Elevating Sustainability in the UC Investment Strategy

TO: Chief Investment Officer Jagdeep Singh Bachher, UC Regents, Student Regent Merhawi Tesfai

FROM: Ashwin Iyer, Cora Murray, Erika Patel, Aster Phan

DATE: May 29, 2024

RE: Elevating Sustainability in the UC Investment Strategy

Executive Summary

The University of California (UC), lauded for its sustainability efforts, faces criticism for continued investments in high-carbon companies like BlackRock and Blackstone. To address this disparity, the UC must consider divesting from Blackstone's Real Estate Income Trust (BREIT) after its 6 year contract expires. Following divestment, the UC should adopt a negative screening policy that excludes high-carbon companies while also redirecting funds toward sustainable investments. These changes will ultimately improve the UC’s environmental footprint while ensuring financial returns. In doing so, the UC can reinforce its commitment to sustainability and set a precedent for other institutions to follow.

Background Summary & Issue Analysis

The UC prides itself on being a global leader in sustainable practices. It has earned this distinction through a 25% reduction in system-wide carbon emissions and several improvements in energy efficiencies since 2009, which have led to savings of $400 million.1 The UC’s guiding goal for sustainability is to eliminate all greenhouse gas emissions by 2045, a target which replaced the previous 2013 commitment to achieve carbon-neutrality by 2025.2 Curbing greenhouse gas emissions will not only address the UC’s climate concerns, but will also advance its interest in advancing equity. Fossil fuels have the greatest impact on traditionally marginalized communities; toxic pollutants produced by fossil fuel plants are most concentrated in marginalized communities, and fossil-fuel driven climate change worsens extreme weather events that disproportionately affect low-income communities of color.

The UC fully divested from fossil fuel indices in 2020. Specifically, the UC screens out companies that own proved and probable reserves of thermal coal, oil, or gas using the MSCI ACWI IMI ex Tobacco ex Fossil Fuel Index for their investments. Additionally, it follows a Sustainable Investment Framework that prioritizes climate change, food and water security, inequality, and the aging population.3 This policy was adopted in 2015 and approached sustainable investment as a form of risk management; rather than a guiding value, sustainability is considered in risk assessment.4

Although the UC presents itself as a leader in Environmental Social Governance (ESG) policy, it heavily invests in companies with large carbon footprints. Notably, the UC has made significant investments into Blackstone, a company whose financial activities support environmental degradation through fossil fuel investment. On January 3, 2023, the UC announced a $4 billion investment in BREIT.5 Shortly after, on January 25, the UC invested an additional $500 million.6 The terms of both investments include an effective 6-year minimum hold period, preventing the UC from full divestment until January 2028.7

Options

Divest Completely from BREIT and Reinvest Sustainably

While the BREIT investments cannot be fully withdrawn before January 2028, the UC should begin divestment from similar investments as soon as legally possible. In the meantime, the UC should create a more sustainable plan for future investments. The UC’s current Sustainable Investment Framework provides a useful foundation for ESG investment. However, this policy allows the UC to invest in companies that financially support fossil fuel usage.8 For example, 83% of Blackstone investments lie in energy, with 52% of these investments involving fossil fuels.9 In 2020 alone, Blackstone-backed power plants produced 18.1 metric tons of carbon dioxide emissions.10 Moving forward, the UC system should follow a strict negative screening protocol to avoid investing in companies with a high carbon footprint. It is evident that this sustainable investment framework must be refined to account for all climate effects that a company may have, rather than only their direct ownings.

Upon divestment from Blackstone, the UCs should redistribute funds to sustainable technology investments. The UCs have stated that one of their goals is to provide early-stage capital to companies that will support the development of sustainable technologies.11 Currently, the UCs have allocated over $1 billion to climate change solutions.12 This investment has produced 3.15 gigawatts of renewable energy and energy in battery storage projects.13 This $1 billion investment is a mere fraction of the amount invested into BREIT. By divesting from Blackstone and similar high-carbon footprint companies, the UC will make more substantial contributions against climate change.

Additionally, Blackstone and other high-carbon companies may be high yield, but clean

energy investments offer more sizable returns. They are roughly twice as profitable as fossil fuel investments.14 The UCs have also acknowledged that fossil fuels are an unacceptable financial risk to the UC’s portfolio.15 This also includes Blackstone, a company that is heavily invested in fossil fuel markets. Therefore, clean energy technology is a more sustainable investment, both environmentally and financially, than Blackstone and other heavily carbon-invested companies.

Thus, the UC system should create a more robust sustainable investment plan that includes divesting from companies related to fossil fuels and reinvesting in clean energy, while also avoiding new investments in any companies with a high carbon footprint. Additionally, when it is legally possible, the UC system should divest from heavily carbon-invested companies, both for financial security and for better sustainability practices.

