Some Approaches in Passively Managed Investments
Due to their broad investment mandate, passively invested index funds often contain exposure to companies or industries that institutions have decided to avoid either due to expected risk or to the institution's mission. Some options for divesting while maintaining passive market exposure are:
A. Finding a passively managed mutual fund, ETF or other commingled funds that excludes the given company/industry or product/service. Increasingly there are domestic, global, and international public equity options that avoid fossil fuel investments, and some exist that avoid tobacco. Still others will exclude more than one area of social concern such as weapons, tobacco and alcohol.
B. Convert your passively managed fund to a passively managed separate account which will allow you to customize the portfolio while still constraining tracking error to a benchmark. Today's optimizer tools can allow for fairly tight tracking error to a number of well-known benchmarks. Firms such as Aperio Group, Parametric Portfolio Associates and others provide such options.
C. As You Sow's Mutual Fund Screening Tool analyzes mutual funds for their percent exposure to fossil fuel, weapon, deforestation, and tobacco.
It is also possible to divest and incorporate ESG factors in the same portfolio. Visit this IEN Webinar for some examples: Passive ESG Strategies for Endowments | November 28, 2017
Fossil Fuel Divestment
Either due to a desire to align with a sustainable mission or out of concern for the potential risk of investing in companies whose energy assets may be stranded in the future, many institutions have been weighing the pros and cons of fossil fuel divestment. Each school's decision is unique to the institution.
Barnard College lays out its approach to divestment in this IEN webinar:
Universities in the UK discuss divestment in this IEN Webinar:
Learn more about addressing climate risks and opportunities through endowment investments here.