Endowments fall
from grace

US college and university endowments have gone from pioneers in the adoption of socially responsible investing (SRI) to markedly trailing the rest of the investment industry in integrating environmental social and corporate governance (ESG), new research reveals.

The Boston-based Tellus Institute, an independent not-for-profit think-tank, looked at 464 endowments and was damning in its findings, revealing that if SRI policies did exist they were limited to screenings of tobacco and so-called sin stocks and divestment from Sudan.

The endowments represented in the study have combined assets of more than $400 billion.

Researchers found endowments also displayed a weak knowledge of ESG investing strategies and were virtually absent from well known investor networks, with just one student-run fund signing up to the UN-backed Principles for Responsible Investment (PRI).

The Environmental, Social and Governance Investing by College and University Endowments in the United States: Social Responsibility, Sustainability, and Stakeholder Relations report’s lead author, Joshua Humphreys, says the research reveals endowments were stuck in a “1990s mindset” when it came to ESG investing.

“Overall, we found that the endowment community exhibits a very weak understanding of the leading ESG investing strategies, trends, nomenclature and opportunities that exist. We found that the endowment community as a whole has a very anachronistic understanding of the ESG space as if they were trapped in the 1990s,” Humphreys says.

Humphreys says this is principally because funds had failed to engage with other investors in collaborative efforts, in particular ground breaking working groups at investor networks such as the UN PRI that have focused on extending ESG integration to private market and alternative asset classes.

The level of funds reporting they utilise SRI/ESG criteria to inform their investment decisions has also steadily dropped, researchers found.

Using data collected by the National Association of College and University Business Officers (NACUBO) the report finds that 18 per cent of funds claim to integrate SRI/ESG factors into their investment processes, down from 21 per cent in 2009.


Lack of collaboration with other investors has meant endowments have been left behind on ESG integration.National Association of College and University Business Officers (NACUBO) report finds that 18 per cent of funds claim to integrate SRI/ESG criteria into their investment processes, down from 21 per cent in 2009.

Researchers found a lack of transparency from endowments. According to the Sustainable Endowments Institute (SEI) survey of 277 US endowments, just 36 per cent reported they disclose their investment holdings to their entire school communities.

The SEI has issued a report card examining endowment transparency and disclosure, which found that more than half of the surveyed endowments scored a C or worse.

When it came to incorporating ESG considerations into investment decisions, Sudan-related investment policies remained the most widespread ESG investment issue on an asset-weighted basis.

Some $150 billion in assets were affected by these policies. This was followed by tobacco screens ($75.3 billion) and human rights ($15.7 billion).

Tobacco stocks were the most commonly screened stocks.



From explosion to erosion
Humphreys described this as endowments moving from “explosion to erosion” when it came to the adoption of SRI/ESG investment practices. Endowments had led the push to divest from Sudan, but activity in the SRI/ESG space had steadily diminished in recent years, Humphreys notes.

Researchers found that much of the activity and reporting around the consideration of ESG factors in investments focused on proxy voting.

However, due to the endowment model, which focuses on alternative assets as opposed to public markets, the focus on proxy voting has meant there is little ESG action taken on the majority of assets endowments hold.

When it came to proxy voting, almost 200 endowments either did not have the capacity to exercise their proxy votes because all holdings were in mutual funds or outsourced this responsibility to external investment managers.


Stakeholders take the wheel
The drivers for adopting ESG investment practices were also different for endowments.

While ESG integration has moved into the mainstream with investors seeing risk mitigation and/or return enhancement opportunities, endowments have typically adopted ESG investment after demands from stakeholders.

These stakeholders include students, donors, alumni and staff and faculty members.

“A lot of ESG investing activities that schools embrace is, quite frankly, not through any sanguine acknowledgement of the pertinence of ESG issues and risk analysis or investment opportunities but simply as a kind of responsive mode to the demands of stakeholders,” Humphreys says.

