The adoption of socially responsible investing (SRI) strategies by colleges and universities has been “growing gradually” over the last few years. Spurred on by evidence that such approaches can reap returns—as well as by growing student activism on campuses—they’re aligning their endowments’ investing strategies with socially and environmentally oriented goals.
Implementing a Variety of Strategies
Despite the general trend, one size does not fit all when it comes to the SRI or environmental, social, and governance (ESG) strategies used by college and university endowments. These can involve anything from screening out companies in industries like private prisons to opting for investments with a positive impact such as clean energy to divesting from holdings deemed harmful to the portfolio and to larger social concerns.
Certainly, a critical mass of college and university endowments of all sizes are choosing to apply ESG principles to their portfolios. Pitzer College, with an endowment of about $137 million, and Harvard University, with an endowment of approximately $39 billion, have both adopted ESG strategies. Many more are combining these strategies with other moves. In 2014, the University of California began applying ESG considerations across all its investments and pledged to invest at least $1 billion in global warming solutions over a period of five years. As for Pitzer, it joined with BlackRock in 2017 to launch the first global equity index fund that is fossil fuel–free and uses ESG strategies.
Some schools are also choosing to withdraw investment from areas like fossil fuels. Responding to a growing student movement backing divestment, the University of Massachusetts announced plans to divest from all direct fossil fuel holdings in 2016, becoming the first large public university to do so. Other schools such as Stanford University, Unity College, and The New School have also committed to divest from fossil fuels in some way.
Many colleges and universities have chosen another path: focusing on engagement. Harvard University was the first university in the US to become a signatory to the United Nations–backed Principles for Responsible Investment (PRI), a global investor network committed to integrating ESG considerations into investment practices and ownership policies. But instead of divesting from fossil fuels, it has opted for activities like serving as colead investor in PRI’s work on corporations that publicly support climate change legislation while lobbying against them in private, according to Climate Action.
“We have worked collaboratively with like-minded investors to bring attention to key ESG factors—such as corporate climate change lobbying or methane risk—and foster positive action at the corporate level,” said Kate Murtagh, managing director for sustainable investing and chief compliance officer at Harvard.
To support these varied strategies, college and university endowment staff also have a growing number of resources at their disposal. The Intentional Endowments Network (IEN), a group of endowment staff, chief investment officers, trustees, and other fiduciaries, recently produced the Intentionally Designed Endowment Roadmap—a set of tools meant to facilitate conversation among college and university decision-makers and align their endowments with their missions. The IEN has produced additional resources tailored to more specific ESG areas, including a primer on gender-lens investing.
In many cases, college and university endowments choosing not to adopt SRI or ESG strategies have done so because they fear that eschewing certain investments could hurt their portfolio’s financial performance. On the other hand, those embracing these tactics point to the fundamental mission of higher educational institutions—to teach and nurture learning for the long-term good of society as a whole—as a natural fit for SRI and ESG investing.
Many also cite evidence that socially responsible investing performance is at least as good as returns for non-SRI focused portfolios. Recent research from the National Association of College and University Business Officers (NACUBO) underscores that point. Relying on data from the 2017 NACUBO and Commonfund Study of Endowments, researchers analyzed and compared one-year and 10-year returns at more than 800 colleges and universities. Business Officer Magazine reported that returns among SRI-focused endowments were 12.1% for short-term and 4.7% for long-term investments, net of fees; those not using SRI considerations experienced 12.3% short-term and 4.5% long-term returns, net of fees. Overall, despite relating to over $1 billion in assets, these figures demonstrated no statistically significant difference in performance between college and university endowments that do and don’t use SRI strategies. At the same time, among endowments with more than $1 billion, returns for short-term investments following SRI strategies were substantially higher than those at other institutions—specifically, 13.5% versus 12.7%, net of fees.
Some individual schools have claimed even better performance. As of 2016, Hampshire College‘s average five-year returns reportedly did better at 6.4% than the average return—4.5%—of the colleges in the Bloomberg Endowment Index.
As Business Officer Magazine writes, “Using SRI strategies, on average, does not appear to negatively affect investment returns, meaning it is possible to realize positive social and environmental returns without sacrificing financial returns.” Adopting ESG strategies can allow college and university endowments to do well by doing good.