Produce Robust Reports that Center ESG Goals

The UC produces many reports to communicate frequently and effectively with its various stakeholders. Since 2021, UC Investments has released an annual climate-risk report in conjunction with the Financial Stability Board’s Task Force on Climate Related Financial Disclosure. Within these reports, UC Investments highlights its climate-related investment strategy, the carbon footprint of its investment portfolio, and the impact of its climate technology investments. As of 2023, UC Investments has begun to provide carbon data on its private equity and credit portfolios, now quantifying emissions for about 73% of its assets.16

Despite providing valuable insight into the sustainable investment practices of the UC, the annual Managing Climate Change Risks (MCCR) report is difficult to access within the UC Investments website, hindering stakeholder knowledge of the environmental impact of UC Investments.17 Furthermore, the MCCR report currently has a narrow scope. UC Investments should strive to expand its Climate Related Financial Disclosures to reach 100% reporting. They must provide public reports of the carbon footprint of specific investments in addition to the climate impacts of general portfolios. Moreover, because climate consciousness is a core investing principle, sustainability evaluations of the UC portfolio should be addressed within high-profile reports such as the annual report. This change would come at no cost to the UC while better informing shareholders of investment practices. By prioritizing environmental information in its reports, the UC will demonstrate its commitment to combating climate change.

Recommendation

We recommend that for the next 6 years, the UC pursue a policy of negative screening to refrain from investing in companies that have high carbon emissions or that invest in sectors with high carbon emissions. This should be paired with an initiative to invest in more sustainable businesses. Additionally, these investments should be evaluated in a robust reporting system to create transparency and trust for stakeholders of the UC system. Once possible, the UC regents should fully divest from BREIT. Ultimately, adopting this two-pronged approach will drastically improve the environmental footprint of the UC’s investment portfolio and set an example for other collegiate investment boards.

Conclusion

The UC’s continued investment in high-carbon profiles fails to align with its progressive sustainability goals, such as its plan to eliminate all greenhouse gas emissions by 2045. Continued investment in companies that invest in fossil fuels, like BlackRock and Blackstone, enables global warming and exacerbates inequitable climate burdens on marginalized communities. To address this issue, we suggest that the UC divest from BREIT as soon as possible, implement a stronger negative screening process for investments, redirect funds toward sustainable investments, and increase sustainability data transparency.

Sources

1 University of California. “2023 Annual Report on Sustainable Practices.” 2023. https://regents.universityofcalifornia.edu/regmeet/mar24/b4attach1.pdf

2 University of California. “UC’s New Climate Action Goals: Frequently Asked Questions.” 2023. https://www.universityofcalifornia.edu/sites/default/files/2023-07/uc-new-climate-action-goals-faq-final.pdf 

3 UC Office Of The Chief Investment Officer Of The Regents. “Sustainable Investment Framework.” nd.https://www.ucop.edu/investment-office/_files/sustainable-investment-framework.pdf4 Smithies, Sam. “UC Fully Divested from Fossil Fuels.” UCLA Sustainability. nd. https://www.sustain.ucla.edu/2020/05/31/uc-fully-divested-from-fossil-fuels/

5 Blackstone. “UC Investments Creates Strategic Venture with Blackstone to Invest $4 Billion in BREIT Common Shares.” Jan 2023. https://www.blackstone.com/news/press/uc-investments-creates-strategic-venture-with-blackstone-to-invest-4-billio n-in-breit-common-shares.

6 Blackstone. “UC Investments to Invest Additional $500 Million in BREIT Common Shares.” Jan 2023. https://www.blackstone.com/news/press/uc-investments-to-invest-additional-500-million-in-breit-common-shares/

7 Ibid “UC Investments to Invest Additional.”

8 Sustainability, Tracking, Assessment, and Rating System Reports. “University of California, Los AngelesPA-10: Sustainable Investment.” 2023. https://reports.aashe.org/institutions/university-of-california-los-angeles-ca/report/2023-09-08/PA/investment-financ e/PA-10/

9 Private Equity Stakeholder Project (PESP) & Americans for Financial Reform Education Fund. “Private Equity Climate Risks Scorecard 2022.” 2022. https://6000718.fs1.hubspotusercontent-na1.net/hubfs/6000718/PESP_AFR_Report_Climate-Demands-Scorecard_S ept2022.pdf

10 Ibid “Private EquityClimate Risks Scorecard 2022.”

11 Ibid “Sustainable Investment Framework.”

12 Ibid “Sustainable Investment Framework.”

13 UC Investments. “ESG Integration Dashboards.” Nov 2023. https://www.ucop.edu/investment-office/sustainable-investment/esg-integrationdashboards.pdf.

14 Boushey, Heather & Justina Gallegos. “Building a Thriving Clean Energy Economy in 2023 and Beyond.” The White House Briefing Room. Dec 2023. https://www.whitehouse.gov/briefing-room/blog/2023/12/19/building-a-thriving-clean-energy-economy-in-2023-and -beyond.

15 University of California. “UC’s Investment Portfolios Fossil Free; Clean Energy Investments Top $1 Billion.” Nov 2021. https://www.universityofcalifornia.edu/press-room/ucs-investment-portfolios-fossil-free-clean-energy-investments-t op-1-billion.

16 UC Investments. “Managing Climate Change Risks,” 2023. https://www.ucop.edu/investment-office/2023-uc-investments-tcfd-report.pdf.

17 Ibid “Managing Climate Change Risks.”

Edited Final Policy Memo_ UC Divestment in High Carbon Companies.pdf

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