Cambridge Associates associate director and head of the consultant’s mission-related investing group, Jessica Matthews, says that endowments that approach the asset consultants to discuss ESG-integration are more concerned about what peers are doing than in the investment case for adopting ESG strategies.“We have certainly heard from our college and university clients on these types of issues but I would agree with what the report concluded that colleges and universities are not doing as much as some of these other groups,” Matthews says.“What really happens at the colleges and universities is that they are very driven by what their peers are doing and the question we always get, if we do get a question from this group, it’s ‘what are the other ones doing? Are we behind? Are they doing anything?We are getting pressure from our students are they getting the same pressure?’ So there is a very strong peer focus here from this group.”

Matthews says that charitable foundations drive about two-thirds of the business of the mission-related investment group at Cambridge.

The group focuses on opportunities for impact investing across asset classes.

Another reason Matthews cites for endowments trailing the industry in terms of ESG integration is that the main champions of the adoption of SRI and ESG-related investing have been students.

“The stakeholders to some degree are the students and they are a transient group, so you don’t have somebody who is a champion for doing some sort of ESG or mission-related investing.

But at foundations, this could often be the president of the foundation,” she says.

While education and university endowments have been slow to adopt ESG investment practices this is often at odds with the ground-breaking work done in this space by the same education institutions’ faculty and staff.


Institutional disconnect at Harvard and Yale
Both Harvard and Yale have established research organisations looking at ESG investing practices. This includes Harvard University’s Initiative for Responsible Investing through the Hauser Center for Nonprofit Organizations. Yale’s School of Management has established a Center for Corporate Governance. Yale also has a Center for Business and the Environment that seeks to provide thought leadership on sustainable investing.

Despite academic staff leading new thinking on ESG investing, there is an apparent disconnect when it comes to the performance of the university’s endowments.

Both universities have student-led advocacy groups pushing its respective endowments to do more to make their investment processes more transparent.

Launched in 2011, Responsible Investment at Harvard describes itself as a “broad coalition of students, alumni and staff”. The organisation was established to pressure the Harvard Management Company (HMC) to initiate greater ESG integration in its investment decision making for the $32 billion endowment.

It has called for the endowment to adopt a transparent policy to incorporate environmental, social and governance due diligence into all aspects of the investment portfolio, as well as set up a social choice fund to prioritise impact investment opportunities.

In an interview in the Harvard Gazette in May, HMC president and chief executive officer Jane Mendillo responded to concerns about the fund’s sustainable investing practices.

Mendillo says that as a long-term investor the fund had a responsibility to look closely at the sustainability of all investments.

“All of our investments are thoroughly vetted for their potential returns, their risks, and also for their sustainability.

Our due diligence process includes critical evaluation of issues related to environment, labour practices and corporate governance,” she told the university newspaper.

Yale University’s endowment has come under pressure to reform from The Responsible Endowment Project – a student led initiative that has called for a major overhaul of SRI/ESG investment practices at the $19.4 billion endowment.

The project has released a framework for responsible investing, arguing that Yale’s Advisory Committee on Responsible Investing, the body responsible for overseeing ethical investment practices, is no longer up to the task.

More than 80 per cent of the endowment’s assets are now held in alternative assets, according to project research released in 2009, with virtually all assets managed by external managers.

The committee’s focus on proxy voting, the project argues, means that it has little impact on oversight of the vast major investment activity.

The project’s demands for reform include full disclosure of holdings by the endowment as well as rigorous disclosure by external managers. It also advocates that the Yale endowment engage in collaborative investor networks such as the UNPRI.

However, the report’s researchers singled out the Yale institute as one of the better performing endowments, citing its allocation of $1.4 billion to clean technologies, renewables and sustainable timber.

“The case of Yale highlights how alternative asset classes such as private equity and venture capital and real assets such as timber can be particularly well suited for investments in environmental sustainability,” the report’s authors note.

The not-for-profit think tank Investor Responsibility Research Center Institute (IRRCI) funded the report.