This post is by Tim Coffin of Breckinridge Capital Advisors part of a series in which IEN members will share their thinking about intentional endowment investing in the face of this global pandemic. Follow along to get insight into the new challenges and opportunities we as a network are facing.
Tim Coffin, Senior Vice President and Director of Sustainability, Breckinridge Capital Advisors
In the face of the pandemic, ESG investment strategies are earning considerable attention. This piece we recently wrote may explain why. It is reasonable to suggest the trend in sustainable investing strategies will accelerate as investment committees raise their sightlines on the horizon and investors lean-in on companies to be more forthcoming with their sustainability initiatives. Resilience will likely become part of investors’ standard vocabulary.
The following article was originally published on Breckinridge's website:
The Trend (In ESG) Is Your Friend
The Intentional Endowment Network’s (IEN) report on performance among educational endowments encourages me to think current trends bode well for sustainable investing. A continuation of the force behind those trends could help convince more institutions and investors that a thoughtful approach to environmental, social and governance (ESG) factors will have a meaningful impact, drive positive change for stakeholders and communities, and improve future investment performance.
IEN found that nearly a dozen higher education institutions that are early adopters of ESG, fossil fuel divestment or other sustainable investment strategies “are proceeding without sacrificing financial returns.” Sacrificing performance for positive impact long has been a skeptic’s lament about ESG investing strategies. IEN’s report, “Financial Performance of Sustainable Investing: The State of the Field and Case Studies for Endowments,” should help reassure doubters while the number of corporations reporting on ESG performance and efforts to bring greater consistency to their reporting also suggest we are moving forward.
Based on its analysis, IEN reported that "All of the eleven institutions have met or exceeded their spending plus inflation performance goals, and all but one exceeded their benchmarks over relevant trailing time periods.” It concluded that "College and university endowment fiduciaries can pursue mission-aligned strategies focused on ESG investments without sacrificing financial returns.”
The study also pointed to a growing body of evidence from academics and practitioners, including the National Association of College and University Business Officers (NACUBO), supporting the contention that sustainable investing strategies perform as well or better than more traditional investing approaches.
Of course, as an investment-grade bond manager that integrates ESG into all our security research and that manages sustainable investing strategies, we agree.
Many of us know — and S&P Global Management maintained in November 2018 — that U.S. university endowment funds were among the first institutional investors to explore ESG investing but, often, in a relatively narrow approach, focusing on a single issue such as climate change, fossil fuels or tobacco.
More recently, it said, a growing number of college endowments are exploring more holistic approaches to sustainable investing amid the strategy's rapid expansion across the U.S. For example, at the start of 2018, more than 80 of the 93 educational institutions surveyed by the U.S. Forum for Sustainable and Responsible Investments had created official investor-responsibility committees, roughly double the number of committees in 2016.
That is a favorable trend, in my view, but it is not the only one.
In January 2019, The Brookings Institution reported, “Corporations are increasingly building sustainability into their business strategies, and linking outcomes to the Sustainable Development Goals (SDGs), as seen in the 7,500 companies issuing annual sustainability or corporate responsibility reports in accordance with the Global Reporting Initiative.” The United Nations SDGs are 17 global goals designed to be a "blueprint to achieve a better and more sustainable future for all.”
It seems to me that this heightened level of corporate interest in ESG is more trend with force. Consider this: The Commission on Business and Sustainability identified $17 trillion in market potential for four of the SDGs by 2050. My sense is that, with that in mind, businesses will keep ESG in the forefront of their planning for many years to come.
ESG issues at the center of business planning and operations moving forward would seem likely to make more stocks and bonds eligible for investing by ESG focused managers, strategies and investors. Remember the days when skeptics would rail about the likelihood that narrowing one’s investment universe would pinch returns? These trends and findings from research by IEN, NACUBO and others may cause those concerns to diminish further.
That is another favorable trend. Here’s one more.
Two of my colleagues here at Breckinridge are participating in a working group sponsored by the World Economic Forum and Focusing Capital on the Long-Term. The group wants to harmonize existing sustainable reporting frameworks into one global standard. The big four global accounting firms and over 100 large companies are cooperating in this effort.
To be sure, there are already several organizations that are addressing reporting frameworks related to ESG in general and related issues specifically and separately. What I like about the global framework my colleagues are working on is that it is not designed to replace the others, but rather to leverage them.
Not to oversimplify this, but greater reporting consistency could mean more and better information for investors like Breckinridge to consider when assessing long-term risks that face our global society —including economies and business — when we make investment decisions on behalf of our clients.
Reflecting on trends like those mentioned here, I think back to an article that appeared in Business Officer Magazine that stated, “Using SRI strategies, on average, does not appear to negatively affect investment returns, meaning it is possible to realize positive social and environmental returns without sacrificing financial returns.”
That is a trend that can be our friend.