ESG, or Environmental, Social, and Governance investing is growing in popularity among both individual investors and institutions such as non-profits. Many non-profits, be it a foundation, endowment, or charitable organization, have considered ESG investments or are educating their respective board and finance committees on this evolving space. The question begs, why should non-profits consider ESG investing for their investment funds?
1) The first reason is that ESG offers a clear alternative to other types of investing such as Socially Responsible Investing, or SRI. While SRI may hold a place with some investors, it is structured to actively remove or choose investments based on specific guidelines and limiting factors. By contrast, ESG investing seeks to analyze a company’s Environmental, Social, and Governance practices alongside your traditional financial and investment related screening processes, not merely exclude. ESG, by nature, can be much more inclusionary and select companies that score high, or higher, than their peers within those metrics. With those inclusionary features, a portfolio can be more aligned with traditional benchmarks across sectors and industries.
2) ESG investing may align with the values of your organization. It is a straightforward proposition for many organizations. If the investments do not align with the goals and mission of the organization, do you want to invest in those securities? A simple quote from an executive director that resonated with me is paraphrased as such, “We are committed to many social causes, and investing alongside companies that seek to do well in these areas aligns with our beliefs”.
3) ESG can be incorporated into the investment portfolio in many facets. Many investors have different viewpoints of how ESG can be utilized and adopted into the portfolio. The first method may be the most fundamental, where only ESG designated strategies are used, and ESG may be in front of performance goals. The second, and potentially more palatable, could be that the investment strategies are not dictated by ESG designations and scoring alone but rather an ESG process of integration into the investment screening and review. This may present a comprehensive process that performance and ESG stand together as opposed to one dictating the other. Together, these aim to generate sustainable wealth creation for non-profit investors that has the characteristics of sound fiduciary stewardship, prudent risk management, and value alignment.
4) Risk and returns may be the same or better versus traditional investing. While ESG investing in the United States does not have tremendous empirical evidence of outperformance, the basic logic would seem to indicate that companies that do good should perform better over the long-term especially given the risks present for those who may not have good records on the Environment, Social, or Governance factors.
5) Your donors likely care about ESG investing. Clearly, your donors are dedicated to making the community a better place through charitable giving. In that regard, ESG investing may be a part of their own value system. Investing those proceeds in an endowment without ESG considerations may not fully encapsulate the goals of that donor or the investments themselves present a conflict. According to Morningstar, 72% of U.S. investors have expressed interest in sustainable investing.1
The 5 above considerations of Environmental, Social, and Governance Investing (E.S.G.) are not encompassing of all factors to consider but a set of core illustrative principles to review. ESG investing is rapidly growing in the non-profit industry and an advisor than can guide you through this evolving landscape is critical. Regardless of the complexities presented, there are opportunities to improve your process and considered approach to your non-profit funds.
1. Morningstar. Are Your Clients ESG Investors? April 22, 2019. Based on a nationally representative sample of 948 respondents.