Why intentionally designed endowments matter for business
A conversation is growing across higher education — as well as foundations, hospitals, cities, faith groups and other mission-driven institutions investors — about how to align investment portfolios with institutional mission, values and sustainability goals. We call these intentionally designed endowments, in that they are intentional about both generating strong returns and driving positive outcomes in society.
The conversation is a result of a growing awareness of a systemic problem with how businesses reconcile creating value for shareholders with creating value for society. For sustainability practitioners, it’s not news that our economic system often incentivizes the "externalization" of costs. If there isn’t a law requiring a company to pay the full costs of certain activities, too often it won’t.
Carbon emissions are a stark example. As we better understand the costs of climate disruption to society (from extreme weather events, health impacts, etc.), it’s clear that carbon emissions are underpriced. In most cases, they’re not priced at all; companies and individuals can emit them for free. Others pick up the tab — whether it’s taxpayers, insurance providers or families paying medical bills and home repairs out of pocket.
Moving externalized costs back to the source
Increasingly, however, we are beginning to "internalize" these costs. A recent KPMG report analyzed this trend and identified three drivers of internalization: regulations and standards, stakeholder action and market dynamics. Understanding these trends is critical for businesses, but also for investors trying to assess the true long-term value of those businesses.
Sustainable investing in various forms — applying screens to determine the best and worst actors; integrating environmental, social and governance (ESG) criteria into investment analysis; investing in solutions with positive impact; and engaging companies as active shareholders — has been growing in leaps and bounds in recent years.
From 2012-2014, assets under management in the U.S. using some form of sustainable investing strategies grew 76 percent from $3.74 trillion to $6.57 trillion (see the 2014 “Trends” report from US SIF). But the underlying fact is that if the economic system better reflected the true costs of corporate practices, all investing would be sustainable investing.
How education handles green endowments
The higher education sector has been tackling sustainability from many angles — education, research, operations and community engagement — for many years. The American College & University Presidents’ Climate Commitment (ACUPCC) — a pledge by nearly 700 institutions across the country to pursue climate neutrality — is perhaps the clearest indicator that sustainability is becoming a strategic imperative for higher education. More recently, endowments have gotten involved. The past two years have seen tremendous progress.
Harvard signed the CDP and the Principles for Responsible Investment (becoming the first university in the U.S. to do so) and hired a VP for sustainable investing.
The University of California System also signed CDP and PRI, in addition to committing $1 billion in investments in climate solutions and getting on a path to integrating ESG into their portfolio. UC also became the first university in the world to sign the Montreal Carbon Pledge, committing to measure and disclose the carbon footprint of investments.
Yale’s iconic Chief Investment Officer, David Swenson, sent a letter to all of its investment managers asking them to consider companies’ greenhouse gas emissions and exposure to climate risk when deciding whether to invest.
Institutions that have committed to divesting from fossil fuels in some form include the University of Dayton, the University of Maine, San Francisco State, Stanford, Pitzer, Unity, Hampshire, Green Mountain, Humboldt State, Chico State and The New School.
A network to support sustainable stakeholders
Last April, Second Nature and Hampshire College convened a gathering to explore these topics with 120 senior leaders from colleges, universities and foundations. Building from that conversation, Tony Cortese and I established the Intentional Endowments Network to help accelerate these trends by supporting endowment stakeholders through education, peer networking, convening and information exchange. We held additional Forums at Arizona State University and Mount Holyoke College, and will hold another May 6-8 in Denver.
Colleges and universities have the opportunity to be role models for all of society, exemplifying cutting edge sustainability practices in all that they do. Being intentional about endowment investing an important part of a comprehensive, holistic sustainability strategy. It is also an important part of setting a context for learning about sustainability, which is critical to ensuring students are prepared to create a sustainable future.
Intentional Endowments Network’s goal is to see intentionally designed endowments become the norm in higher education. With $450 billion in assets, and immeasurable social and intellectual capital, these institutions have the capacity to make a significant contribution to shifting the culture and practice of the financial services industry — and by extension sustainability practices at companies in every sector.
As more managers are compelled to integrate ESG criteria into investment analysis, more analysts will be asking CEOs and CFOs on quarterly earnings’ calls about these issues. As endowments become more active owners, being more intentional about voting their proxies and filing shareholder resolutions, sustainability issues will be in ever-greater focus.
About 2,000 colleges and universities have some form of endowment in the U.S. Assuming an average of 30 trustees at each would suggest this conversation could grow to include 60,000 influential leaders in all walks of life. As evidence continues to build that sustainability factors are material investment considerations, they will need to dive into these issues as a part of their fiduciary responsibility.
Perhaps more important, millions of students — future leaders in all sectors — will see and internalize the importance of aligning their actions with their values.