Responsible Investment

UPDATED: May 24, 2012, at 10:40 p.m.

0n April 3, approximately 25 students, including members of the Student Labor Action Movement, union organizers, and Harvard employees, gathered in front of Massachusetts Hall to celebrate Harvard’s decision not to reinvest in HEI Hotels & Resorts—a hotel chain that had come under fire in recent years for repeated allegations of failure to comply with labor regulations.

Five months earlier, many of the same students had spent the fall campaigning against Harvard’s holdings in HEI with the Occupy Harvard movement, which listed non-reinvestment in HEI among its original demands drafted in November 2011.

But while student advocates had been pushing for Harvard not to reinvest in HEI because of ethical concerns, Harvard Management Company President and CEO Jane L. Mendillo stressed that HMC’s decision had been based purely on financial considerations.

“Importantly, this decision was based on factors related to the HMC portfolio and its strategy and needs; not on concerns about HEI’s practices,” Mendillo wrote an email to University President Drew G. Faust.

The discrepancy between Occupy and HMC’s reasoning on HEI is emblematic of a deeper disconnect that exists between the investing philosophies of activists and of HMC portfolio managers. While many students are pushing for Harvard to embrace socially responsible investment standards, HMC insists that its primary responsibility is to generate strong returns for the University, not to advance social change through the markets.

Over the past year, the push for SRI—which encourages the incorporation of environmental, social, and governance concerns into a company’s evaluation of investments—has gained momentum on Harvard’s campus, culminating in the founding of a new group called Responsible Investment at Harvard. RI members say HMC, which is tasked with overseeing the investment of Harvard’s $32 billion endowment, needs to create a transparent and consistent policy that more closely reflects the University’s values in the educational sphere.

Mendillo says the group already “integrates sustainable investment considerations into all of its investment decisions.” But RI says that given the company’s limited transparency, it is impossible to judge the degree to which Harvard considers responsible investment factors.

Despite the increased focus on responsible investment, there remains a lack of consensus among activists and University administrators about what it would entail for Harvard to be socially responsible or sustainable in its investing strategy. And because HMC is reluctant to share information relating to its investments, the University’s current approach to investments may be more socially conscious than advocacy groups realize.

DEFINING RESPONSIBILITY

As Occupy Harvard firmly planted itself in the Yard and tensions between protesters and University administrators mounted, the idea for Responsible Investment at Harvard began to form.

“People just started talking about these ideas,” said Senan Ebrahim ’12, former UC president and one of the group’s founders. “Our class has a certain perspective that we can be agents for a positive change in the world.”

RI was founded in the fall with the goal of “changing the way Harvard manages its money.” Since then, 32 student groups have pledged support for RI’s mission. Building on this wave of support, RI launched the Fair Harvard Fund, a campaign for a Social Choice Fund within Harvard’s endowment that would be invested with an eye toward social good. As of mid-May, the fund had raised almost $10,000 from more than 400 donors.

Faust says the University will look into the possibility of creating a fund similar to the one requested by RI “for those who wish to donate in that way.”

“We just have to figure out what the various pros and cons are,” she says.

But determining the pros and cons—and crafting a responsible investment strategy in general—might be easier said than done. Among activists and experts alike, there are inconsistencies in the definition of “responsible” or “sustainable” when it comes to investment policy.

“To be a responsible investor requires transparency, accountability, and consideration of [extra-financial] factors when making investment decisions,” says Samuel F. Wohns ’14, one of RI’s founders and a Crimson magazine editor.

Graduate student and member of RI Justin A. Junge writes in an email he thinks a responsible investor should aim to “do no evil” and “attempt to do more good.”

But experts on responsible investing say the definition of what constitutes a responsible investment can vary from company to company. Steve Lydenberg, a senior research fellow at the Hauser Center’s Initiative for Responsible Investment, says that he prefers to think of responsible investing as “knowing an investment,” which involves “not only knowing the financial implications of an investment but knowing the social and environmental implications of an investment.”

The issue is further complicated by the fact that a company may invest in another company, which invests in another company. Peeling back the layers of an investment can be difficult, and as investors are shielded from potential ethical violations by several degrees of separation, the line of responsibility is increasingly blurred.

Although the standard used within the financial community is generally two degrees of separation, RI has not yet settled on a set policy, according to RI member Collin A. Rees ’12.

Eventually RI will be forced to define its standards, but doing so will require finding “something that works for Harvard,” Rees says.

The uncertainty about where to draw the line for Harvard may stem in part from a larger disagreement about the purpose of Harvard’s investments.

