ESG trailblazers now lag other institutional investors

University and college endowments tend to be less active in ESG investing, focus primary on single-issue negative screening and lack transparency on their practices, even though they were leaders among institutional investors in pioneering the investment area, according to a new study.

The study, which was commissioned and funded by the Investor Responsibility Research Center Institute, was conducted by the Boston-based Tellus Institute, whose research focuses on sustainability issues.

It focused on 464 endowments with total asses of $321 billion on their environmental, social and corporate governance investments, Jon Lukomnik, executive director of the New York-based IRRC Institute, said in an interview about the 62-page report, “Environmental, Social and Governance Investing by College and University Endowments in the United States: Social Responsibility, Sustainability, and Stakeholder Relations.”

The IRRC study, released July 18, aggregated and screened for ESG criteria multiple existing survey datasets of Commonfund Institute, the National Association of College and University Business Officers, and US SIF Foundation, which supports socially responsible investment research, as well as using Tellus' primary research among a select subset of schools.

The study examined three broad areas of environmental, social and governance investment activity:

c the incorporation of ESG criteria into endowment management;

c shareholder advocacy and active-ownership initiatives; and

c the governance and transparency of ESG investment decision-making.

Supporting its findings, IRRC found among the datasets it use that joint NACUBO-Commonfund studies found a steady decline in ESG investments among endowments. In 2011, 148, or 18%, of 823 participating endowments reported applying some form of ESG criteria to portfolio holdings. That level was a decline from 2010 when 161, or 19%, reported “having some form of social investing policy” and a drop from 178, or 21%, in 2009.

Tellus research ranked the top ESG investment-related screens used by endowments as of 2010, finding: Sudan was used most often, affecting $150.2 billion in assets; tobacco, $75.3 billion; human rights, $15.7 billion; Myanmar, $8.4 billion; equal employment opportunity, $7.2 billion; abortion, also $7.2 billion; defense and weapons, $7 billion; faith-based, also $7 billion; labor, $6.4 billion; pornography, $6 billion; environment, $3.9 billion; gambling, alcohol, community, and corporate board and other governance issues, $500 million each; and executive pay, $400 million.

One of the most common ways “endowments incorporate ESG criteria stem from the faith-based traditions of their schools,” the report said. “In effect, endowments that incorporate faith-based ESG criteria aim to eschew investments in companies involved in businesses that compromise strongly held religious tenets.”

In a statement about the IRRC report, Mr. Lukomnik said: “The findings are somewhat counterintuitive to what one would expect from the university community. Historically, endowments were groundbreaking institutional investors that addressed social and environmental considerations in their investments far earlier than others. Our findings indicate that today's endowments no longer are leaders in the institutional ESG investment arena.”

In an interview, Mr. Lukomnik said, “I don't think they got away from (ESG investing). I think they got frozen in time ... They were doing single-issue screening (of investments)” and generally haven't changed. The reason for their inertia might be “because they aren't participating in the (institutional investment) networks to discuss how to integrate risk” in investment issues.

“I think it is the lack of participation in other networks that has limited the information endowments have,” he said.

In the interview, Mr. Lukomnik pointed out, for example, only one endowment, the $329 million University of Connecticut Foundation, Storrs, is a member of the Council of Institutional Investors and no endowment is among the 900 investment-related organizations that aresignatories of the United Nations Principles for Responsible Investment, a set of voluntary guidelines.

“Informed investors should know what others are doing,” Mr. Lukomnik said in the interview. “It's a curious lack of engagement with other institutional asset owners. Whether or not you do it, you want to be aware of the state of the art.”

In addition, the IRRC study “found a general lack of transparency on ESG practices,” Mr. Lukomnik said in the statement. “Investment policies are remarkably opaque, even at some state-funded universities.”

The IRRC report said, “Although many endowment officers still associate SRI exclusively with "negative screening' of public equities, ESG criteria incorporation can also be a more proactive exercise applied across asset classes.”

The report also notes “few endowments appear to be integrating ESG factors in order to deepen their financial analysis.” n