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.
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.