While the concept of the intentionally designed endowment includes integrating material sustainability, ESG, and/or mission-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 from, and build on over time. There are also several different approaches to alignment at the full portfolio level, and all of these strategies can be combined in the best way to suit an endowment’s unique circumstances.
1. Take Exploratory Steps
Endowment leaders and other college and university fiduciaries might choose one or several of these strategies to increase alignment with their institutional goals and/or build broader support for sustainable investing on campus:
- 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. Learn from Peers who have created a sustainable investment fund.
- Start a student-managed ESG fund: Student-managed funds promote student leadership and benefits both students - by providing practice and experiential education - and endowments - by providing research and new ideas. IEN’s SIILK Network, a peer learning network for students, has created a tool kit and provides case studies and monthly meetings to support your students in managing these funds. Learn more from the SIILK Network.
- 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. Learn more about how to launch a GRF.
- Add sustainable investing options to campus retirement plans: IEN’s Sustainable Retirements Initiative can support you in making sustainable investing strategies available to staff through the institution’s employee retirement plan. Learn more
2. Apply Sustainable Investing Strategies to Endowment Management
The following strategies can be applied alone, or in combination with other strategies and/or alignment steps. Each can be applied to just one portion of the portfolio, or integrated across asset classes. Some strategies, like working with diverse asset managers, can be incorporated as a whole-of-portfolio approach.
- Work with diverse asset managers: Integrate asset management firms owned by women and people of color into your manager search process. Learn more
- Be an active owner by using proxy voting, shareholder resolutions and investor statements: 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. Learn more
- Invest in the local community: Explore opportunities with the risk/return characteristics of fixed income and cash that have a positive impact on the local community. Learn more
- Allocate a % of the portfolio to specific impact or to a manager with ESG expertise: The network has created a non-comprehensive list of sustainable investment products in each asset class that (1) incorporate ESG factors, (2) apply exclusions or (3) focus on a specific impact. Find investment options or read more below about using ESG integration or thematic impact investing across your portfolio.
3. Implement a More Comprehensive, Whole Portfolio Approach
Institutional investors may apply a specific sustainable investing policy or approach, like the ones described above, across the full endowment portfolio to better align with their institutional mission. The most common approaches we see applied to a full portfolio are divestment, ESG integration, and impact investing. Note that the approaches described below can also be phased in (applied to just a single asset class or manager at first). Often institutional investors choose to do a combination of all three, along with the strategies described above.
- Risk- and/or mission-based divestment: Some colleges and universities commit 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, palm oil/deforestation, and industrial agriculture related companies.
- ESG integration across the portfolio: Demand for the incorporation of environmental, social and governance factors is growing. The Principles 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.
- Impact Investing with a twin focus on specific environmental or societal impact and financial risk/return: With thematic impact investing, endowments can more specifically focus such investments on solutions that are aligned with their institution's mission. While the term “impact investing” is sometimes used as an umbrella term for a variety of sustainable investing strategies, in this case we mean investments that have specific social or environmental impact goals. See more about sustainable investing terminology on this page.
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