ESG and Endowment Investing
The shift towards ESG-focused investing is transforming the endowment sector
By Simon Turner
The rapid rise in the importance of ESG is continuing unabated. Endowment funding is a sector well-matched to ESG integration. 50% of endowment funds already incorporate ESG into their investment decision-making processes. As momentum builds, the question for endowment funds is increasingly becoming: why not incorporate ESG into investment decisions across the board?
Why ESG and Endowment funds are a Natural Fit
Endowment funds are established with tax-deductible donations to fund charitable and non-profit institutions such as churches, hospitals, and universities. These investment funds are connected inextricably with the long-term future of the institutions raising the funds.
What’s really interesting from an ESG perspective is that endowment funds generally invest in line with an institutional mission (or fiduciary duty) related to the cause behind the endowment. For example, university endowment funds are often focused on social outcomes around education. Hospital endowment funds are often focused on social outcomes centered around healthcare. In both cases, these outcomes are a core part of the social aspect of ESG investing.
The other key point is that the intergenerational timeframe core to most endowment funds makes controlling their long-term investment risks particularly important for certain investor types. For example, church endowment funds are generally investing with a “forever” timeframe which presupposes the long-term sustainability of the church raising the funds. So their investments need to align with this outlook by reducing risk through prudent sustainability strategies, and by positioning their funds to benefit from long-term opportunities created by global issues such as climate change.
As a result, endowment funds are a natural fit with ESG-focused investing. These funds are generally already focused on some ESG factors, so the step towards an integrated ESG investment strategy is a smaller bridge for them to cross than for other investors. And these funds need the long-term risk-reduction benefits offered by ESG-focused investing. After all, they are investing to ensure a long-term and sustainable future for the institution behind the endowment, as well as the planet.
ESG-Driven Changes Afoot in the Endowment Fund Sector
The trend towards ESG-focused and sustainable investing has accelerated in the past two years. This is a market-wide phenomenon. However, the change afoot in the endowment sector is particularly noteworthy.
One of the biggest changes has been the shift by many endowment funds away from the fossil fuel sector as a means of climate change mitigation. There’s growing recognition that being invested in fossil fuels is both a poor long-term strategy, likely to be out of alignment with their funds’ goals.
For example, institutions like Harvard University, the University of California, Boston University, and Georgetown University in the US, and Cambridge University and Oxford University in the UK, have recently divested their portfolios of fossil fuel stocks. There are many reasons for this: long-term investment timeframes, in-house knowledge about the long-term risks posed by climate change, and alignment with their fiduciary duties. In addition, when the other leading endowment funds are all taking these climate change mitigation actions, fossil fuel divestment is fast becoming a consensual best practice across the sector. And the question is increasingly becoming: why aren’t we taking action to align our portfolios with a more sustainable world?
More changes coming
The reasons why half of the endowment funds are already taking strong ESG action are compelling. And it is also clear that the remaining half will face increasing pressure internally and externally to take proactive ESG action which aligns with their fiduciary duties and mitigates long-term risks to which their portfolios are exposed. So while we’ve seen a lot of change already across the endowment investment sector, it’s safe to assume that there’s a lot more coming. We expect more dramatic increases in ESG integration across the endowment sector in the years to come.
At Global Imprint, we’re here to help you make sense of the ever-evolving ESG landscape. Reach out to our team to set up an introductory call or complete our ESG Readiness Survey to get your ESG baseline.