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Colleges Face Roadblocks to Socially Responsible Investing

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Debate continues about whether responsible investing practices give up potential investment return and are therefore inconsistent with college trustees’ fiduciary responsibilities.

College endowments were early adopters of addresing social and environmental concerns through their investments, but have fallen out of the vanguard in recent years. Only about a quarter of endowments in a recent Commonfund Institute study said they practiced responsible investing. Fifteen percent of the respondents said fiduciary concerns were an impediment to more socially conscious strategies.

The study, released Friday, investigated policies, practices and attitudes with respect to responsible investing among 200 U.S. colleges and universities.

That sample made up 24% of the participants in the 2014 NACUBO-Commonfund Study of Endowments. The respondents comprised 123 private and 77 public institutions with a total of $89 billion in endowment assets as of June 30, 2014.

Commonfund said that in the absence of a completely standardized vocabulary of responsible investing, it had included participants that engaged in one of the following practices for purposes of the study:

  • Socially responsible investing (SRI), which strives to avoid investments in certain stocks or industries through negative screens
  • Environmental, social and governance investing, which involves integrating the three ESG factors into fundamental investment analysis
  • Impact investing, whose goal is generating and measuring mission-related social, environmental or economic change alongside financial return
  • Divestment of fossil fuels, an exclusionary screen strategy

Of the 200 institutions in the study, 53 were “adopters” of responsible investing practices.

The rest were “non-adopters.” They did not currently engage in any of the four practices, but may have had policies and procedures in place that related to responsible investing, or had views on the topic or were considering future changes to their portfolio.

Commonfund said these proportions of adopters versus non-adopters — 26.5% vs. 73.5% — may be indicative of the current state of responsible investing.

SRI was the most commonly used approach to responsible investing covered by the study, and ESG was a significant but distant second.

Use of impact investing and fossil fuel divestment among the institutions studied was negligible. Only five institutions engaged in the former and two in the latter.

The adopter group in the study contained proportionately more private than public institutions. Of the 53 adopter institutions, 42 were private and 11 were public. Among the 147 non-adopters, 81 were private and 66 were public.

Slightly more than half of the adopters — primarily those using SRI screens — were identifiable as faith-based institutions.

For many faith-based entities, fiduciary duty was balanced against, or redefined to include, the moral and ethical values that the institution sought to advance.

Investment Committees’ Understanding

One survey question asked how well the institution’s board or investment committee understood the difference between ESG integration and SRI practices.

Fifty percent of study respondents said their board and investment or finance committee had a “good” understanding, 18% said they had no understanding and 23% said they did not know or were uncertain.

Just 8% said these bodies had a complete understanding.

Similarly, 53% of study participants neither agreed nor disagreed with the statement that ESG integration could add value to the investment process, regardless of mission-related concerns. Nineteen percent agreed with the statement, while only 8% disagreed.

Study respondents indicated “substantial” impediments to greater adoption of ESG integration: 36% of the total respondent group cited concern about the possibility of lower investment performance, and 15% identified concern about violating fiduciary duty.

Thirty percent said lack of transparency due to investment in commingled funds was a big impediment, while 27% cited the need for more research to determine how ESG integration affects investment returns. Exclusion vs. Inclusion

Commonfund said some vagueness still existed about what was involved in various responsible investing practices, especially when it concerned the difference between SRI and ESG.

SRI relies primarily on the exclusion of investment based on an institution’s moral or ethical standards, while ESG seeks to include investments with certain specific desirable characteristics.

Forty participating institutions — 20% of the total and just over three-quarters of the adopter group — reported using SRI screens.

Nearly two-thirds of these SRI users were faith-based institutions, and at least 30% of them prohibited investment related to abortion, alcohol, armaments/weapons, gambling, pornography, tobacco and unfair labor practices.

Seventeen adopters — about 8.5% of total study participants and just under one-third of the adopter group — reported integrating ESG factors into their investment decision making.

Here, the proportion of faith-based institutions, while considerable, was smaller at 47% than those using SRI. Among the 17 ESG users, an average of 35.5% of their endowment assets were managed according to ESG criteria.

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