It was only a few decades ago that trustees in many jurisdictions were restricted from investing in certain assets. Fiduciary duty has evolved as the thinking about investments has changed. This is true, then, of how trustees should be applying fiduciary duty to current day investment challenges, including systemic risk and climate change risk.

Ed Waitzer, professor and director of the Hennick Centre for Business and Law at the Osgoode Hall Law School in Toronto, has written extensively on trustee fiduciary duty and how the trustee duties in the pension context have evolved.

He will feature at the PRI-CBERN Academic Network Conference in Toronto this October, presenting a draft of the paper, The fiduciary duty – emerging themes in Canadian fiduciary law for pension trustees, which is the third in a series of research projects on the subject.

In it he says fiduciary duty is a dynamic concept – and while it is firmly rooted in clear and enduring legal principles, it has responded to changing contexts and worldviews.

“Events of the last decade have challenged the efficient market hypothesis, and the use of modern portfolio theory, as the basis for prudent investment and risk management practices (and, accordingly, the consequential legal framework governing pension fiduciaries),” he says.

He also says that pension fiduciaries are increasingly expected to consider questions of future value, rather than simply market price.

“Aside from the hazards of market volatility, they are expected to assess the impact of their investment decisions on others, including generations to come, with all the uncertainties so entailed. Accordingly, there is a growing recognition that risk management for pension funds extends well beyond that which is captured by market benchmarks, extending to market integrity, systemic risks, governance risks, advisor risks and the like.”

People out, returns in

Similarly an article by Jay Youngdahl, a partner at the Texas-based Youngdahl & Citti in the US and a visiting fellow at the Initiative for Responsible Investment in the Hasuer Center for Nonprofit Organisations at Harvard University, says many view modern portfolio theory (MPT) as the only way to comply with fiduciary duty in investment even though it is arguably incompatible with productive investment in the conditions that exist today.

In the article The time has come for a sustainable theory of fiduciary duty in investment, he says the foundation of the duties of fund trustees in the US began years ago in an environment of very different societal and investment expectations.

“Blind adherence to MPT no longer appears to be sufficient in fulfilling a trustee’s true investment duties to beneficiaries in the real… Current conceptions of fiduciary duty need to reflect this reality,” he says.

In the same article Youngdahl says the rigorous mandate to conform to the legal fiduciary duties has been a longstanding standard of trust law, while the definitional content of the investment function of this duty has been in constant evolution.

“…Adherence to fiduciary duty is ironclad, but the substance of the investment duty has always been malleable,” he says. “If you look at the history of fiduciary duty the basis has never changed, but what you do to fulfil that has to be dynamic.”

By way of example, he looks at the Restatement of Law in the US, an influential convention whereby experts in law convene, assess the law and make pronouncements about it.

He says the Restatement of the Law Second, Trusts, in place until 1992, said trustees could not purchase shares on margin or buy bonds selling at a great discount. They also could not buy shares in new companies, so no venture capital investments or investments in capitalisations, and it was considered improper to buy land.

“So, for example, distressed debt would be a per se violation,” he says.

“There is a growing recognition that risk management for pension funds extends well beyond that which is captured by market benchmarks…” says Ed Waitzer.

Youngdahl observes that people are no longer at the crux of the fiduciary duty.

“One thing that has happened to fiduciary duty is that people have fallen out of it. Now it is equated with a quarterly return. This is a distortion of what it’s about historically and what it should be about,” he says.

“Trustees have been looking at that wrong. The trustee fiduciary duty is all about protecting promises and pension promises are long term.”

In this context he says trustees have a duty to think long term, and to think about the factors that affect the long term.

“In the context of the fiduciary duty you have to think about long-term things. It is a violation to only think of quarterly returns.”

 Collective thinking to incentivise the long term

In the first of Waitzer’s series of articles, he argued pension funds take the lead on long-term thinking. The second article said if you weren’t convinced by the logic, then the law will get you, and he did sessions with trustees on what the lawsuit would look like. This third article looks at how, generically, the courts are likely to respond.

Waitzer argues that trustees have a duty to consult, a duty of obedience, a duty to collaborate, and a duty to comply with social norms.

“It is no longer legislatures defining law, but some social norms. All will be articulated in the law in short order,” he says. “But the article I haven’t written is OK, we hear you: what do we do?”

