Foundations are increasingly talking the talk about embracing ESG investing, but surveys suggest both small foundations and large ones still lag behind wider trends in ESG adoption. Although 33% of all US assets under management are in sustainable investment strategies, according to the Forum for Sustainable and Responsible Investment’s 2020 trends report, foundations tend to have a much lower proportion of their total assets invested in ESG, despite some evidence of increasing take-up. In general, this all points to a substantial gulf in ESG adoption between foundations and investors.
The Gap Between Appearances and Impact
On the surface, private foundations appear quite engaged in ESG strategies. Research published in 2019 by support services firm Foundation Source showed around 51% of 122 surveyed private foundations had at least some sort of allocation in impact investments. However, a deeper dive shows significant dispersion in the overall level of commitment to real impact: just 3.3% had 100% of their assets in impact investments, while 17.8% had 5% or less allocated to impact investments.
Similarly, a June 2021 study from FEG Investment Advisers found 55% of community foundations now have some sort of responsible investing allocation within their portfolio—ESG being the most common. Although this certainly represents a giant leap since the study was done in 2017, when just 16% had a responsible investing allocation, the same dichotomy appears in the weeds. The highest average allocation within responsible investment and ESG was just 6.6%.
Reluctance About Impact Investing Persists
The Foundation Source survey also uncovered a reluctance to engage in impact investing on the part of private foundations, which it attributes to both a lack of knowledge about the topic and concern about potential investment returns from impact investing. About 38% of those surveyed said they “don’t know enough about it,” and about 20% believed impact investing would “generate lower returns” compared to conventional investing.
Lack of knowledge of ESG and a belief that ESG investing offers lower return potential seemed closely related. Just over half of the respondents stated that “impact investing means settling for lower returns,” raising questions of fiduciary duty in regards to ESG. In fact, various studies have indicated that sustainable investing does not result in lower investment returns, and that the belief that impact investing yields lower returns is essentially a myth.
Tellingly, most private foundations surveyed by Foundation Source (74%) reported conversations about ESG with their financial advisor were relatively rare. Around 64% said they were “unsure” about the variety of impact investments their financial advisor could provide, and about the same proportion were “unsure” about the quality of these investment products.
Differing Trends in Small Versus Large Foundations
With their larger resources, you might expect bigger foundations to be leading small foundations in ESG; however, this is not necessarily the case. A 2020 survey of more than 130 foundations by US investment adviser CAPTRUST suggests foundations with less than $100 million in assets under management were significantly more likely to invest in ESG funds than larger foundations.
Most of those surveyed (70%) were not currently investing in ESG strategies. Just over half of respondents (51%) said they were undecided about whether to invest in ESG funds, though 9% said they were planning to increase their ESG allocations.
CAPTRUST believes it can sometimes be challenging for larger foundations to get both their board of directors and investment committees to align on ESG, with the topic tending to garner a wide range of views. It also points out that many foundations could be inadvertently restricting which grants they can access by not engaging with sustainable investing, as some national grants are only awarded to foundations that invest in ESG.
The Huge Potential of Impact Investing
Taken together, the surveys suggest that there is huge potential for foundations of all sizes to increase their engagement with ESG and impact investing. Foundation Source, for instance, says financial advisers have an excellent opportunity to help private foundations achieve a broader impact by providing education to “dispel the myths” around ESG. It posits that private foundations both need and want more information before they dive into ESG, although many are already pushing forward on ESG issues.
Given their strong interest in impact investing, it’s just a matter of time before foundations catch up with the wider level of ESG adoption. Turning more attention toward impact investing now can put foundations ahead of investment trends.