Viewpoint: Responsible Investing - Read All About It

August 10, 2018  | by Commonfund Institute

Industry Knowledge | Investment Strategy | Responsible Investing

The new and newsworthy in this year’s Council on Foundations–Commonfund Study of Investment of Endowments for Private and Community Foundations® (CCSF) is headlined by responsible investing. No other area of inquiry showed as much year-over-year change or as much change over the past few Studies; to be clear, the changes would not be considered dramatic, but they are consistent and the trend line is easily discernible.

Last year’s Viewpoint offered an in-depth analysis of responsible investing among participating foundations. This year we are revisiting the topic, but in a more abbreviated form—an update, because changes from FY2016 to FY2017 are worthy of comment and we now have one more year’s data in this evolving investment discipline.

The news in brief: Among private foundations, 19 percent of Study participants said they seek to include investments ranking high on environmental/social/governance (ESG) criteria versus 15 percent that said so last year. Among community foundations, 18 percent said that they seek to include investments ranking high on ESG criteria, a sharp increase from 8 percent last year. Socially responsible investing (SRI), in which certain investments are excluded or screened out, was practiced by 22 percent of private foundations this year, up from 17 percent a year ago. Among community foundations, 21 percent said they practice SRI compared to 14 percent last year. Among private foundations, 30 percent allocated a portion of the endowment to investments furthering the institution’s mission (MRI, or mission-relate investing) versus 25 percent that did so a year ago. Among community foundations, 22 percent allocated a portion of the endowment to investments furthering the institution’s mission, a two-percentage-point gain year over year. (Definitions of these approaches to responsible investing may be found here.)

The changes from last year to this are the most dramatic in the period that this Study has probed the responsible investing practices of both private and community foundations—a period beginning in 2014 and extending through 2017, giving us four years of data. The series of tables that follows examines the growth of the three responsible investing approaches over this period of time.

TB1-ESG

Private foundations have consistently practiced ESG at a higher rate than community foundations, and after three years when private foundations’ rates of adoption were level, there was a four-percentage-point increase in FY2017. An even greater change took place among community foundations. This year, the frequency with which they reported implementing ESG criteria more than doubled and nearly pulled even with private foundations.

TB2-SRI

The pattern of SRI adoption among foundations is very similar to that of ESG. Private foundations’ implementation of SRI was quite level for three years and then expanded in FY2017. And, for all but one year (2015), private foundations more frequently have employed SRI at higher rates than have community foundations. Similar to ESG investing, in FY2017 community foundations reported a sharp increase in the rate of adoption of SRI, to the point where they used SRI at a rate only one percentage point lower than private foundations.

TB3-MRI

Mission-related investing is practiced at the highest rate of the three approaches to responsible investing. Over the four-year period, its rate of adoption among community foundations has grown by almost 50 percent. MRI has shown steady growth among private foundations, save for a decline in FY2016. This year, the rate of MRI adoption among private foundations reached a high for the period.

Other Aspects of Responsible Investing’s Evolution

While adoption of responsible investing is expanding, there remains a group of Study respondents saying that their boards have decided to exclude responsible investing from consideration. And, in fact, this group was larger in FY2017 than it was in FY2014, although lower this year than it was at its height in FY2016.

TB4-XRI

Typically, boards reluctant to adopt responsible investing practices cite two factors: the perceived potential for lower investment returns and the possibility of not fulfilling their fiduciary duty. Additional reasons often cited are a relative lack of standards and definitions, and the difficulty of implementing such a program, particularly for foundations with a high share of passively managed assets.

What of the future? The Study has asked whether foundations are considering changing their investment policy to include ESG integration. For both private and community foundations, the trend is consistently upward, as the following table shows. While private foundations frequently have been ahead in adopting various responsible investing practices, community foundations may be expected to take the lead in ESG integration if these indications of future considerations in fact become reality.

TB5-Integration

Conclusion

This Viewpoint is intended to be an update of last year’s more in-depth analysis of trends in responsible investing. This is a subject that warrants revisiting periodically, as interest in it continues to grow and, oftentimes, leads to action as boards decide to implement some form of responsible investing policy.

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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.

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.