A key obstacle to thinking long term is that all of the incentives are short term, which he argues could be diffused by acting collectively.

“I’m the first to confess I don’t hold myself out as an expert in long-term thinking or how to balance competing interests. We need the ability to think long term when incentives are virtually all short term. But the duty to act collectively will change those incentive structures and we need to equip people to do it.”

He points to the PGGM PEP portfolio as an example. Click here

Waitzer says considering ESG factors when making investment decisions is compatible with trustees’ duty of care, as it allows them to evaluate sources of risk that would otherwise be overlooked.

“Climate change and impacting a systemic change is absolutely a fiduciary duty,” he says.

It’s sustainability, stupid

At the January United Nations Investor Summit on Climate Risk and Energy Solutions, the chief executives of California’s two largest pension funds, Ann Stausboll of CalPERS and Jack Ehnes of CalSTRS, were both vocal about the relationship between fiduciary duty and climate risk. The question of what fiduciary duty encompasses is a dynamic question that pension funds globally are pondering.

Stausboll, chief executive of the $235-billion CalPERS, says fiduciary duty of pension funds should extend to issues outside the parameters typically understood as being directly related to beneficiaries’ financial interests.

“As fiduciaries, it is our job to make sure investors, businesses and policymakers are responding aggressively and creatively to the risks and opportunities associated with climate change and other sustainability issues,” she says.

 

Other papers by Ed Waitzer in his recent series

Reclaiming fiduciary duty balance

Defeating Short-termism – why pension fnds must lead

 

 

 

The Government of Singapore Investment Corporation (GIC) is stockpiling cash as it positions itself to take advantage of any potential opportunities, lifting its cash allocation from 3 per cent at the start of 2011 to 11 per cent of its total portfolio by the earlier part of this year.

The sovereign wealth fund’s chief investment officer, Ng Kok Song, in his annual investment report says the fund’s investment team has been accumulating cash, and decreasing holdings of public equities and bonds.

“Due to the heightened uncertainty in global markets, we allowed the cash inflow from investment income and fund injection to accumulate during the year in preparation for better investment opportunities,” Ng reported.

Despite the turbulent times on world markets GIC also maintained its exposure to developed-world assets, including Europe.

GIC portfolio exposure by region in March 2012

REGION PERCENTAGE
The Americas 42
Asia 29
Europe 26
Australasia 3
*As of March 31 2012

Governance structure overhauled
In an effort to adapt to the volatility and uncertainty on global markets, the fund has also overhauled its governance structure, adding new committees and an international advisory board.

GIC has added new board committees aimed at improving its oversight capacity in both its investment and internal processes.

A new investment review committee will provide specialist oversight of all large investment decisions and will be chaired by Asian banking industry veteran Peter Seah.

GIC has had a focus on large direct investment in recent times. In research released this week, the Sovereign Wealth Institute ranks GIC as the largest direct investor by total transaction amounts.

This was followed by the Qatar Investment Authority and fellow Singaporean sovereign wealth fund, Temasek Holdings.

The institute reports that GIC’s assets under management are $247.5 billion. The fund does not disclose its total assets under management.

The new audit committee will aim to strengthen oversight of internal controls for complaints, financial reporting and disclosure, as well as looking at risk management processes at the fund.

In recognition of the increasingly complex macro environment funds must negotiate, GIC has also added a new international advisory board, chaired by former long-time prime minister Lee Kuan Yew.

“The advisory board provides perspective on the future, in particular global investment trends, emerging asset classes and new growth opportunities,” GIC president Lim Siong Ruan says.

When it comes to its portfolio, the fund has decreased allocation to equities from 49 per cent to 45 per cent over the course of the year.

This has mainly come from developed-market equities, with the fund maintaining its emerging-market equity holdings, which are primarily Asia-focused.

 

Long-term investment horizon
In a description of its long-term investing approach, GIC reported that it would maintain exposures to public markets as it was prepared to ride out short-term volatility.

“We can only enjoy the rewards of long-term investing if we are prepared to tolerate short-term losses or underperformance relative to market indices from time to time,” GIC states in its annual report.

It singles out its emerging-market equity holdings as an example of this. Emerging-market equities was one of the worst performing asset classes last year, swept up in the sell-off of risk assets.

