UC Investments and Climate Change

Risk Factors Have Changed with the Weather and Sustainability Issues

Years from now, 2015 will be understood as a pivotal year for climate policy in California, in the United States, and at the United Nations’ upcoming climate meetings in Paris. At the University of California, with investment assets of nearly $100 billion, we believe the response to this progress on climate policy needs to be more than a divestment-or-nothing reflex. Blanket divestment from fossil fuels grabs headlines but doesn’t actively address climate change.

Over the past few months, the university has sold its remaining direct holdings in coal-mining and oil-sands-focused companies. The move is part of our new risk-review process that more comprehensively considers environmental sustainability, social responsibility and governance risks in our investment strategy.

We believe, like our colleagues at the state’s pension investment fund CalPERS, that climate change is an active risk factor to consider when we evaluate investment opportunities. We will look at carbon prices when we assess electric utility investments. And we believe that investing in solutions to climate change will have more significant impact than a blanket divestment policy. That’s why we are committing $1 billion toward finding solutions to climate change.

We are also looking at how we can support UC’s Global Food Initiative that aims to develop solutions to food security, health, and sustainable agriculture.

Our approach to sustainability counters the timeworn trope that institutional investors can adopt a values-based investment strategy only if they can guarantee targeted returns. In our view, institutions that ignore societal values in their investment strategy imperil their bottom line — today and for years to come.

Social media can turn what might have been parochial trends into overnight scandals of national and global scale. The power of social media and big data is so transformational that hedge funds that successfully integrate social media sentiment into financial trading programs are often outperforming traditional market players.

In this new world, environmental, social, and governance issues spread so quickly online that they could someday be as crucial as foreign exchange or sovereign risk in calculating an investment’s projected internal rate of return.

As a global leader in sustainability research and practice, the University of California has been wary of coal-mining and oil-sands investments for a while. Our sell-off of the small holdings in our active portfolio acknowledges the growing regulatory and market risks associated with these businesses.

More tellingly, hedge funds that were short-selling coal shares this year have been rewarded handsomely for that choice. Over the same period, Goldman Sachs struggled to write off its $200 million investment in a Colombian coal mine as labor unrest and other operational challenges racked up substantial losses.

As environmental, social, and governance risks turn potential investor profits into huge losses, institutional investors increasingly are adding staff just to field stakeholder inquiries about ethically questionable holdings.

In this new world, fund managers will need to offer services that consider these concerns rather than hide behind Wall Street’s old-school “sin” industry profitability argument. While some such industries and poorly governed firms may continue to make money in the short term, many will ultimately pose great financial risks to institutional investors.

We believe that fiduciary duty now requires systematic attention to sustainability factors.

We have learned that when we consider sustainability as a risk factor, our investment analysis improves. We are confident that aligning with UC stakeholder community values that consider climate change, sustainability, diversity, economic fairness, and transparency will improve our portfolio’s bottom line.

This year, we joined the White House in an effort to help long-term investors such as ourselves — pension funds, endowments, sovereign funds, family offices and foundations — identify, screen, assess, and invest in companies that offer the most promising, and potentially profitable, solutions to climate change.

We believe the performance of such investments will unlock billions and potentially trillions of dollars within those key investor communities to help companies bridge the gap between innovation and commercialization, and speed the distribution of technology that reduces global greenhouse gas emissions.

As our students return to campus with the certainty of purpose that divestment is the only solution to society’s woes, we are integrating sustainability into our investment framework as a philosophy of long-term investing in and for the future, and as a key metric for evaluating risk.

By doing so, we will not only be able to generate competitive, risk-adjusted, long-term investment returns, but also help save the world.

Jagdeep Singh Bachher is the chief investment officer of the University of California regents.


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