The world gathering in Egypt for COP27 reminds us of the urgency of our collective fight against climate change. Faculty, student, and staff attendees from Penn represent the energy and talent that so many Penn community members contribute to this crucial effort. This is an opportune moment to share our thoughts on the role of Penn’s endowment in combatting climate change. The complexity of the issue and the urgency of the climate challenge merit a thoughtful consideration and explanation of Penn’s policies.
Penn’s endowment exists to provide long-term support for Penn’s educational mission. This year, Penn will spend a record $960 million from its endowment to support student financial aid, faculty salaries, faculty teaching and research, Penn’s health system, and countless other programs that rely heavily on endowment spending. While the core purpose of Penn’s endowment is to provide this financial support, some have argued that large endowments should play a role in mitigating climate change and, in particular, that fossil fuels do not have a place in university endowments.
We all share the same goal of a decarbonized economy. The significant role that fossil fuels play in today’s world, however, make policy decisions complex. We must move away from fossil fuels, but we can only do so completely once we can produce abundant, affordable, and secure energy from carbon-free sources. This energy transition still requires trillions of dollars in new investments, major new policy developments, and significant technology advances. Even as we are moving down the path towards our collective goal, society will still have to consume fossil fuels. Selling fossil fuel investments does not end fossil fuel production or create clean energy alternatives, and it risks transferring ownership to buyers who may care little for the environmental consequences of their actions. Europe’s energy crisis painfully highlights the world’s inability to immediately pivot to clean energy sources. It also demonstrates that high energy prices harm society’s most vulnerable and that control of energy supplies matters both to global security and to the environment.
Penn’s investment program does not hide from this complexity. Rather, we take a nuanced approach to determining appropriate policies, and we subject our thinking to ongoing review. Our primary goal will always be to generate strong risk-adjusted returns to ensure support for Penn’s educational mission. Our policies recognize that the use of fossil fuels accelerates climate change, that society must transition to a carbon-free economy without punishing the world’s most economically vulnerable, and that climate change creates investment risks that we must consider. Reflecting on these factors, Penn established a significant and overarching goal of achieving net-zero carbon emissions across the endowment by 2050. To date we have taken several steps that advance this broad goal.
First, we have altered our approach to investments held in Penn’s name. Two years ago, the University announced that it did not directly hold any companies focused on the carbon-intensive production of tar sands or thermal coal. Today, Penn does not directly hold investments in any companies focused on the production of fossil fuels. This includes Penn holding no investments in two hundred of the companies with the largest potential carbon emissions content in their reserves1.
Second, our net-zero goal has led to changes to our relationships with our external investment managers. As is typical for universities and foundations, most of Penn’s endowment is held and managed by external investment firms, rather than being directly invested by the University’s Office of Investments. Last year, Penn announced the cessation of new commitments to private equity vehicles devoted to fossil fuels. In addition, we require our managers to factor the implications of a de-carbonizing economy into their investment decisions. We encourage our managers to support or push the companies they invest in to make the business changes needed to achieve emissions reductions. If the underlying companies are not responsive to constructive proposals for emissions reduction, or if they fail to show credible progress towards meaningful goals, then we expect Penn’s managers to make a rigorous evaluation of whether the positions remain appropriate investments.
Finally, we are proactively supporting the energy transition by identifying promising investments that are part of it. The Office of Investments has allocated capital to several external investment managers who exclusively focus on making investments in this area. These investments are consistent with our primary goal of maximizing long-term returns and should also actively contribute to decarbonization. At the same time, many of our other external investment managers have increasingly found compelling investments related to the energy transition. In aggregate, we estimate that approximately $250 million of the endowment is invested in transition-related investments. Such investments will grow over time given the focus of the Office of Investments.
Penn’s teaching and research will always be our most powerful tools for answering Ben Franklin’s call to do good in the world. Penn’s endowment, if stewarded responsibly, can provide perpetual support for those core and essential University missions. Our endowment’s net-zero goal, our desire to support real world decarbonization, and our hundreds of millions of dollars of investments in the energy transition are all elements of that stewardship. As we move forward we will continually subject our approach to careful review, weigh any evolution of relevant facts, and communicate with the community as our policies evolve. With the endowment providing critical financial support for the efforts of Penn’s amazing faculty, students, and staff, Penn is a powerful, creative, and determined force in the global effort against climate change.
1Based upon The Carbon Underground 200TM, January 2021.