However, GIC notes that its emerging-market-equity portfolio has achieved a 127-per-cent return since 2000, compared with a 22-per-cent return from developed-market equities over the same period.

In keeping with its long-term investment horizon, the fund reported that the almost 75 per cent of its investment mandates are for periods of more than three years, with almost 10 per cent of mandates stretching out for periods of more than a decade.

Approximately 20 per cent of the fund’s assets are externally managed.

The fund reported that more than 54 per cent of its mandates are in alternative asset classes, with 36 per cent allocated to equity managers and 10 per cent to fixed income managers.

 

Greater than inflation
In other investment decisions this year, the investment team also decreased its holdings of nominal bonds by 5 per cent over the course of the year, taking its fixed income holdings from 22 per cent to 17 per cent of the total portfolio.

It marginally increased its private equity and infrastructure holdings from 10 per cent of the total portfolio to 11 per cent.

All other asset classes have remained constant over the course of the year.

The fund reported that it had sliced 1 per cent off its exposure to the eurozone and increased it exposure to both Japan and North Asia (China, Hong Kong, South Korea and Taiwan) by the same amount.

The portfolio reported an annualised rolling 20-year real rate of return of 3.9 per cent, the same as the previous year’s performance.

Over five years the fund has achieved a 3.4 per cent nominal return in US-dollar terms and over 10 years it has achieved a 7.6 per cent return.

The Government of Singapore requires the GIC to achieve “a good, sustainable real rate of return over a 20-year time horizon” when investing the foreign reserves of the country over the long term.

 

Global investors should have as much as 30 per cent of their portfolios exposed to natural resources, more than double the current market average, because of a burgeoning worldwide food crisis, GMO’s Jeremy Grantham says.

The droughts afflicting farmers in the US and the subsequent spike in food commodity prices are just forerunners to the climate-change fallout that will see many food-importing developing countries struggle to feed their populations, according to Grantham.

The co-founder and chief investment strategist at Boston-based asset management firm, Grantham, Mayo, Van Otterloo and Company (GMO), warned investors in his most recent quarterly letter that long-term investors should position their portfolios for a resource-scarce world and decades of rising commodity prices.

“For any responsible investment group with a 10-year horizon or longer, one should move steadily to adopt a major holding of resource-related investments,” Grantham advises.

Not only should investors look to gain exposure to natural resources, but they should also prepare for how the rising resource prices will impact the rest of their portfolios.

“I am now also convinced that rising resource prices will worsen the prospects of the portfolio, by both squeezing profit margins and reducing overall growth,” he warns.

“If correct, this will have serious implications for longer term endowments and pension fund returns: among other factors, a lower growth for GDP in the long term may mean lower returns on all capital.”

 

Rise, natural resources
Grantham advocates allocating 30 per cent of a total portfolio to natural resource plays, with half of this allocated to what he calls a “senior or preferred component” of forestry and farms.

“My personal, somewhat arbitrary, breakdown of a targeted 30 per cent is to have 15 per cent in forestry and farms, 10 per cent in ‘stuff in the ground’ and 5 per cent in resource efficiency plays,” Grantham outlines.

His views on increasing exposure to natural resources are shared by a number of large institutional investors, which have made strong forays into this space in recent years.

The innovative Yale Endowment is one such leader, with its latest update to investors detailing a sharpened focus on natural resources.

From June last year, the endowment decided to split its real-asset allocation into two separate natural resource and real estate buckets.

The endowment is closing in on its target allocation of 9 per cent to natural resources, currently allocating 8.7 per cent to a portfolio of opportunities that includes timberland, oil and gas, and metals and mining.

Its longstanding oil and gas (begun in 1986) and timber (1996) have achieved 16.9 per cent per annum since inception, the endowment reports.

Its investment team aims to achieve a 6 per cent real return target from its natural resource holdings.

In Europe, long-term institutional investors are also looking to be early movers into agriculture.

Swedish buffer fund AP2 last year announced a $250-million joint venture with a US pension fund and financial services provider to buy farmland in the United States, Brazil and Australia.

AP2 invested the money into a newly formed company that has joint venture partner, TIAA-CREF, as its majority shareholder and administrator. TIAA-CREF already has extensive agriculture investments worth more than $2 billion, which include 400 farms, vineyards and orchards in the United States, Brazil, Australia and Eastern Europe.

