Environmental, Social and Governance Investing by University Endowments

With more than $400 billion in combined assets under management, US college and university endowments constitute an important segment of institutional investors involved in sustainable and responsible investing – defined here as the explicit incorporation of environmental, social and corporate-governance (ESG) issues into investment decision-making and active-ownership activities. This study provides one of the most comprehensive analyses to date of the state of ESG investing by educational endowments.

In it, we aggregate multiple survey datasets that address three broad areas of ESG investing activity: 1) the incorporation of ESG criteria into endowment management; 2) shareholder advocacy and active-ownership initiatives; and 3) the governance and transparency of ESG investment decision-making.

In addition to analyzing existing survey data, the study advances a novel interpretation about the distinctiveness of endowments’ involvement in ESG investing. What differentiates educational endowments from the adoption of sustainable and responsible investing strategies by other institutional investors, such as foundations, hospitals, public pensions, corporations, unions or faith-based investors, is the particular constellation of stakeholder relations within which the vast majority of ESG investment practices have been adopted by colleges and universities.

Students, alumni, donors, faculty, staff and administrators, trustees, community groups and broader civil society organizations all have competing stakes in endowment management and repeatedly exert claims on the environmental, social and governance implications of college investments. Indeed, stakeholders often drive changes to investment policies and practices around ESG issues, whether through campaigns for divestment or proactive sustainable and responsible investment or student involvement in shareholder advocacy initiatives.

In response to these dynamics in the 1960s and 1970s, endowments were among the pioneering institutional investors to adopt new policies and institutions to address social and environmental considerations in investment. Yet three decades later, endowments no longer appear to be leaders in the greatly evolved institutional ESG investment space, with very limited exceptions.

Among our chief findings that lead to this conclusion are the following trends:

• The primary forms of ESG investing activity by endowments tend to remain confined to single-issue negative screening of public-equity portfolios, related to issues such as tobacco, sin stocks, and targeted divestment from the Sudan.
• Considerable focus is put on proxy-voting recommendations even though the widely adopted “Endowment Model of Investing” has lead many colleges to shift their investments away from directly held, publicly traded securities into indirect investments in commingled vehicles and more opaque, illiquid investments in alternative asset classes, where very little consideration has been made by endowments of ESG issues, despite growing opportunities to do so across asset classes. Advisory “committees on investor responsibility” developed to focus on ESG proxy voting have consequently seen their relevance diminished.
• The endowment community, on the whole, exhibits a very weak understanding of ESG investing strategies, trends, opportunities, and language. In the areas of around sustainable investing and community development finance, in particular, we found wide spread confusion about the meaning of these investments. There is not yet a standardized conceptualization among endowments of sustainable and responsible investment activities that are widely practiced by others actors in the capital markets.
• Endowments are widely absent from leading investor networks where ESG investment issues are routinely discussed – which explains, in part, the wide spread lack of understanding of common ESG investing practices.
• Misperceptions about ESG investing open immense learning opportunities for the endowment community, though a much greater openness to discussions of sustainable and responsible investing will be needed. Endowments desiring to understand the current state of ESG research and application will need to join these conversations and begin convening their own dedicated, multi-stakeholder networks.
• Small-scale experimentation is occurring at the margins in areas such as microfinance investment, student-run SRI funds, green revolving loan funds, and shareholder advocacy.
• Increasing numbers of surveys and reporting mechanisms have emerged over the last decade to obtain information about sustainable and responsible endowment management, but there remains widespread lack of independent verification of self-reported data.
• Despite the proliferation of surveys, transparency of ESG investments remains particularly poor.
• More case studies are needed of specific experiences with the incorporation of ESG issues into investment decision-making and active-ownership initiatives.

The full report is available here.