Chief Investment Officer of the Regents
Statement on fossil fuels, climate change and UC’s investment strategy
Richard Sherman, Jagdeep Singh Bachher and Amy Myers Jaffe
June 8, 2017
The University of California’s commitment to the fight against climate change is unwavering and steadfast regardless of political winds. We are proud of what the University of California has done to date. UC was the first university to join with Mission Innovation a global initiative to double clean energy research and development investment worldwide over five years. It has committed to carbon neutrality by 2025 for its ten campuses, five medical centers, and three national labs. UC has signed agreements to buy 80 megawatts of solar power, the largest amount owned by any U.S. university. Its campuses host carbon neutral communities and smart homes at the UC Davis West Village, micro electricity grids at UC San Diego, and battery storage facilities at UC Riverside. The U.S. Environmental Protection Agency has named the UC among the nation’s distinguished leaders in the use of clean, renewable energy.
The University of California is committed to playing a proactive role in the energy transition and has to think carefully about the various avenues to navigate this journey. For starters, we are, to date, the only institutional investor that is a signatory to Bill Gates’ Breakthrough Energy Coalition whose mission is to accelerate clean energy solutions. We are investing in a major clean energy developer focused on wind, solar and renewable enabling transmission infrastructure. Earlier this year, we contributed $50 million to Congruent Ventures, a new energy seed stage venture capital fund. We are also allocating $100 million to a fund that will target high-performing, mission-based companies that deploy clean energy, health, water and sustainable agriculture solutions.
Student activists are advocating for the University of California to fully and unequivocally divest from fossil fuels. The students would like the university to take this step to use its financial power to “inspire social and institutional change.” Indeed, the fossil fuel divestment movement has become one of the signature campaigns of climate change activism. The movement has achieved many victories, including raising awareness regarding the deleterious role unfettered burning of fossil fuels has on the environment and forcing investors to consider more resolutely the financial implications of dealing with climate change. These are important accomplishments. Still, full divestment from fossil fuel company securities remains the target for many activists, including the student organization Fossil Free UC. Over 600 UC students and 700 UC faculty have raised their voices to this call to action.
Does UC’s climate leadership position mean it is time to fully divest from fossil fuels? We continue to look critically at all of our fossil fuel investments on regular basis under our sustainable investment lens. We agree that our work to position our portfolio to acknowledge the transition to low carbon energy is an imperative. To respond to calls that we take an even more active stance, the UC Board of Regents will consider a policy statement on climate change as part of a planned upcoming review of our formal investment policy guidelines.
As we join together as a community in the fight against climate change, it is vital nonetheless to recognize the Office of the Chief Investment Officer of University of California’s (OCIO) fiduciary responsibility to over 500,000 current and former employees to protect and grow our retirement assets. Symbolic gestures must be placed in this context of the financial health of our university endowment and retirement plan. We respect the voice of UC students who would like to argue otherwise. We listen carefully to their concerns and take their views into account. We are deeply concerned about the future of this generation and their children’s generation. But we do not anticipate the Board of Regents will vote immediately for full divestment now and here’s why.
Scientific consensus on climate change is real. But we are also mindful that the scientific projections for how to hold the earth’s temperature rise to 2 degrees, or even 1.5 degrees, require a reduction, not a complete elimination, of global fossil fuel use, according to the UN Intergovernmental Panel on Climate Change, the International Energy Agency and UC’s Institutes for Transportation Studies. Moreover, the same social justice ethics that drives student activism dictates that society weighs an energy transition that sustains mobility for millions of people who cannot currently afford advanced vehicle services.
In September 2014, aligning UC’s investments arm with the goals of the broader institution, the OCIO developed and adopted a framework on sustainable investing. The framework, developed with input from the UC Board of Regents, UC students, faculty, staff, and other stakeholders, is designed to guide the process of evaluating environmental sustainability, social responsibility and governance (ESG) into the investment evaluation process of the OCIO with the same weight as other material risk factors influencing investment decision making.
The framework is not window dressing. Since its enactment, it has helped the OCIO identify and address ongoing climate change risks as part of its investment analysis; we have sold holdings in the world’s largest coal mining firms and firms that predominately generate profits from Canadian oil sands mining. We found through careful financial analysis that investing in these business entities holds sufficient risk to outweigh any short-term benefits that markets might offer. But we have also gained traction by engaging, alongside our peers, with fossil fuel and mining companies that can pivot their businesses to consider climate solutions. Following shareholder resolutions and active engagement, many of the companies targeted by divestment campaigns are increasing investments in renewable energy, lithium mining, hydrogen and other promising technologies that will be part of our energy tomorrow. These billions of dollars in shifting capital into clean energy are important to the energy transition, just like similar capital commitments made by socially progressive clean energy companies.
As the world progresses to a new energy paradigm, the UC’s energy investments will follow suit. Our holdings of securities of oil and gas drilling and refining firms now represent only about 3 percent of UC’s total public equity holdings, below the real world average of 6 to 7 percent share of the global economy. Those statistics are based on the general definition of oil and gas, as provided by the Global Industry Classification Standards (GICS) classifications. If we apply the alternative metric of Carbon Underground 200, suggested by Bill McKibbon, CarbonTracker and other important climate activists, our oil and gas holdings are even smaller at 2.8 percent of UC’s total public equity holdings. Of the companies we own that are within the Carbon Underground 200, 5 of the largest oil companies have announced a commitment to clean energy investing and several more have exited the oil sands and Arctic acreage, after completing climate resiliency testing under pressure from shareholders like UC, CalPERS, and CalSTRS. Similarly, four of the world’s largest mining companies on the Carbon Underground 200 list are reducing holdings in coal and shifting to other markets such as lithium, again responding to shareholders. The UC OCIO is also making shifts. In 2017, UC reduced its holdings of oil and gas resources in its real assets portfolio by $200 million at the same time increasing investments in clean energy and sustainable agriculture.
It is our intention to shift our holdings to cleaner energy investments over time based on market trends and opportunities rather than to give ourselves an arbitrary deadline that might put our financial stakeholders at risk. By doing so, we hope to strike a harmonious balance between our commitment to clean energy and our fiduciary responsibility to our endowment and our retirees. We will continue to report on our progress, with an eye to building trust in our UC community that we are listening and have the UC’s long-term future in mind in all that we do.
Richard Sherman is the chief executive officer of the David Geffen Company, an investment management firm. He is chairman of the investments subcommittee of the University of California Board of Regents.
Jagdeep Singh Bachher is the chief investment officer and vice president of investments of the Office of the Chief Investment Officer of the UC Regents.
Amy Myers Jaffe is senior advisor, energy and sustainability, at the Office of the Chief Investment Officer of the UC Regents and executive director, energy and sustainability at UC Davis.