How to get Started in Responsible Investing

The biggest challenge in implementing any type of responsible investment program is in clearly defining and prioritizing those issues most relevant to an organization. Although it may seem a straightforward exercise, there are often several challenges that prevent boards from taking this crucial first step. These include:

• Achieving alignment among board members. Very rarely do trustees agree on key ESG factors, let alone agree on whether (or how) they should be incorporated into investment decision-making. As just one example, although society at large recognizes that climate change is an urgent global challenge, it is not unusual to have one board member who questions its existence and/or importance. Many issues serve as “hot buttons” and can easily become politicized during board deliberations. Getting trustees to agree on ESG focus areas can be difficult and may require compromises that leave some board members unsatisfied with the solution.
• Adequately addressing all stakeholder interests, including staff, donors, partners and the community at large. Often, stakeholders take different sides of the same issue, particularly in the debate over whether an ESG program compromises returns. In other cases, stakeholders may welcome initiatives to align investments with the organization’s mission, but push back on the way these are implemented (i.e. questioning the choice of investments, and/or pressuring for fewer/greater commitments).
• Prioritizing those issues that are “investable” in a portfolio. While some ESG related issues are more straightforward (i.e., tobacco), others are more multi-faceted (i.e., poverty alleviation). In seeking to make a measurable impact, it can be difficult to tie certain ESG investments with non-financial, ESG based outcomes, and determine the actual value created.

Commonfund works with many foundations and endowments to help implement responsible investment programs that are appropriate in type and scale for each organization. Every organization is unique and will need tailored, in depth education, analysis of investment options, approaches to ESG portfolio construction, and benchmarking.

Following are some brief case studies that might prove informative for other institutions that are considering the role of responsible investing in their organizations:

• A community foundation, focused on reducing inequality and servicing disadvantaged and marginalized populations, wanted to explore an impact investment program. While there was full agreement to align investments with the mission, the board was skeptical of existing investment solutions that could defensibly demonstrate a direct improvement on inequality. In addition, some trustees felt strongly that as a community foundation, the focus should be locally based. While the board is still exploring the future use of impact investment strategies in the investment portfolio, at this point, they have decided to expand their existing Program Related Investment efforts. Using grant-based, staff run, financing mechanisms, they believe they are better able to make capital commitments directly tied to the community being served.
• A university was being pressured by its student body to divest fossil fuels from its endowment portfolio. Over time, the relationship between the endowment and the students had become increasingly antagonistic. Although the board was overwhelmingly against divestment, there were mixed (and vocal) opinions on whether investments should be climate sensitive or should ignore the issue and prioritize financial returns. Alongside the internal debates, the university development office was fielding calls from large donors who supported divestment and other large donors who did not want the endowment to take its focus away from generating returns. Over a period of several months, Commonfund assisted the endowment in its analysis of various ways to manage fossil fuel exposure in the portfolio, helped the endowment office message its efforts to various stakeholders, and convened a half-day session with students and trustees. In many ways, one of the best outcomes of this effort was an increased sense of empathy between the various stakeholders. Students began to recognize the strengths and weaknesses of divestment from a portfolio construction lens, while trustees were able to engage with students in a non-confrontational way. Ultimately, with every “side” given the chance to collaborate on a complex topic and see through each other’s lens, the students and trustees came to an agreement on next steps. Currently, the board is exploring various “climate smart” investment options within its equity portfolio and is rolling out a portfolio-wide ESG policy. At the same time, students are acknowledging that the endowment is making tangible progress and has begun to collaborate on efforts to implement sustainable practices across the university campus.