Developments in world financial markets seem to occur more quickly every year, requiring ever-higher levels of expertise and experience on the part of investment committees. Climate change is a more slowly-evolving issue that will require a more strategic approach from trustees and investments committees. Environmental regulations like The Paris Agreement and the Clean Power Plan clearly raise important investment considerations for institutional investors. In addition, beyond portfolio considerations, practical issues suggest themselves.
For colleges and universities:
- Will the Paris Agreement and the Plan mean higher or lower energy costs for institutions that maintain extensive campus facilities?
- What will the impact be on tuition and fees?
For private and community foundations:
- How will the proposed regulations affect the various sustainability initiatives that many of these institutions have supported?
- How will private and community foundation grantees be affected?
These questions, and the implications for portfolio risk and return, are difficult to answer definitively in the current highly fluid decision-making environment. While there will doubtless be a wide range of ways in which states do or do not implement the proposed regulations, the announcement of the Clean Power Plan has set in motion a process to which fiduciaries should be attentive, particularly with respect to the effect of the regulations — whatever their final form — on the state or states in which they operate.
From the point of view of a nonprofit fiduciary, the place to begin an analysis of the implications of the Clean Power Plan is by reviewing the institution’s investment policy statement (IPS). Here, assuming that the board is open to or actively considering the possibility of a low carbon portfolio, a number of questions arise:
- How will introduction of a low carbon strategy affect the asset allocation targets and ranges in the policy portfolio?
- How might the portfolio’s current expected returns and sustainable spending rates be affected?
- How will implementation of a low carbon strategy affect risk targets?
- What other portfolio changes might be needed to meet the institution’s required rate of return?
- Are there implications for the institution’s mission?
Fiduciaries may want to consider, as one potential solution, a well-diversified, multi-asset low carbon investment portfolio that reduces risk by systematically limiting allocations to carbon-based assets while maintaining the diversification benefit that comes from a lower level of controlled exposure.