Dating back to the 1970s, colleges and universities have formed part of the vanguard of the socially responsible investment community, creating advisory committees to help guide investment decisions and playing starring roles in divestment campaigns that have targeted South Africas Apartheid rule, tobacco companies, and businesses operating in Sudan during the Darfur genocide.
But as of late, those institutions seem more like theyre stuck in a time warplacking for transparency, active shareholder engagement, and polices around environmental, social, and corporate-governance (ESG) issues, according to a new report by the IRRC Institute and the Tellus Institute.
Instead of seizing opportunities to generate social and environmental benefits through endowment investments, and sharing best practices in the leading communities of practice around sustainable, responsible, and impact investing, endowment managers are largely missing in action, say the authors.
Higher-education institutions in the U.S. have more than $400 billion of assets under management, and the authors studied a survey sample worth about 80 percent of that investment space. Despite the volume of assets under management, however, you wont find many representatives from endowments in attendance at investor network groups, where institutional investors routinely exchange information about ESG issues.
For example, an initiative called Principles for Responsible Investment, backed by the United Nations, counts more than 900 global investor signatories worth more than $30 trillion in assetsbut not a single college endowment among them.
That absence helps explain why university endowments exhibit such a weak understanding of common ESG investment practices, says Joshua Humphreys, the studys lead author.
Only about a fifth of survey participants incorporate some kind of ESG criteria in their portfoliosand that figure has been on the decline, dropping from 21 percent in 2009 to 18 percent in 2011.
Even when endowments incorporate such criteria, the authors note other challenges. Although endowments do increasingly appear to be incorporating environmental investment criteria, the report states, theyre not using standardized definitions, which makes it hard to measure enviornmentally based investment overall. Repeatedly during our interviews, consultants and investment officers expressed a sense of confusion as to what counts as a sustainable investment, the authors write.
The reports authors also found that endowments arent applying ESG criteria in a holistic sense. Rather, they tend to screen for single issues, such as excluding investments related to Sudan.
Although many endowment officers still associate [socially responsible investing] exclusively with negative screening of public equities, ESG criteria incorporation can also be a more proactive exercise applied across asset classes, the authors state. Rather than merely restrict investments because of ESG concerns, sustainable and responsible investors often also actively filter portfolios for positive ESG attributes.
Endowments arent necessarily investing according to their stated policies, either. For example, although the authors identified 64 endowments that incorporate Sudan-related criteria:
. . . real divestment from Sudan was in many cases highly targeted, often to only a small number of directly held Chinese companies. Many schools with divestment policies that purportedly affected their whole portfolios continued to invest in the companies slated for divestment through externally managed commingled funds and passively managed index fundseven though Sudan-free and Sudan-compliant index funds and screening tools were readily available.
When it comes to transparency, Humphreys says, its interesting how little disclosure is being made, adding that, there needs to be greater transparency around performance.
