Asset AllocationJune 21, 2016

Cambridge Endowment Warns its Managers on Carbon Risk

Engagement trumps divestment for the $8.7 billion British university fund.

Reported by Featured Author

The University of Cambridge’s £5.9 billion ($8.7 billion) endowment has written to its asset managers urging them to engage on long-term climate-related risks.

“A tokenistic approach may be counterproductive, as there is no guarantee that a desired outcome could be achieved merely by selling a particular share or other investment.”CIO Nick Cavalla and Vice-Chancellor Professor Sir Leszek Borysiewicz sent the letter following an “in-depth analysis” of the fund’s portfolio, according to a university spokesperson. They received input from Yale University CIO David Swensen and Allianz’s Senior Economic Advisor Mohamed El-Erian, among others.

While the report and letter stopped short of promoting divestment from fossil fuel-related companies—as demanded by student and media campaigns—it acknowledged that “future action by governments, including, for example, fiscal and regulatory change concerning carbon, is likely to affect the economic attraction of particular investments for the long term.”

Cambridge’s endowment has “no exposure to the most pollutive industries, such as thermal coal and tar sands” as well as “negligible” exposure to other companies linked to fossil fuels, the spokesperson added.

“Climate change is the deepest environmental problem of our times,” Cavalla and Borysiewicz said in the letter to managers. However, they added that divestment was considered “neither an appropriate ethical, nor indeed a practical, policy.”

“A tokenistic approach may be counterproductive, as there is no guarantee that a desired outcome could be achieved merely by selling a particular share or other investment,” they wrote. “Instead, the university intends where possible to pursue a constructive process of engagement and, given the office’s intermediated investment model, reliance will be placed on working with its selected investment managers.”

Cavalla and Borysiewicz warned that potential carbon taxation and other laws relating to pollution were “likely to impact meaningfully on the economic returns of the least energy efficient and the most polluting industries,” with knock-on effects for many companies.

“Nevertheless, our economic wellbeing will depend on the combustion of fossil fuels for many years to come, as the world makes the transition to a lower carbon future,” they added. “The more enlightened operators in this area are likely to have better long-term success as businesses if they anticipate policy and regulatory changes, seek to invest in research, and to diversify away from the most environmentally damaging activities.”

The investment office planned to engage closely with managers and exercise its voting rights where feasible, Cavalla and Borysiewicz concluded.

Cambridge’s decision echoes that of its neighbor Oxford University, which came under pressure two years ago to divest from fossil fuel companies but elected for a more nuanced approach.