An institution may choose to adopt sustainable investment practices across the whole portfolio or to stage in different facets of an intentionally designed endowment. While the concept of the intentionally designed endowment includes integrating material ESG and/or values-related factors into the investment process across all investments in all asset classes, there are several initial steps endowments might take to begin the process, learn, and build on over time.
A. Exploratory Steps
An institution may choose to adopt sustainable investment practices across the whole portfolio or to stage in different facets of an intentionally designed endowment. While the concept of the intentionally designed endowment includes integrating material ESG factors into the investment process across all investments in all asset classes, there are several initial steps endowments might take to begin the process, learn, and build on over time.
1. Create a sustainable investing “sleeve” or “ESG donor pool"
Endowments might consider carving out a specific amount or percentage of the portfolio for sustainable investing. Such a pool can capitalize on the increasing demand by donors who want their funds invested sustainably. IEN maintains a list of examples of endowments taking this approach.
2. Allocate a % of the portfolio to specific impact or to a manager with ESG expertise
This IEN document provides a non-comprehensive list of sustainable investment products that incorporate ESG factors or apply exclusions or focus on a specific impact. The Intentional Endowments Network has become aware of these products through members of our network and other connections but has not fully diligenced these products. The spreadsheet is in beta mode with information being completed as researched.
There are several forms of shareholder engagement that endowments can undertake to address material investment risks, improve corporate sustainability performance and support policies that move society towards sustainability. These include proxy voting, engaging in dialogue with mutual funds or companies held in the portfolio, filing or co-filing shareholder resolutions, and signing on to public investor letters or statements.
Student-managed funds promote student leadership, advance education and real-world training, and enhance the ability of all graduates to drive sustainability solutions throughout their careers. Student consultations on sustainable investing to the institution’s endowment based on student-managed fund performance are increasingly common, benefiting both students by providing practice and experiential education, as well as endowments by providing research and new ideas.
5. Launch a green revolving loan fund for your campus.
Green Revolving Loan Funds (GRFs) are self-managed revolving funds that finance energy efficiency improvements on campus, achieving reductions in operating expenses and greenhouse gas emissions, while regenerating funds for future projects. Tools such as The Green Revolving Investment Tracking System are available to streamline the tracking and calculation of project-level energy, financial and carbon savings data for all sustainability projects and efficiency improvements.
The Billion Dollar Green Challenge was launched by The Sustainable Endowments Institute in 2011 and is now co-managed by Second Nature (higher education institutions) and the Sustainable Endowments Institute (local and state governments and others). In 2018, there are over 60 institutions participating, more than two-thirds of which were colleges and universities.
This 2014 two minute interview from NPR's Marketplace with then SEI director Mark Orlowski, explains how endowments can invest in GRFs as part of their investment strategy. Done properly, these investments can help campuses avoid substantial costs by upgrading to more efficient technologies and improving design to lower demand for energy. Over the years, these savings can add up to significant returns on the original investments.
B. Toward a More Comprehensive, Whole Portfolio Approach
As demand for sustainability solutions in society grows, so do investment opportunities. Increasingly, there are attractive investments designed to generate market-rate returns available. Endowments may already have such investments in their portfolio, whether or not they are marketed or identified as ‘impact investments.
To view a panel presentation on how to construct a sustainable investing portfolio without sacrificing financial returns, watch Stories from Advisors: Constructing Mission-Aligned Portfolios that Perform
Institutional investors may decide to divest from specific companies or industries, to proactively integrate environmental, social and governance (ESG) factors into investment decisions, or provide equity or debt capital to companies whose products or services advance solutions to today's environmental and social challenges. Often institutional investors choose to do a combination of the three.
Some colleges and universities decide to divest from specific companies, industries, products, services or countries. The choice to divest can be motivated by concerns about future risks to the business model or by the belief that the company, product or service is antithetical to the mission of the college. Most recently the foci for higher education divestment has been fossil fuel investments, weapons, private prison management companies, and palm oil/deforestation related companies.
Demand for the incorporation of environmental, social and governance factors is growing. The Principals for Responsible Investment (PRI) is a leading proponent of a more comprehensive approach to investing in global markets that incorporates ESG factors to reduce risk and enhance returns. Additionally, investors who experienced the financial crisis of 2008 and who see inherent risks in the capital system from climate change and a growing wealth gap, seek a different approach to investment, and investment managers are responding to the demand with growing ESG expertise.
3. Impact: Investing with a twin focus on specific environmental or societal impact and financial risk/return.
Comprehensive sustainable investing strategy in an endowment can include divestment, ESG integration, engagement and thematic impact investing. With thematic impact investing, endowments can more specifically focus such investments on solutions that are aligned with their institution's mission.