That begs the question: Why are university endowments not adopting ESG at a higher rate?
Participants in The 2017 NACUBO Study, were asked why they hadn’t adopted ESG investing? Among the responses:
• “Constraining investment options risks potentially reducing investment returns and the ability to manage the volatility of investment returns”
• “Endowment goal is to maximize risk-adjusted returns to enable [the] university to advance institutional mission”
• “The expense ratios associated with these types of investments are often higher”
• “Our endowment assets have been donated by generous donors to support our mission first and foremost, not to adhere to defined ethical guidelines or incorporate ESG factors”
• “Fiduciary responsibility is to maximize total returns over the long-term”
Comparable to investing discussions surrounding active vs. passive or strategic vs. tactical , there clearly is, and will continue to be, debate over whether ESG investing produces positive or negative risk-adjusted returns.
Debate over performance aside, another reason there hasn’t been more of an uptick goes to the heart of any investment process, the Investment Policy Statement (IPS).
An endowment portfolio and the decisions made by an Investment Committee should reflect the objectives and constraints of its IPS. The IPS is the playbook (typically approved by the Board) that outlines how an Investment Committee administers the endowment. From the perspective of an Investment Committee member and Fiduciary, the process of incorporating ESG in the endowment starts and ends with the IPS.
How does an Investment Committee and Board incorporate ESG within the IPS? In the upcoming third installment of our Mission-Aligned Investing™ white papers, DiMeo Schneider & Associates’ Mission-Aligned Investing™ Team outlines the step-by-step process:
1. Identify Your Motivation
2. Define Your Values
3. Rank Your Values
4. Choose an Efficient Approach
After choosing an approach, it is critical to update the IPS. It should include the following:
• A brief description of the mission
• The permissible investments as well as any constraints
• How the investments will be evaluated
• How the impact of ESG investing will be measured
Even though ESG interest and assets have increased significantly, DiMeo Schneider & Associates, L.L.C. has not seen the same uptick with university endowments.
NACUBO’s 2017 study on ESG could be viewed as limited interest from endowments. However, it may be as simple as legacy constraints from the IPS and an unclear process for aligning values and investments.
For more information, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
