Community foundations are targeting environmental, social and governance (ESG) investing strategies to complement the positive effect of their charitable grant programs. Assets allocated to ESG strategies may enable community foundations to invest in stocks, bonds and other asset classes based on principles that align with the philosophies guiding their local financial commitments.
There is a powerful connection between ESG investment principles and the missions of community foundations that work for the social benefit of their local areas. ESG has evolved to be associated with investment strategies that seek to consider both financial return and the good of society and the environmental. Using an ESG and sustainability lens helps Breckinridge to identify companies with superior business models; those assessed to be actively managing the effects of their operations on the environment, their communities and key stakeholders.
“ESG allocations in long-term investment portfolios can extend the mission and values of a community foundation’s grantmaking program across their investment policies as well,” says Timothy Coffin, director of sustainability at Breckinridge Capital Advisors. “In addition to the typical annual disbursements, the foundations can leverage long-term endowment assets to help drive the change they are seeking.”
An investing approach that is growing among community foundations.
Recent reporting demonstrates the trend.
- The FEG “2019 Community Foundation Survey” reported that interest in investing to achieve both social and financial benefits has almost doubled since its 2017 survey. Among the 48 percent of respondents that invest for social and financial benefit, socially responsible/ESG investments were the most common vehicle.
- The NonProfit Times reported in November 2018 that 50 percent of respondents to a poll conducted by the SEI Nonprofit Management Research Panel either were investing in ESG strategies or planned to begin during 2019. Of the nonprofits participating in the poll, 18 percent were community foundations.
- The Council of Foundations and the Commonfund Institute conducted a “Study of Responsible Investing” in 2016. Among the 186 study participants, 41 percent were community foundations. The study found that 29 percent of participating foundations commit between 61 and 99 percent of endowment assets to investing strategies that are seeking to integrate ESG factors and 57 percent invest up to 20 percent of endowment assets.
- US SIF Foundation’s 2018 report identified $11.6 trillion in assets under management at the outset of 2018 invested by institutional investors, money managers and community investing financial institutions in strategies that incorporate ESG. The largest number of institutional investors cited fulfilling their missions and pursuing social benefit as their primary motivations for pursuing ESG incorporation.
Approaches to ESG incorporation vary among community foundations.
In its report, “Community Foundation: The Power of Aggregated Capital,” Cambridge Associates shared that “a wise client once told us, ‘If you know one community foundation, you know one community foundation.’” In other words, each foundation is unique and has taken its own path toward incorporating ESG. A review of selected community foundations websites and reports show that some approaches include:
- Investment policy statement (IPS) – Many community foundations have integrated their intentions to target ESG investing into their IPSs. A large community foundation in northwestern Pennsylvania, for example, includes a socially responsible investing (SRI) policy in its IPS. That SRI policy states, “It may be appropriate to seek non-traditional strategies, particularly, managers that employ ESG characteristics to implement this policy.” Whether included as part of the IPS or as an addendum, an SRI statement formalizes the practice of integrating ESG into investment decision making.
- Model portfolios – Working with community foundations, advisors have developed model portfolios that allocate assets across investment classes, including strategies that integrate ESG characteristics into security analysis and selection. These investment options, often selected by the foundation for its endowment assets, are also typically available through donor-advised funds administered by the foundation.
- ESG-focused pools – Similar to model portfolios, ESG-focused pools are managed exclusively by firms that specialize in ESG investment management. A well-established community foundation in the East Bay, working with an investment consultant, developed an ESG-focused pool that it describes as: “Similar in composition to our Long-Term Pool and designed to achieve returns commensurate with it, the ESG Pool is a strong fit for donors with long-term granting horizons of seven (7) to 10 years or more.”
For investors considering ESG integration, fixed income may be a natural first step. At Breckinridge, ESG integration is an investment philosophy that aligns with our tradition of in-depth research and our long-term perspective. As one of the leaders in ESG integration within the fixed income space, our ESG integration methodology combines a quantitative assessment of ESG factors alongside a review of qualitative ESG considerations to derive a composite sustainability rating for corporate and municipal bonds. In partnering with community foundations to address their long- and short-term needs, we have employed our strategies within their investment programs in several ways.
Breckinridge can work with community foundations to incorporate sustainable, investment grade, corporate fixed income strategies for a variety of objectives, from long-term, risk-adjusted total return and capital preservation to short term liquidity, income and cash flow needs.
Community foundations are uniquely positioned to leverage the positive effect of their assets through their funding programs and investment policies. As a firm deeply committed to ESG and sustainability, Breckinridge can help community foundations complement the positive impact of their local financial commitments through their investment policies and programs.
DISCLAIMER: The opinions and views expressed are those of Breckinridge Capital Advisors, Inc. They are current as of the date(s) indicated but are subject to change without notice. Any estimates, targets, and projections are based on Breckinridge research, analysis and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.Past performance is not indicative of future results.
Nothing contained herein should be construed or relied upon as financial, legal or tax advice. All investments involve risks, including the loss of principal. An investor should consult with their financial professional before making any investment decisions.
Some information has been taken directly from unaffiliated third party sources. Breckinridge believes such information is reliable, but does not guarantee its accuracy or completeness.
Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.
BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices.
Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.