 

Move for food
In his broad-ranging quarterly letter to investors, Grantham drew from analyses of climate, agriculture and water resources to make the case that the world is five years into a severe – and likely ongoing – food crisis.

He predicts these food shortages will threaten poor countries with increased malnutrition, starvation and even collapse.

“Resource squabbles and waves of food-induced migration will threaten global stability and global growth, this threat is badly underestimated by almost everybody and all institutions, with the possible exception of some military establishments,” Grantham says.

He warns that the commonly held assumption of a minimum 60-per-cent increase in food production is needed by 2050 to feed the forecast world population of 9 billion is unachievable.

Grantham highlighted water shortages, the degradation of farming land around the world and the growing cost, diminishing stores and effectiveness of fertilisers as major hindrances to sustaining food production, even at the current inadequate levels.

Recent US drought-driven spikes in grain prices Grantham predicts are just a foretaste of things to come and particularly concerning, given the widespread plantings undertaken after 2008 shortages led to food-price riots in some developing countries.

For investors, higher input costs driven by a scarcity of natural resources will impact company profit margins and economic growth, and squeeze national budgets in the developed world. In the developing world, it could lead to much more volatile political and social instability, he predicts.

Grantham advises investors look to what he calls “quality” stocks.

These companies either have a much lower resource cost as percentage of total revenues or have a higher profit-margin base to buffer against rising costs.

To read the full GMO quarterly letter, click here to visit their website.

 

The gargantuan impact of systemic risk in global financial markets has been corroborated by a consortium of industry and academics collaborating to provide independent quantitative research, insight and leadership on systemic risk.

Driven by director of MIT’s Laboratory for Financial Engineering,  Andrew Lo, senior managing director at State Street Global Markets, Jessica Donohue, and managing director for research and academic relations at Moody’s, Roger Stein, the Consortium for Systemic Risk Analytics was founded to provide a platform for institutional investors, academics and industry experts to present and discuss new research and better quantify drivers of systemic risk.

 

Collaboration across the board
Systemic risk has presented a major challenge for regulators funds managers, academics and investors who have relied on the diversification tenets of modern portfolio theory for their investment allocations.

“Systemic risk was never imagined by modern portfolio theory,” Lo says. “Modern portfolio theory is now incomplete because of the complexity in financial markets.”

Stein says much of the work involves dealing with the large volumes of incompatible data. He notes that, ironically, in some cases there can be too much information for investors and policy makers to evaluate. Much of the work that is now being done is about using new analytic techniques to rationalise and filter down information to something that is more actionable.

Donohue says in the end investors have to consider systemic risk in asset allocation and tactical asset allocation.

“We are creating relationships and my hope is that will result in relevant measures and ways of thinking that will help investors better manage the turbulent environment,” Donohue says.

The consortium will seek to foster collaboration between academic and industry to research the interrelatedness of markets and the potential sources of systemic risk.

 

Bringing people together
The aim of the consortium is to initiate bilateral conversations on these risks.

“We are driven by a sense of urgency. Systemic risk is not something that businesses are focusing on; it requires a collective effort. Contrary to popular belief, most financial services firms are not evil but are concerned about their impact on systemic risk and so are willing to share information about exposures in their portfolios,” Lo says.

An example of the work the consortium is doing is a “network map” that Stein and Lo developed to combine portfolio analytics and network analysis. The map outlines the relatedness of money market funds and the risks to them through exposures to non-US debt. In this case, Moody’s agreed as a one-off to provide the anonymised data to Lo and Stein. They then shared the results of their new analytic approach with the group, which included State Street, Moody’s academics as well as government organisations such as the Securities and Exchange Commission and the Office of the Comptroller of the Currency.

“The notion is to bring people together who wouldn’t otherwise talk to each other, and to do so in a way that expressly addresses issues of confidentiality and complexity,” Stein says.

 

More than just quants
Lo has done much research on systemic risk, including a variety of measures and the relationships among markets and different investment holdings. “There is increasing correlation,” he says. “For example, in the hedge fund industry there is no corner that is undiscovered; all are crowded trades.”

