The smallest of the institutional investors, endowments and foundations at $2 trillion in global assets under management have historically had an outsized influence on the trajectory of investment management. The investment goal of ensuring that the endowment’s rate of consumption can be sustained and relatively limited liquidity needs—typically about 5% of the average of the endowment’s value over the past three years—give endowments and foundations the flexibility to invest with a long-term horizon and drives them to be more forward-thinking.
By investing with a long-term horizon, endowments and foundations must manage risks over multiple horizons; ranging from the risk of losses in a severe market dislocation to long-term risks, such as climate change. To illustrate, Yale University first identified absolute return investing, or attempting to generate positive equity-like returns regardless of broader market conditions, as a distinct asset class in 1990; today aggregate absolute return assets under management exceed $6 trillion. More recently, Rockefeller Foundation coined the term impact investing, or investing with the dual goals of financial return and environmental or social benefit, in 2007.
Foundations and Mission-Related Investing
Mission-related investing, or investing a foundation’s endowment, rather than its charitable contributions, with the dual goals of market returns and furthering the foundation’s mission, is becoming increasingly common among foundations, particularly following the 2015 IRS notice that permits endowments of US-based private foundations to consider the relationship between investments and the foundation’s mission. F.B. Heron Foundation committed in 2012 to invest 100% of the endowment’s assets toward better fulfilling the organization’s mission by 2017 (it did just that by the end of 2016); in 2017 Ford Foundation committed up to $1 billion over 10 years to mission-related investments (MRIs); and in 2018 the Nathan Cummings Foundation became the second major foundation to commit to investing 100% of its endowment in alignment with its mission. According to Nathan Cummings Foundation CEO Sharon Alpert, “the problems we are working on will not be solved by grantmaking alone. Capital markets have to change to drive sustainable and inclusive growth.” These trailblazers in sustainable investing stand out among endowments and foundations.
Endowments and Sustainable Investing
Although endowments for universities, hospitals, and churches cannot rely on the 2015 IRS notice, they are increasingly considering sustainability in their investment decisions as they try to catch up–at least partially–with trailblazing foundations and more broadly public pension plans in this regard. While large endowments like Harvard Management hired its first sustainable investing subject matter expert in 2013, a number of smaller endowments are still developing their sustainable investing strategies. With over 86,000 foundations in the US and 154,000 in Europe, only 9% of which have over $10 million in assets, not all endowments and foundations have the resources to hire ESG expertise. Below are the contours of an approach that a resource-constrained endowment or foundation could take to develop a sustainable investing program. Naturally each endowment or foundation has an investment philosophy and process, operating environment, capabilities, and organizational structure, which will impact its specific approach to sustainable investing. Each of these steps should be tailored to fit the endowment or foundation, and none of these steps should be construed as investment or legal advice.