Richard Slocum oversees investments at Harvard Management Co., the U.S.'s largest college endowment, with almost $42 billion of assets as of June 2020. By the time he took over the job in March 2017, he'd managed institutional money for more than 20 years, and before that had worked at some of the top banks in New York helping companies access institutional private markets.
But even in spite of all that experience, he's starting from square one when it comes to zeroing out the Harvard endowment's greenhouse gas emissions, which the university pledged last year that it would do by 2050. There is as yet no industry standard for what a net-zero portfolio even means, leaving investors and portfolio managers largely in the dark as to how they should try to get there.
Harvard's move comes after years of sustained activism from students calling for fossil-fuel divestment and amidst increasingly urgent demands from investors that financial institutions withdraw their support for polluting businesses. But getting out is tricky, and HMC's portfolio of complicated investments will make the process all the more difficult.
As part of Harvard's exit plan from greenhouse gas, Mr. Slocum is proposing a novel way to turn short-selling within a hedge fund portfolio into a type of offset, combining one aspect of financial engineering with another. An offset is a way to claim credit for eliminating greenhouse gases, typically by paying to protect trees or fund clean energy. Here's how Mr. Slocum explains his idea:
Short-seller A borrows shares issued by a heavy carbon emitter from Investor B, and immediately sells those shares to Investor C. At this point, both Investor B and Investor C enjoy the benefits and bear the risks of owning those same shares. Both have the same carbon footprint — Investor B still has its original carbon footprint, and Investor C now has one as well. Two investors now have a carbon footprint, where there used to be only one, but overall emissions from the operations of the carbon emitter have not been changed.
Mr. Slocum's solution: Allow Short-seller A to deduct the associated emissions from its emissions footprint. This would permit a short position to function similarly to an offset. This, in turn, makes his suggestion contentious, as the value of offsets is the subject of heated debate among various high-profile standards-setting bodies.
While more than a third of the endowment is managed by hedge funds, short positions are a small part of Harvard's overall portfolio — likely less than 1%, although HMC can't put a precise percentage on it because its hedge fund asset managers typically don't report their individual holdings. But it's a key lever for investors working toward a net-zero world, Mr. Slocum said. Short selling not only puts negative pressure on emitters, in his framework, it also allows them to advocate for changes as activist shareholders.
Mr. Slocum answered Bloomberg Green's questions about his proposal, and about Harvard's carbon-free goals. The interview has been edited and condensed for length and clarity.
Harvard said last year it would create a path for "net zero" greenhouse gas emissions by 2050. Why so long? And how is this different from divestment?
The 2050 timeline was meant to align Harvard's endowment emissions goal with the Paris Agreement. To get to net zero for the planet, technological advancements will play a crucial role. Carbon capture and clean energy production are two critical advancements that need to happen in order to stem the damage done by high-emitting industries. HMC is investing in new technologies that, if successful, could revolutionize numerous high-emitting activities in the economy to meaningfully reduce carbon in the atmosphere.
We'd say the main difference between a net-zero goal and divestment is that a net-zero pledge recognizes that fossil-fuel consumption is part of our near- and probably mid-term reality. We think that addressing both the supply and demand sides of the equation is a more effective way of making a true impact.