By R. Paul Herman, CEO of HIP (Human Impact + Profit) Investor Inc.

How can you move your endowment and trustees from Intention to Implementation?  This four-step guide can help shift your institution more swiftly and comprehensively to a 100% impact-focused portfolio -- across all asset classes.  

 1. Re-affirm your MISSION, and embed it in every investment conversation – and asset class. 

Environmental organizations, from The Nature Conservancy to zoos and aquariums, exist to protect, preserve and spread Nature as its mission.  However, many endowment portfolios – even those with a clear purpose – are not always aligned with the mission. For the Global Conservation Network, whose mission is to ensure the expansion and preservation of species, Dr. Onnie Byers and GCN’s Board of Directors saw the portfolio of species protection directly conflicted with the mission. Two years ago, GCN re-allocated its diversified portfolio towards a “going fossil free” goal across all asset classes. GCN re-allocated to equity funds in small, mid and large cap, as well as emerging markets, plus bond funds holding corporates, munis and sovereigns to minimize the exposure to fossil-intensive companies. GCN reduced the associated greenhouse gas emissions associated with its portfolio by 70%. Today, with new fossil-free indexes available and more fund managers integrating environmental, social, and governance criteria (ESG), GCN could move to a portfolio that is 100% free of fossil-fuel producers and related firms, whether stocks or bonds.  

2. MEASURE the impact of your portfolio in every fund and holding. Impact can cover human, social and environmental goals. 

You can use the lens of Maslow's Hierarchy of Needs – which can translate into everyday themes our moms can understand like Health, Wealth, Earth, Equality and Trust. Every fund can be measured as to its impact performance for a particular theme. As Credit Suisse research has shown, more women on the board of an organization correlates with historically higher returns and lower volatility. This impact metric of Equality for Women Leaders can be applied to every fund whether equities, fixed income, real-estate, MLPs, or hedge funds. For environmental goals, endowments like CalPERS have signed the Montreal Pledge to mandate that all fund managers must report the environmental exposure and intensity of the underlying holdings. This can result in an overall intensity for each fund, every asset class and the portfolio as a whole. Consider setting a quantitative goal by a certain time frame. Becker College’s new 100% goal for social-impact is another example of measuring portfolio impacts. Examples of impact metrics that fit into mission themes include:

• Health – physical health and mental agility; investments in health care, and proactive wellness can be aligned.
• Wealth – income growth and building net worth; economic empowerment of low-income and international work forces can be aligned.
• Earth – clean air to breathe, pure water to drink; closed loop systems and “trash to cash” strategies can be aligned.
• Equality – inclusive by gender, ethnicity, age and citizenship;  innovation systems at the local level in emerging markets around the world can be aligned.
• Trust – transparency and disclosure, as well as legal exposure and lobbying; open-source reporting, feedback systems from citizens can be aligned.

3. LEARN how the impacts of your investments connect to drivers of future risk and return in your portfolio. 

Morgan Stanley’s Institute for Sustainable Investing has researched thousands of mutual funds that integrate ESG and impact criteria.  While a random distribution would generate a 50-50 split on over- and under-performance, Morgan Stanley has found that ESG-integrated funds had equal or higher median returns and equal or lower volatility 64% of the time. For your own portfolio, you can track this visually (see Figure 1 and Figure 2) by plotting Risk and Return on a graph, and color-coding by Impact, ESG or your Mission-Alignment.  This one-pager tool has been helpful for families, foundations and endowments to track the existing impact and financial performance of their portfolio.

Figure 1: The Funds in Your Diversified Portfolio Have a Mix of Positive and Negative Impacts

Figure 2: At the Asset Class Level, the Funds Vary in Risk/Return and Impact Performance
 

4. Hold your investment consultant, advisers and fund managers ACCOUNTABLE to impacts.  Every asset class has an opportunity to be aligned with your mission.

• Cash – “Where does your cash sleep at night?” is the motto of New Resource Bank, which loans funds to growth oriented sustainability-focused commercial borrowers, and is part of the GABV.org. Credit unions and CDFIs (community development financial institutions) can help local investing too.
• Fixed income – Cities, hospitals and colleges issue muni bonds, but are they delivering for citizens, patient health and educational performance?  Rating the impact of these muni bonds can help bring capital to impact-oriented investing, especially for cities now seeking to fund their Climate Action Plans (CAPs) and solutions.
• Equities – Overweighting firms that better treat employees can be a winning financial strategy. ESG-weighted indexes are becoming more prevalent, which can help fit a goal of tracking error in the portfolio.
• Real Estate – Efficiently run buildings and properties are a success strategy for REITs; more than 200 REITs can be measured on their building performance.
• Master Limited Partnerships – Does the fracking and tar sands sourcing of dirty energy fit your portfolio? MLPs can be graded for risk by this exposure.
• Hedge Funds – Transparency about the fundamental nature of their strategies can provide confidence that the endowment is aligned with, and supportive of, the overall mission.
• Private Equity and Venture Capital – This is an opportunity to possibly “buy local” in the stakeholders and communities in which you operate, from clean energy infrastructure, as well as ventures started in the communities you serve.

As you can see there are many implementable ways to measure impact, align investments with your mission, and connect with the future financial risk and return expectations.  How will you progress forward? 

R. Paul Herman is CEO of HIP (Human Impact + Profit) Investor Inc., an impact ratings and advisory firm for investors, advisers, fund managers and 401(k) plans – and a founding Member of the IEN – and welcomes your feedback and ideas for building a better world. ([email protected])