While RI sees socially responsible investing as a method of effecting social change, Mendillo looks at Harvard’s investments as a means of supporting the University’s primary educational mission. Mendillo says the potential for Harvard to impart social change lies less in its investments than it does in the areas supported by the returns generated from those investments.

“Harvard’s biggest impact is really through education and research and its financial aid policies,” Mendillo says. “Our job is producing strong long-term returns that allow Harvard to fulfill its important mission.”

CHECKS AND BALANCES

HMC says that the nature of their investment strategy, which prioritizes long-term returns, requires it to consider sustainable investing in its decisions already. In the process of conducting due diligence on its investments, HMC considers issues related to the environment, labor practices, and corporate governance because, according to Mendillo, “investments that fall short in any of these areas are unlikely to generate the strong long-term returns we require.”

“If there’s a concern...we are not going to be interested in the opportunity because we want an investment that we can sustainably grow for a long period of time,” Mendillo says.

HMC also stands by its policy not to invest in certain industries, including cigarette companies and the businesses that provide packaging and filters for tobacco products. Harvard has also promised to steer clear of PetroChina since its 2005 decision to divest from the company because of its connection to the Sudanese government.

But instead of non-investment or divestment, Harvard mainly relies on its power as a shareholder to influence companies’ practices through proxy voting. Two committees are charged with evaluating the companies’ proposals. This checks and balances systems was integrated into HMC’s money management system after the University came under fire in 1972 for its investments in Gulf Oil, which allegedly aided the Portuguese government in fighting rebels in Angola.

In response to student outrage, Derek C. Bok, who was University president at the time, created the Advisory Committee on Shareholder Responsibility and the Corporation Committee on Shareholder Responsibility. Tasked with reviewing “shareholder resolutions raising issues of social responsibility,” the groups were created to ensure that Harvard’s publicly traded investments be subjected to a degree of ethical scrutiny.

The ACSR, which includes four faculty members, four alumni, one undergraduate, and three graduate students, meets annually over dinners at the Harvard Faculty Club to discuss the issues that require shareholder approval. It reports its recommendations to the CCSR, a three-person subcommittee of the Harvard Corporation—the University’s highest governing body—which ultimately decides how to vote on each issue.

Although the CCSR is not required to follow the advice of the ACSR, their views align the majority of the time. According the CCSR’s 2010-11 annual report, the Corporation subcommittee agreed with the ACSR in 29 out of the 38 cases reviewed that year.

RI hopes to reform the ACSR and CCSR, insisting that the two committees have lost influence and relevance since their founding 40 years ago. Changes in the structure of financial markets have led Harvard to put less of its money in publicly traded equities, reducing the portion of Harvard’s investments that are actually reviewed by the committees. According to the annual report, the number of proposals voted on by the University dropped from 111 in 2008 to 19 in 2009 “due to changes in asset allocation.”

Though Rees says the ACSR and CCSR are good in theory, “in reality [they] don’t have a lot of power and need to be reformed.” Rees and other advocates argue that the University should allow the committees to review a larger portion of Harvard investments and consider opening their meetings to other members of the Harvard community, increasing the transparency of an otherwise secretive review process.

TRANSPARENCY

HMC’s opaqueness has become a point of contention between students in RI and University administrators, and may account for the widespread misconception that Harvard ignores social factors when making investment decisions.

Students acknowledge that the University may already be engaging in what would in their opinion constitute an acceptable amount of responsible investing. But they say that so long as the Harvard community is left uninformed about any steps the University already takes to invest responsibly, advocates will continue to question HMC’s investment strategy.

While RI recognizes that Harvard cannot release all information regarding its investment portfolio, group members say that Harvard should release a list of its previous investments either months or years after they are made. They point to schools like Columbia University that adhere to such a policy as proof that disclosure need not harm investment returns.

“Transparency ideally would be the next step, but I also think we can’t sit around and wait for Harvard to become more transparent when it’s been run un-transparently for the last 300 years,” Ebrahim says.

Without more openness regarding how HMC manages its money, RI says, there is no way students can gauge how responsible an investor the University really is.

“I believe that [HMC is] following some of these processes. That’s what HMC says and I believe that’s true,” says Rees. “But we believe that a more codified set of rules or more stringent guidelines, including more transparency, is something that can really help us get rid of all the bad [investments] and something that can serve as a model for other universities and endowments.”

—Staff writer Hana N. Rouse can be reached at hrouse@college.harvard.edu.