As part of our efforts to incorporate climate considerations across our portfolio, the investment committee of the UUCEF has recently shifted some of our fixed-income investments to bond managers who include environmental factors in their decision-making process. These managers buy “green bonds” (those designed to support climate protection and other environmental initiatives) whenever possible. But we’ve learned that since this area of investment is still very new, such bonds are not plentiful—and there are typically many buyers competing for the chance to own them.
The same situation, we’ve found, applies in the private equity market. (For the first time this year, our Investment Committee decided that the UUCEF may invest in selected private equity vehicles, which offer a diversification benefit to our portfolio and the potential for strong returns. We intend to make relatively few investments of this kind, however, since private equity ties up the funds invested for multiyear periods, decreasing liquidity.) Many of the most exciting ways that capital is being directed toward climate innovation are happening through private funds, but the ones that have the best risk profiles–because they are run by managers with track records of success, and strong research teams– are often oversubscribed or require very large account minimums, which are out of reach for the UUCEF. While we have examined a few options this fall, we have not yet found a private equity investment that we feel combines a reasonable risk/return profile with a high climate impact. It’s heartening, though, to see how much demand exists for these investments, which we expect will lead to the creation of more of them soon.
In the meanwhile, we continue to look for investments with a positive climate impact across the portfolio. It’s important to know that we, like most institutional investors, set targets for the percentage of the portfolio we want in various asset classes—US equities, international equities, core bonds, alternatives, etc.—and then rebalance back to them periodically. This makes fossil fuel divestment and clean energy investment two separate matters—not two sides of the same coin. If you divest from the public equities issued by fossil fuel companies, that money is reinvested in public equities of other existing companies. Even if those firms have great environmental practices, buying their shares does not support the development of new forms of energy. On the other hand, shifting large amounts of money out of public stocks and into venture capital funds that are developing wind or other renewables technologies would significantly shift the risk/return and liquidity characteristics of a portfolio. So while we are exploring very deeply how to use our power as investors to support the clean energy transition, we are also careful to maintain the asset allocation that has served us well.