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Getting Started in Responsible Investing

February 25, 2019  | by Deborah Spalding

Investment Strategy

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.
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.

Authors

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Deborah Spalding co-leads the Commonfund Asset Management Investment team and oversees the design, tailoring, and implementation of custom investment solutions for clients. She also leads the firm’s sustainable investment efforts. Deborah serves as a member of the Commonfund Asset Management Executive Group and the Investment Committee, and chairs the Commonfund Asset Allocation Committee. Prior to joining Commonfund, she was the Chief Investment Officer for the State of Connecticut’s $30 billion Retirement Plans and Trust Funds. Previously, she was a Managing Partner at Working Lands Investment Partners, LLC, an independent investment management firm that invests in rapidly growing environmental markets. Prior to that, she held several executive level positions including Executive Vice President and Head of International Investments for Schroders Investment Management N.A. and Managing Director and Head of International Institutional Investments at Scudder Kemper Investments. She began her career as an equity analyst at SKB & Associates in San Francisco. Deborah received a B.A. in International Relations and Asian Studies from Tufts University and holds graduate degrees from Harvard University, University of California Berkeley and Yale University. She is a past Board Chair and a member of the investment committee of the National Wildlife Federation, and an advisory board member of the Center for Business and the environment at Yale and is a Lecturer in Forest and Ecosystem Finance at Yale.
Deborah Spalding
co-Chief Investment Officer, CFA

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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.