Building a Portfolio

How Do Endowments Approach Impact Investing?

institutional investing trends
October 24, 2019

Institutions have long advanced their missions through programming and grants, and some are also beginning to do so by creating sustainable endowments. While learning about impact investing has led some institutions to seek impact with a subset of their funds, a few have dedicated most or all of their portfolios to mission-aligned investments.

Endowments Increasingly Pursue ESG

Universities, nonprofit foundations, and other institutions create endowments by investing money in stocks, bonds, or other financial products that trustees then oversee. Contributions from donors may help the endowment grow over time, and investment income from the endowment can fund the organization’s activities. Although many institutions design endowment portfolios solely to grow and safeguard financial resources, others take environmental, social, and governance (ESG) factors into account and invest their endowments to target impact.

This trend is due in part to organizations who recognize investing as a potential avenue to achieve their mission-related goals; some also argue that ESG considerations have material effects on the risks and returns of investments. In the case of colleges and universities, student activists who cite disparities between schools’ missions and investment choices have brought impact investing to the attention of administrators and trustees. For example, Becker College made news in March 2016 when it announced that it would align 100% of its endowment with its ESG values. After analyzing its portfolio, Becker concluded that 80% of its investments were already consistent with its ESG guidelines, so redesigning its endowment for impact required reallocating only a small portion of its funds.

In contrast, creating a sustainable endowment took a significant effort for the Russell Family Foundation, since only 7% of its portfolio was aligned with its mission at the start of a four-year plan to achieve impact. At the end of those four years, nearly 75% was in impact investments. Other institutions have found incremental ways to approach impact. For example, Arizona State University formed an ESG donor pool and created a task force to explore impact investing while it analyzed its entire portfolio for impact and prepared to set ESG benchmarks.

Where endowments choose to focus their attention depends on their institutional priorities. Under the Patricia Kind Family Foundation‘s program of mission-aligned investing in the area of poverty alleviation, the foundation has used its endowment to make low-interest loans to initiatives that employ disadvantaged people and has lent money to a food truck that serves people living in food deserts. The University of California invests in climate change solutions, and others, including the Tara Health Foundation, invest through a gender lens.

Although the road map does acknowledge that the process may look different for different institutions and that the path to a sustainable endowment it isn’t always linear, it offers a set of steps to guide organizations through the process.

A New Road Map for Aligning Investments with Values

To guide institutions through the process of shaping endowments for impact, the Intentional Endowments Network (IEN) has released a road map for researching sustainable endowments, articulating values, and building a portfolio. Acknowledging that the process may look different for different institutions and that the path isn’t always linear, the IEN road map offers a set of basic steps for organizations to take. These steps include:

  • Learn about impact investing. IEN anticipates that trustees will have questions about how targeting impact affects performance. Participating in investor initiatives to learn from peer institutions’ experiences and seeking input from a consultant may be helpful at this stage.
  • Build consensus among trustees, the investment committee, and other stakeholders. This step may involve holding town hall meetings and facilitating a dialogue within institutions or with the surrounding community. Nurturing open conversations around impact investing reassures community members that the institution values sustainability. Upon reaching consensus, institutions should write an impact investing policy by incorporating ESG goals into their full investment policies or adding a statement on sustainable investing.
  • Develop the portfolio. The next steps form a cycle that’s meant to be repeated as institutions continually work to align their portfolios with their values. The cycle starts with assessing the portfolio—either with security-level analysis, which is best suited to screening for ESG risks, or manager-level analysis, which allows a more detailed look at both ESG opportunities and risks. Institutions may also opt to follow both approaches concurrently, possibly with tools such as the Principles for Responsible Investment‘s investor guides. Following the assessment, institutions should align their portfolios with their missions. This is not an all-or-nothing action; as mentioned above, some institutions opt to dedicate a percentage of their portfolio to sustainable investments or establish an ESG donor pool. Institutions may also choose to focus on shareholder engagement efforts and pursue impact through proxy voting or signing shareholder resolutions. In contrast, others may decide to integrate ESG concerns across their portfolios or adopt an impact theme. From there, institutions monitor their portfolios for both financial performance and impact. Monitoring leads back to reassessment, and the cycle repeats.
  • Share progress. Finally, IEN recommends that institutions publicly communicate their impact progress. They might publish a case study, participate in a conference, or share results with an investor initiative. This promotes transparency and increases awareness of impact investing.

There are many possible approaches to achieving sustainable endowments, and some institutions may wish to omit certain steps of IEN’s process or to replace them with their own procedures. Whatever its role in the process, however, this new road map can serve as a useful framework for thinking about creating an endowment with true impact.

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