Yale’s Swensen: Consider Climate Change When Investing

"The Investments Office bases its approach to global warming on the conclusion that greenhouse gas emissions pose a grave threat to human existence," Swensen wrote in a letter to Yale's external investment managers. "Climate change (caused by deforestation and emissions of carbon dioxide, methane and other gases) creates a substantial risk of significant changes to the world's ecosystem and in actions to address those changes, making consideration of the impact of climate change essential when evaluating investment opportunities."

Rather than divesting, Yale said it would emphasize companies that "take into account the effects of climate change and anticipate possible regulatory responses with actions that recognize the externalities produced by the combustion of fossil fuels," according to a statement from Yale's Corporation Committee on Investor Responsibility.

In his letter, Swensen asked of Yale's external investment managers "that when making investment decisions on the University's behalf, you assess the greenhouse gas footprint of prospective investments, the direct costs of the consequences of climate change on expected returns, and the costs of policies aimed at reducing greenhouse gas emissions on expected returns." Simply put, he added, those investments with relatively small greenhouse gas footprints will be advantaged relative to those investments with relatively large greenhouse gas footprints.

A 2014 survey, "Climate action and profitability: CDP S&P 500 Climate Change Report 2014," showed that S&P 500 firms that are actively preparing for climate change demonstrated an 18% higher return on equity and 50% lower volatility of earnings.

Swensen, in his letter, asked its external investment managers to talk with company managements about the financial risks of climate change and the financial implications of current and prospective government policies to reduce greenhouse gas emissions – and encourage them to mitigate financial risks and to increase financial returns by cutting emissions.

"Yale asks you to avoid companies that refuse to acknowledge the social and financial costs of climate change and that fail to take economically sensible steps to reduce greenhouse gas emissions," he wrote.

One example of the financial risks of climate change: Last summer, Investment Advisor magazine reported on Farmers Insurance's nine class-action lawsuits against dozens of municipalities around Chicago for "failing to prepare adequately for heavy rains and flooding caused by increasingly warmer temperatures — in short, by climate change."

Swensen is quick to realize that analyzing the greenhouse gas emissions associated with investments is no easy task.

"As in all aspects of investment analysis, decisions will be based on incomplete, imperfect information," he wrote in his letter. "That said, consideration of the risks associated with climate change should produce higher-quality portfolios."

—Related on ThinkAdvisor:

• How to Invest Like Yale's David Swensen
• Does Your Client Want to Divest From Fossil Fuels?
• Fossil Fuels: More International Investment Risk Than Opportunity?
• Firms Prepping for Climate Change Have Higher ROE: Study
• Wet Suit: Insurers Seek Damages From Towns Over Climate Change