Key strategic questions

The report presents comprehensive questions for fiduciaries to consider, such as:

• How can institutional investors align their long-term investment goals with their social, environmental, and governance priorities?
• What are the potential costs and benefits of sustainable investing practices? What is the impact on financial performance?
• How might fiduciary responsibilities evolve based on the current knowledge of material risks that are revealed through ESG analysis?

Background and overview

The report provides a background to sustainable investing of college and university endowments. College and university endowments in the US have around $600 billion under management, with 31% of respondents to the NACUBO-TIAA Study of Endowments (802 respondents) applying some sort of responsible investing policy to portfolio holdings in 2018. However, just 8% of institutions report excluding responsible investing considerations.

Investment endowment norms

The report identifies two investment approaches ethically conscious investors can use: Socially Responsible Investing (SRI) and Environmental, Social, and Governance Investing (ESG). SRI aims to align investments with an individual or institution’s mission or values using positive and negative investment criteria. ESG aims to provide a more complete view of potential investment opportunities and risks by factoring environmental, social, and governance criteria into investment decisions. The report also identifies various investment strategies, including impact investing, negative screening, and divestment.

Context for sustainable investing

The sustainable/investing industry has grown with US SIF’s 2018 Report on U.S. Sustainable, Responsible, and Impact Investing Trends finding that total assets under management using SRI strategies expanded from $8.72 trillion at the start of 2014 to $12 trillion at the start of 2018, representing a 38% increase. Evidence indicates that sustainable investing can perform well, and implementation can result in higher annual above-market average returns.

ESG integration into investment decision-making

Evidence suggests that the integration of ESG issues into the internal firm investment process enhances financial performance. For instance, a 2012 DB Climate Change Advisors report found that 89% of research studies showed that companies with high ESG ratings exhibit market-based out-performance compared to their industry peers. Furthermore, 90 companies with strong sustainability policies outperform those without sustainability standards, as shown through an 18-year study from 1993 to 2011.

Strategies for ingenious implementation

The report provides six recommendations for intelligently integrating sustainability practices into investment decision-making by responsible investors:

• Integrate ESG factors into the investment process holistically.
• Evaluate investment performance based on long-term goals and benchmarks.
• Utilise performance measurement systems that consider ESG factors to create profitable environmental and social benefits.
• Analyse ESG information and synthesise its insights into beneficial action.
• Encourage investee companies to improve transparency.
• Engage in shareholder dialogue with investee companies.

Conclusion

Institutions should use the report to source strategies for aligning ESG practices with long term financial goals for endowment fiduciaries. Incorporating ESG into investment practices can increase profitable returns and create significant environmental and social benefits. By utilising measurement systems to evaluate investment performance and engaging in shareholder dialogue with investee companies, institutions can work to achieve sustainable and profitable outcomes.