ESG Factors: Investment Opportunity

The following article on ESG by Hirtle Callaghan’s Garrett Wilson was published in the Association of Independent Colleges and Universities of Pennsylvania (AICUP) April 2015 e-Newsletter, The Spotlight.

ESG Factors: Investment Opportunity
Colleges and universities are facing a wave of pressure surrounding the divestment of fossil fuel holdings. Citing the business of fossil fuel extraction as socially detrimental, educational communities around the world are making their voices heard. Although official commitments to formally divest from fossil fuels have been limited, the campaign has raised a broader discussion regarding the alignment of endowment investment policy with an institution’s mission and values.

Historically, attempts to align investment policy with community values has focused on socially responsible investing or “SRI”. SRI is implemented through industry or sector exclusion (i.e. alcohol, tobacco, gambling), otherwise known as negative screening. Unfortunately, there are 3 fundamental problems with SRI implementation.

  1. Diverse communities often struggle to agree on what to exclude
  2. SRI screens often damage investment performance
  3. SRI screens are most often accompanied by higher fees

Today, a new approach to aligning values with investment policy is gaining ground. This approach, called environmental, social and governance (ESG) investing integrates ESG factors into the investment decision process. ESG factors include performance on issues such as carbon emissions, resource efficiency, labor standards, data security, workplace health and wellness, anticompetitive practices, and corporate governance.

Rather than excluding specific industries, ESG investing seeks to reward companies that are proactively mitigating risks and pursuing opportunities associated with ESG issues. Research indicates that while these factors may appear simply qualitative in the short term, they possess an indirect quantitative impact that can be material to long-term business and therefore investment performance.

ESG investing overcomes the 3 traditional problems with SRI (listed above) and fits naturally into an endowment investment policy due to its long-term focus, compelling investment thesis, and responsiveness to constituent conscientiousness. As a result, some of our most influential colleges and university endowments are integrating ESG factors into their investment programs. 

Garrett Wilson

Garrett is an Investment Specialist at Hirtle Callaghan focusing on Environmental, Social and Governance (ESG) investing.  Prior to joining Hirtle Callaghan in July, Garrett completed his MBA at the University of Virginia’s Darden School of Business where he was a portfolio manager on the student run sustainable investment fund and worked at DBL Investors, an impact investing venture capital fund.  Previously, Garrett spent five years in the Global Markets Division of Bank of America Merrill Lynch in New York and San Francisco.  He received his B.A. in Government from Georgetown University.

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