Studies have shown that environmental, social and governance investing provides equal or better returns compared with non-ESG funds, but now the Intentional Endowments Network has the track records from 11 colleges and universities that have moved their endowments to ESG, at this point largely focusing on climate change.
The new IEN study, Financial Performance of Sustainable Investing: The State of the Field and Case Studies for Endowments, includes “real studies of college pensions” and investment performance since adopting sustainable investing strategies, said George Dyer, IEN co-founder and executive director, in a news conference, and shows that not only did endowment funds have better performance than their benchmarks, but with lower costs and fees. The case studies also can provide fiduciaries a way to implement “mission-aligned strategies without sacrificing financial returns,” the study stated.
The study included big schools, such the University of California and California State University systems and Arizona State University, as well as smaller schools such as Becker College and College of the Atlantic. All 11 of the schools “have met or exceeded their spending plus inflation performance goals and all but one exceeded their benchmarks over relevant trailing time periods,” said the IEN’s managing director, Alice DonnaSelva.
For example, Aaron J. Moore, CFO of California State University Foundation, stated that when school officials saw student advocacy of climate change action, the foundation began a conversation with Greystone Consulting (part of Morgan Stanley) in 2013, and the five-year discussion focused on several points: 1) what changes made to endowment structure would mean for returns, 2) what products were available, 3) what options were they most interested in pursuing, e.g. ESG or impact, and 4) how values of the foundation aligned with CSU’s.
They decided to focus on ESG investing, he said. Their first and only divestiture was to remove thermal coal-related companies from the portfolio. This, he said, was because they felt more “proactive” in investing rather than continually divesting. They also decided to move the $33 million portfolio in sections, starting with equities and then fixed income. He said alternatives “didn’t have enough choice” in products to make changes. He stated that “preliminary results show us up 75 basis points over the benchmark with related fees cut nearly by half.”
Also moving to ESG is the University of California system, which was the first public university to sign the Principles for Responsible Investment in 2014 and made ESG investing a part of its investment policy in 2018, with a plan to invest $1 billion in clean energy solutions by 2020.
Arizona State University Foundation’s chief investment officer, Jeff Mindlin, said ASU has had a school of sustainability for 15 years, so decided to put practice into investment. He said they developed a policy statement, created a subcommittee, developed a scorecard and even gave a small amount of money to students to manage and learn. Today, the endowment has a $100 million sustainability pool and is “encouraged” by performance thus far that has beat the benchmark by 96 basis points. “We are confident we can [do this] without giving up performance,” he said.
Stronger Returns, Lower Risk
Smaller schools, such as Becker College, located in Worcester, Massachusetts, and started by founding fathers John Hancock and Samuel Adams, is the first to be 100% invested in SRI for its $5 million endowment fund. Working with HIP (Human Impact + Profit), the school has had stronger total returns, lower risk, higher Sharpe ratios, more alpha and lower beta, according to Paul Herman, HIP CEO. He added that the endowment made several moves, including divesting alternatives, adding small managed accounts “who took [ESG investing] seriously,” which also cut fees by 38%. He added the advantage of a small college is “committees can move faster and not get bogged down in trustee meetings.” Overall, he said, the portfolio rose from top-quartile to top-quintile performance.
College of the Atlantic, located in Bar Harbor, Maine, was one of the first to divest from fossil fuels. In 2013, it began working with Cambridge Associates to diversify its portfolio while remaining fossil fuel free. Since 2013, its 8.8% annualized return has ranked in the top quartile of all peer endowments, according to the study.
Although speakers said students had been early to pressure endowments into ESG, especially as their generation will have most to lose with climate change, alumni also have been active. In fact, North Carolina State University received a $50 million gift commitment in 2012 with the stipulation that it be invested in a “socially responsible fashion,” states the report. The fund has outperformed both its benchmark and the university’s larger endowment fund.
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