particular assets.

Harvard makes investment decisions with environmental, social, and corporate governance (ESG) factors in mind, according to Lee. These factors include issues pertaining to climate change, pollution and worker health, and investors use them to assess risk and maximize long-term returns.

“They’re all about investing prudently and financially soundly, doing it in a responsible way,” Lee, who heads the CCSR, said.

Howell E. Jackson, a professor at Harvard Law School and the chair of the ACSR, said the committee carefully researches and deliberates on every proposal it considers.

“There is actually a huge amount of background reading,” Jackson said.

Once the ACSR makes recommendations about each proxy vote, it sends them to the CCSR, which Jackson said has a tradition of “overwhelmingly following” the ACSR’s recommendations.

Lee agreed, adding that “the overwhelming majority of the time, [the CCSR adopts] their recommendation on how to vote.”

In the unusual cases when the Corporation committee does not accept the ACSR’s recommendation, Jackson said the discrepancy is often because new information emerges about the issue in question. The CCSR publishes an annual report outlining the decisions made on proxies for that year; Lee said the report forms an effort on behalf of the Corporation to be transparent about Harvard’s shareholder votes.

“We’re one of the few universities that discloses how we vote on the proxies, and I think that’s an important part of what we do,” Lee said.

Last year’s report outlines the University’s position on 44 issues, noting a sharp increase in the last few years in the number of proposals relating to political campaign spending. A rationale for the vote outcome and a sketch of the committee’s thought process accompanies each decision. The resulting 35-page report provides a glimpse into Harvard’s approach to investment ethics.

“The University’s posture with respect to socially responsible investing is relatively progressive, I think,” Jackson said.

The ACSR relies heavily on past precedent to make decisions. If a decision breaks with past precedent, their report clarifies why the recommended vote is unique from past decisions. But ESG priorities change over time. Harvard often voted against proposals to publicize political lobbying several years ago, according to Lee, but now consistently votes in favor of them.

Students, faculty, and alumni do not always agree with the University’s approach—and in recent years, some have called on Harvard to take a firmer ethical or political stance on controversial investment issues. The campus activist group Divest Harvard in particular has held rallies, blockaded multiple University buildings, and had its members arrested in protest of the University’s investments in fossil fuels.

Harvard has since “paused” investments in fossil fuels, though University representatives have repeatedly made clear the decision was motivated by fiscal—rather than political or ethical—concerns.

More recently, the Harvard College Project for Justice, a student group, petitioned Harvard to divest from its stake in private prison companies, which the University holds through investment firm Vanguard.

The University has long maintained an official position against divestment as a form of protest. Former University President Derek C. Bok, who led Harvard from 1971 to 1991, outlined in the 1989-1990 President’s Report his argument against divestment in all but extreme circumstances.

“Perhaps the greatest danger in exerting political pressure of this kind is the risk of sacrificing academic independence,” Bok wrote.

Faust responded to calls for divestment from fossil fuels with a letter in 2013 asserting that Harvard would not change its stance.

An Ethical Guide

Beyond shareholder voting, ethics enters directly into Harvard’s investment decisions as well.

ESG factors also guide Harvard’s selection of external managers and ownership of farmland and forests, among other matters.

Incorporating ESG factors often means working with external nonprofits. In 2014, Harvard was the first U.S. university endowment to become a signatory of the United Nations-supported Principles for Responsible Investing, an international network of organizations committed to incorporating ESG factors into shareholder responsibility and investment decisions.

Harvard is also a signatory of the Carbon Disclosure Project, a nonprofit that pushes publicly traded companies to disclose their use of fossil fuels. Harvard sends quarterly letters to non-renewable energy companies requesting that they implement standards for sustainability reporting. Lee said the Corporation will monitor HMC’s actions related to the project.

Harvard uses organizations like the Sustainability Accounting Standards Board, the Forest Stewardship Council, and Global G.A.P to set ESG standards for their investments.

But as HMC cuts its internal staff and moves many investments to external managers—and as it sells its forest land and other natural resources—it is unclear how its approach to responsible investing will develop.

Lee said HMC will work to put ESG principles in place under the new system.

“We’re going to go to a new model which is going to be mostly externally managed. That requires the manner in which you pursue ESG principles be implemented differently, but the ESG principles will continue to guide us,” he said.

HMC spokesperson Patrick McKiernan said Harvard will continue to be committed to social responsibility even under the new system.

“Throughout the life of an investment, we monitor identified ESG risks and work with managers to ensure effective oversight. We also write letters to our team of external managers to inform them of our focus on sustainable investment and commitment to the PRI principles,” McKiernan wrote in an email.

—Staff writer Eli W. Burnes can be reached at eli.burnes@thecrimson.com.

—Staff writer Luke W. Vrotsos can be reached at luke.vrotsos@thecrimson.com. Follow him on Twitter at luke_vrotsos.