Now, more than ever, asset owners are taking a step back to consider the big picture. And that means that returns are only one aspect of achieving goals. Today, organizations care about investments that are consistent with their mission and/or social view, often seeking to make a positive impact on the world. That leads many institutional investors to ask, “How can my investments have an impact broader than returns alone?” That switch in mindset paves the way for the growing popularity of sustainable investing in institutional portfolios. Research shows that approximately 20% of nonprofits currently implement sustainable strategies, and this number has been consistently growing.1
Given the rising trend of implementing sustainable strategies, it’s critical to consider a range of benefits and trade-offs before adding them to your portfolio. Getting started can be the hardest part. Here are three key areas to think about:
- Building consensus
Diverse investment committees and boards bring much value to decision-making within an organization. Yet many points of view can make it challenging to agree. ESG consensus research shows that larger organizations have bigger boards and investment committees.2 That means more diverse stakeholders are involved in decision making, which opens up more of an opportunity for varying perspectives.
But the first step in implementing a sustainable investing strategy is listening to stakeholders and gaining consensus. Agreeing upon a shared set of objectives will guide the strategy and process. There are so many important areas in which to make an impact. Narrow it down to a plan that makes sense for your values and your investment goals. Your investment partner can help navigate this discussion and provide data to help bring in some analytical content to aid in the decision making process.
- Implementation preferences
Your financial objects, portfolio makeup and the amount you plan to allocate to sustainable strategies can make a big difference in implementation. Larger organizations often have the ability to incorporate sustainability across the entire portfolio by investing directly at the security level or in a broad range of ESG-integrated, thematic or impact strategies through both funds and separate accounts. Because of cost considerations and investment minimums, this can be more challenging for some mid/smaller organizations. Those organizations might consider starting with investments in a few sustainable strategies that allow for custom implementation through either mutual funds or separate accounts, depending on the provider’s offering. For example, some separate accounts can sample an index while applying values-oriented screens that fit an organization’s requirements across the portfolio. This can be achieved at an often lower cost and with scale leveraged by the OCIO through access to more funds and managers they may already have in their network.
- Risk implications
Last, but not least, do not compromise diversification. Whether you invest directly in sustainable funds or incorporate values-based screens through separate accounts, it’s important to maintain a wide variety of manager/fund options across asset classes. You want the ability to maintain or replicate the diverse portfolio that you already have in place, while incorporating strategies that meet your sustainability goals. Your portfolio should remain focused on risk management; be sure to re-establish your risk metrics if modifying your asset allocation.
Sustainable investing means different things to different people, and not all investment providers can offer the same level of sustainable investing capabilities and resources. A dedicated, experienced team, top of the line technology and accurate reporting are key. Lean on your investment provider for advice on the best way to bring impact investing into your strategy.
1. “2020 NACUBO-TIAA Study of Endowments (page 60),” NACUBO, nacubo.org, and “Commonfund Study of Investment of Endowments for Private and Community Foundations (page 4),” Council on Foundations, cof.org.
2. "Why It’s Hard to Build ESG Consensus," PLANADVISER. planadviser.com
Important Information Environmental, social and governance (ESG) guidelines may cause a manager to make or avoid certain investment decisions when it may be disadvantageous to do so. This means that these investments may underperform other similar investments that do not consider ESG guidelines when making investment decisions. There can be no assurance goals will be met. If an environmental, social and governance (ESG) guidelines may cause a manager to make or avoid certain investment decisions when it may be disadvantageous to do so. This means that these investments may underperform other similar investments that do not consider ESG guidelines when making investment decisions. There can be no assurance goals will be met. If an underlying fund is subject to certain social investment criteria it may avoid purchasing certain securities for social reasons when it is otherwise economically advantageous to purchase those securities, or may sell certain securities for social reasons when it is otherwise economically advantageous to hold those securities. [ESG] [Sustainability] is not uniformly defined and that scores and ratings may vary across providers.