The purpose of this paper is to inform US-based foundations, endowments, and other mission-driven institutions on the current state of play of sustainable investment. Mission-driven institutional asset owners are the target audience for this paper for the reason that they are most likely to be early adopters of sustainable investing. However, the value of the research is not exclusive to this audience. This qualitative study is based on the perspective of investment professionals within US-based foundations and other endowed institutions. While this paper tilts toward the perspective of foundations and endowments, it ultimately seeks to inform all long-term investors that are contemplating sustainable investing.

Section I sets the context for the paper by highlighting trends in sustainable investing. This section draws primarily from US data to highlight the rise in sustainable investing and provides a synopsis of sustainable investment strategies such as negative screens, positive screens, ESG integration, impact investing and shareholder engagement.

Section II explores the drivers, governance structures and investment products which are shaping the sustainable investment landscape in the context of US-based institutional asset owners. Drivers include the growing body of evidence supporting sustainability and corporate financial performance, changing policy and regulation, increasing desire for mission alignment and momentum from social movements. Internal governance structures are discussed providing insight to the challenges and successes of strategies such as ESG integration, impact investing and shareholder engagement. Drawing on the experience of WRI’s $40 million endowment in 2014, the paper provides a case study on sustainable investment.

Section III outlines the barriers and management strategies to implementing and mainstreaming sustainable investing practices. Four key barriers to sustainable investing are discussed. Disrupting the status quo is the first barrier facing challenges such as, false perceptions about sustainable investing, short-term biases, decision paralysis, misconceptions about fiduciary duty and absence of accountability in decision making. The second barrier addresses the difficulty asset owners face in translating their sustainable goals into actionable frameworks. Expanding on the second, the third barrier addresses the inadequacy of ESG data, disclosure standards and performance metrics leading to inconsistency, confusion and frustration. The final barrier discusses the limited high-quality funds that integrate ESG criteria which weaken the investment chain.

The conclusion recommends initial actions to mitigate the barriers to successful sustainable investing. There are five key recommendations to overcome these barriers. Knowledge and capacity building is the first recommendation, suggesting techniques such as internal education and fostering strong ESG leadership. Secondly, strategic delegation is recommended in the form of a special committee or working group to understand the asset needs. To compliment internal leadership, external engagement is the third recommendation which seeks to build learning communities. The fourth recommendation argues for the importance of investing in sustainable funds and learning from this experience.  Support from key stakeholders such as asset managers, investor networks and other service providers is the final recommendation to overcoming the barriers to sustainable investing.

1. As well as an increase in sustainable assets under management (market growth), several factors suggest that sustainable investment is not a passing fad. These include persistent pressure from social movements like the fossil fuel divestment campaign; interest from increasingly sustainability minded investment decision makers like millennials and women; a growing body of evidence on materiality; new enabling policies; the global recognition of the challenge of addressing climate change as evidenced by the Paris Agreement; and the fast rate of new sustainability products entering the market.
2. Multiple forces drive institutional investors toward sustainable investing. Their motivations, generally rooted within broader social and economic shifts, fall into four main categories: (1) a perception and growing evidence of ESG materiality, (2) changing policy and regulation, (3) the desire for mission alignment, and (4) momentum from the fossil fuel divestment movement.
3. Failing to consider long-term investment value drivers, which include environmental, social, and governance issues, in investment practice is a failure of fiduciary duty.
4. Research found that market-level and internal barriers hinder asset owners engagement with sustainable investing. The internal barriers typically appear at the early stages of engagement with sustainable investing. These barriers include inertia in the status quo, limited frameworks for action, inadequate data and disclosure and gaps in the investment chain.
5. The paper suggests four tools to overcome these early barriers which are listed below:
6. TOOL 1 - Knowledge and capacity building to equip internal champions. An internal champion, equipped with this knowledge, can provide coherency and leadership to an uncertain process
7. TOOL 2 - Strategic delegation to form a special committee. A separate committee will allow time and resources needed to cultivate a shared understanding of the relevant issues and to devise the broad approach for the institution’s strategy
8. TOOL 3 - External engagement to communicate with consultants, managers, and peer asset owners. Asset owners can also use these conversations to encourage managers and consultants to improve their sustainable investment practices or offerings
9. TOOL 4 - Portfolio experimentation. Before making grand commitments across a portfolio, asset owners can consider exploring the investment landscape by investing a portion of the listed equities allocation into sustainable investment funds
10. Mandatory disclosure requirements have historically been limited to financial accounting, but a growing number of voluntary frameworks for disclosing non-financial risks and opportunities are emerging. These are summarised p24 - p26.
11. Appendix A: Sustainable investor networks and associations - includes overview, membership, AUM and services e.g. Global Impact Investing Network (GIIN).
12. Appendix B: Select sustainable investment frameworks and guidance - includes a description, source and year the knowledge product was established e.g. An investment framework for sustainable growth by Mercer, 2014.