This college class is an object lesson in sustainable investing
The student-constructed portfolios combining financial and ESG considerations are handily outperforming traditional funds.
Concentrated stock portfolios continue to outperform significantly when combining sustainability and financial criteria. That's the major blinking-in-very-large-neon-lights headline from the portfolios our students at Brown University have been constructing in our classes on sustainable investing.
Inspired by the student-run club at Brown University on socially responsible investing (or Brown SRIF), its own financially outperforming portfolio is available on their Facebook page. Our sustainable investing class began in spring 2016 and was the outcome of the divestment movement on campus in 2013, leading to university president Christina Paxson’s desire to do what Brown can to research, teach and invest in a positive way. Her letter to the Brown community in October 2013 was thoughtful and laid out what continues to be an unfolding strategy. A taskforce is meeting to consider further steps that the university might make in this regard, which is exciting to see.
In order to construct a sustainable portfolio within the university endowment, which was one of the original goals of Paxson’s plan, one student, Sophie Purdom, stepped up to help attract more funds for the students to manage from university operations; it now totals $150,000. Purdom also helped tweaked the process to look first at financial criteria, then sustainability strategy.
This fund has outperformed the other student-run fund, Brown Investment Group, which does not consider sustainability as a major consideration.Concentrated stock portfolios continue to outperform significantly when combining sustainability and financial criteria.
Companies need to pass both screens and be voted on by students to qualify as a "buy" for the students' sustainability fund. Students are assigned sectors to watch for when companies are overvalued and might need to be sold down the road. Students participating have found this quite useful for launching their eventual careers in banking, consulting and beyond. Meanwhile, the student club is at a record level of popularity.
Given her work, also recognized internally at Brown, Purdom was brought in to intern as a senior at the Brown Investment Office and created a class with me to institutionalize teaching on the subject for the Brown student community.
Our class proved to be quite popular, with 45 students pitching stocks for one minute each, winnowing down to 15 final presentations that wrapped up our class, from which the five best companies were voted on. This takes from the more successful sustainable investment strategy as implemented by the likes of Generation Investment Management and Parnassus, each of which manages tens of billions of dollars thanks to their success at aligning sustainability with shareholder value. We also did this over the summer with rising high school students, mostly from China, who also rose to this task successfully.
Let’s see how our three portfolios to date have done.
The original five-stock portfolio we chose in spring 2016 has been enormously successful. After about 1.5 years (through mid-November), here’s their growth:
- Applied Materials: 184.2 percent
- Xylem: 74.5 percent
- 3M: 43.0 percent
- Alphabet: 42.8 percent
- Hannon Armstrong: 30 percent
Overall, that's an astounding 74.7 percent, versus 28.4 percent for the S&P 500 and 37.8 percent for Parnassus Endeavor, selected to back the Brown University Sustainable Investment Fund established within the endowment in June 2016 — a high level of outperformance for our student-constructed fund.
Parnassus Endeavor is a well-run fund isolating the best companies to work for from a quality-of-workplace perspective; it has grown to manage roughly $4.5 billion while outperforming all U.S. sustainability funds over the past 10 years. But our students did even better.
The five companies above succeeded while seeking positive sustainability outcomes, such as Xylem on water infrastructure and Hannon Armstrong on energy efficiency financing. And these results don’t include their high-dividend payments, so the outperformance was even larger.
This sort of performance was also seen twice more this year, starting with the portfolio chosen by our spring class. That more global, five-stock class portfolio consisted of Unilever, Alphabet, Vestas Wind Systems, Microsoft and Taiwan Semiconductor. It since has been up 19.1 percent, compared to the S&P 500’s increase of 10.4 percent, MSCI World’s gain 11.5 percent and Parnassus Endeavor's rise of 13.1 percent. Once again, Brown students and the process we followed led to better performance than benchmarks or well-managed sustainability funds.Students have given us a lot to learn when it comes to aligning sustainability with financial criteria.
This summer, our amazing rising high school seniors — from China, Egypt, Taiwan, Singapore and numerous U.S. states — similarly rose to this task.
That class ended up with a global five-stock portfolio comprising of Borg Warner (parts manufacturer for the low-carbon transportation economy), Boeing (a company aiming for fuel efficiency through ongoing airplane design improvement), Johnson & Johnson (a champion of supply-chain management among other sustainability considerations) as well as Siemens and Henkel from Germany, both sustainability leaders.
Performance of this portfolio so far has been up 12 percent versus the 5.7 percent for the S&P 500, 6.6 percent for MSCI World and 7 percent for Parnassus Endeavor.
Purdom and I co-edited our most recent book, "Sustainable Investing: Revolutions in Theory and Practice," which outlines trends and emerging imperatives in the field of sustainable investing. We are using it as a textbook in classes at Yale and Brown universities. The book included student contributions. (More student solutions to a variety of corporate, investor and policy challenges will be featured in my forthcoming fifth book, "Sustainable Innovation and Impact.")
The students have given us a lot to learn when it comes to aligning sustainability with financial criteria. Their work could become the future of active investing, as underperforming active funds give way to passive strategies, as students demonstrate how to identify better financial performance. In China and other developing world settings, the imperative is even clearer, as ESG success leads to confidence, integrity, market share and better competitiveness.
It’s only a surprise to us that more professional investors haven’t taken notice. Millennials certainly have seen this, as studies from Bank of America, Morgan Stanley and Schroders recently have made clear.
There’s a revolution underway, a financial revolution, and one we have long hoped for in our books on sustainable investing. A positive dynamic emerges when financial success combines with better societal outcomes. Their methodology extends beyond public-equity investing. It also could show the way to private-sector solutions to critical sustainability issues, given the lack of public-sector leadership on these issues.
Change the world and make more money: Who could argue with that?