The consortium is interdisciplinary, with Lo involving various departments of MIT in the research and discussion including physics, engineering and maths.

“Although much of the discussion focuses on financial data and analytics, we also talk about the impact of things like dependence on key computer systems as being potential sources of systemic risk. It is an active debate,” Stein notes.

State Street Global Markets, the investment research and trading arm of State Street Corporation, has produced a prolific amount of research and work through State Street Associates, its collaboration with leading academics.

Some of that work includes measures of systemic risk and turbulence in conjunction with Mark Kritzman, who also teaches at MIT. Similarly, Stein’s focus has been developing approaches to extending quantitative credit measures for applications in systemic risk analysis.

Donohue says industry consortium members do not share proprietary information, but published works, such as those of Kritzman, could be applied to share insights with the group.

The consortium will have a public website and announce new members within the next month.

 

 

Institutional investors around the world have been lobbying for the right to have a say on pay, a right to have an input into the remuneration of the executives in the companies they invest in. In June the UK’s business secretary, Vince Cable, laid out new plans that will give shareholders three-yearly votes on executive pay in that country.

Speaking to the House of Commons, Cable said “…it is neither sustainable nor justifiable to see directors’ pay rising at 10 per cent a year while the performance of listed companies lags behind and many employees are having their pay cut or frozen.”

Similarly the issue of pay is rife in the investment industry: everything from paying internal pension investment staff enough to the over-pay and pay structure in funds management firms.

 

The wrong ratio
Saker Nusseibeh, chief executive of Hermes Fund Managers, believes the debate is centred on the wrong issue.

“Personally I think the remuneration structure needs to change. Quantum is the wrong issue,” he says. “The bonus structure is flawed with a short-term focus. The industry needs to tie managers into paying for what they do and a bonus is above what you do or a specific task.”

Nusseibeh is comfortable speaking out on issues in the industry. He is chair of the 300 Club,  a group of global investment professionals whose aim is to raise and respond to urgent uncomfortable and fundamental questions about the very foundations of the investment industry and investing.

The 300 Club’s mission is to raise awareness about the potential impact of current market thinking and behaviours, and to call for immediate action. Short-term behaviour and short-term bonuses is one such issue, and was highlighted extensively in the recent Kay Review.

“In the funds management business the ratio of salary to total compensation is 2:1. The ratio is wrong,” Nusseibeh says.

Other structural problems worth highlighting in the industry, he says, include longevity – or lack of it in leadership positions – and compartmentalisation, in which each actor in the financial industry is being rational in their own silo but in totality is creating irrational behaviour.

“This leads to the law of unintended consequences,” he says. “An example is with ownership of companies; we have to collectively decide what we want companies to do.

“It goes back to honesty. The financial business is not necessarily comfortable with full transparency and honesty. It is a very elitist culture and things are made more complex than they need to be so players can take a margin.”

By way of example he says: “There were enough people around before the crisis who knew what was happening to stop it. There’s asymmetry of information. We think to encourage honesty you have to lead by example.”

 

True advice
Hermes Fund Managers is owned by BT Pension Scheme and that fund remains its largest client, however the multi-boutique asset manager also, increasingly, manages money for third-party clients.

“With our third-party clients we’re prepared to be completely transparent; hopefully they’ll ask that of other funds managers,” he says. “We are a great believer in transparency of pay and we publish how much we pay everyone” *

“If you’re hiding something, like how much you’re being paid, you have to ask why,” he says

Nusseibeh sits on the BT Pension Scheme investment committee. He says the Hermes business has been built on three pillars: excellence, responsibility and innovation.

“We have to show the same care and responsibility to our third-party clients that we show to our parent. This means transparency. They have access to our internal spreadsheet, risk analysis and attribution, and our qualitative assessment of the manager. We review all of our portfolios on a continual basis, have a formal review monthly and investors have access to the minutes of the meeting. It is true advice: telling a client when we don’t agree.”

 

* According to a document called Pillar 3 Disclosures at the end of December 2011, aggregate annual remuneration of senior management who have a material impact on the risk profile of the firm is £9,381,000 in respect of the 2011 performance year. This is made up of fixed pay and variable pay. The bonus structure includes an equity participation scheme and a bonus deferral scheme.

 

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.

ESG AND ENDOWMENTS

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.