A decade ago, fiduciaries wondered, “Will considering ESG investments violate my fiduciary duty?” Today, that question has been turned on its head. Decision-makers now ask, “Will I breach my fiduciary duty by not investing responsibly?” Bernstein professionals Travis Allen and Chris Clarkson join Clare to discuss next steps for investment committees considering responsible investing, as well as the most critical aspect that many overlook—measuring “responsibility” in your portfolio. For more, read our blog, “Are Nonprofits Dutybound to Invest Responsibly?".
00:00 - 00:26
Responsible investing. You can't see me right now, but I'm putting air quotes around that term because it is a constantly evolving concept in industry and it means lots of different things to different types of investors. One thing that I encounter quite often when I'm working with endowment and foundation committees is a bit of resistance where folks will say, look, as fiduciaries, we think it's really interesting, but we just can't go that route right now.
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Well, newsflash, everyone, as we're going to discuss today, that may not necessarily be true. And in fact, the exact opposite of that may just be the case going forward.
00:44 - 01:18
Hi, everyone, I'm Clare Golla, Head of Endowment and Foundation Advisory Services at Bernstein, and this is Inspired Investing, where we inform and educate individuals and organizations that strive to invest purposefully with and for a mission. Today, I'm joined by two of my colleagues, Travis Allen, who leads our Responsible Investing efforts nationally, and Chris Clarkson, a Senior Wealth Strategist on our Endowment and Foundation advisory team. Hi, Travis and Chris, thank you so much for being here with me today. Thank you, Clare. I'm glad to be here. Thank you, Clare. Also delighted to be here.
01:18 - 01:49
All right, guys, I'm just going to dive right in here. These days, we are seeing a heightened demand for services provided by nonprofits, and it's putting a ton of pressure not only on the organizations themselves, but also the foundations that support their work. And so I'm definitely having conversations with clients about, in tight times, are there ways for us to leverage more of our dollars, tap into additional pools of assets to support our mission and programs. So with that, I'm going to turn to you, Travis, and get your thoughts on that.
01:49 - 02:12
Yeah, I think that it's not a surprise that many organizations and foundations are asking about ways to invest their assets in investment strategies that are better aligned with the mission of the organization. We have never had as many responsible investing options as we have today.
02:12 - 02:46
Obviously, it's been growing rapidly, the demand for responsible investing, which doesn't always make it easier for them to make decisions, fiduciaries, trustees, board members, to make decisions about the right way to deploy responsible investing into their portfolios. But what is clear is that organizations for the first time now have a wide range of responsible investing tools that allow them to tailor their investments to their mission. And so let me give you an example.
02:46 - 03:09
If you're talking to an organization that focuses on the environment, reducing climate change, or reducing the impact of runoff on local waterways, it would be really important for them to think about the way that their investments may either hurt or help the cause that they focus on in their day-to-day.
03:09 - 03:35
And I think increasingly the people around those organizations, their funders, their employees are also asking those types of questions. So I don't think that this is a trend that is going away. I think that responsible investing as part of the way that organizations seek to achieve their mission will be a part of the way that we manage endowment and foundation assets going forward.
03:36 - 03:38
Yeah, absolutely. Travis, I completely agree.
03:38 - 04:11
And we hear this a lot, right, from committees that, yes, this makes so much sense, and we would love to invest more in alignment with our mission and the programs and the work that we're doing every day. But one thing that we come up against, particularly with traditional endowments, and maybe I'll turn this to you, Chris, oftentimes we will get a response from folks when we bring it up that, you know what, we're governed by UPMIFA and we just can't sacrifice returns or take on additional risk because of this law. Well, Clare, I hear that, too.
04:11 - 04:44
But honestly, I think that's outdated thinking. Of course, fiduciaries are governed by UPMIFA, the Uniform Prudent Management of Institutional Funds Act, and we can get into that. But the investment management industry has evolved and the understanding of fiduciary duty has evolved with it. A decade ago, you were right, fiduciaries were asking, will, considering environmental, social, governance (ESG) investments, will it violate my fiduciary duty?
04:44 - 05:15
But now, just as many are asking, will it breach my duty by not considering those factors? And the data bears that out. In fact, I recently saw a report published by Cerulli Associates on ESG investing in the US, and they asked the institutional investors, asset owners what was driving their use of ESG criteria. And 87 percent cited fiduciary duty as the biggest driver.
05:16 - 05:43
Ha! That's really interesting. Do you think it has anything to do with risk, for instance, you know, entities that you might be investing in that are not leaders in environmental or social or governance factors may pose some sort of a risk for them and their institution as an entity investing? Yeah, I think that's part of it, Clare. But I do think that there's also a growing focus on
05:43 - 05:59
responsibility or environmental, social, and governance issues in terms of outcomes, not just risk, you know, how will my investment in this company impact the issues again that I care about as an endowment or a foundation?
05:59 - 06:19
And I think that one of the reasons why that demand has been growing is that one of the old myths about responsible investing that you would have to accept lower returns or greater risk in order to invest in ways that align with your values is being debunked.
06:19 - 06:47
Right. We now have years of track records produced by responsible investment strategies that actually demonstrate that you can invest in ways that can deliver attractive risk-adjusted returns, but with improvement in environmental, social, and governance characteristics or performance as well. And Chris, I'm curious that, this takes it back, we're really flipping this whole conversation on its head, right, with regard to fiduciary duty.
06:47 - 07:04
And so if you are able to potentially align your investments with the purpose and mission of the institution itself, how do you think about this in conjunction with sort of those duties of loyalty, care, and prudence that fiduciaries are supposed to sign on?
07:04 - 07:36
I'm glad you brought up the duties that UPMIFA imposes on a nonprofit fiduciary. Right, so, first and foremost, a nonprofit fiduciary needs to consider the charitable purpose of the institution, right, whereas a trust or a pension fund, they have to act solely in the interest of their beneficiaries. The nonprofit needs to act solely to further its charitable purpose, and fiduciaries are subject to those duties of loyalty, obedience, and care.
07:36 - 07:58
And all three have some bearing here. So first, that the duty of loyalty, right now, that requires that a fiduciary put the organization's interests before their own. So this would present a fiduciary from investing in a way that's promoting their own personal values,
07:58 - 08:23
if they don't align with the mission. However, they can invest the assets of the organization if it is consistent with the mission. Now, sometimes that's very straightforward. Travis mentioned the example of a nonprofit that's focused on environmental conservation, so they can very logically incorporate investment strategies that would incorporate that climate change as a goal.
08:24 - 08:54
But, you know, the linkage doesn't have to be that direct. You know, for example, universities whose mission is to transmit knowledge to ensure the survival of future generations and improve the quality of life for all. Well, they've been some of the biggest adopters and found ESG investments to be consistent with that mission. Obedience. So that requires fiduciaries to comply with relevant laws, governing documents.
08:54 - 09:26
But one thing the fiduciaries also have to consider, donor intent. So if a donor makes a gift and mandates that it be invested in ESG incorporating strategies, well, that's an instruction that the organization has to follow. And lastly, fiduciaries subject to that duty of care, which means they must manage with the care an ordinarily prudent person in a like position would exercise under similar circumstances. Right.
09:26 - 09:55
And there's a host of factors that fiduciary need to consider in reaching the overall investment strategy that has risk and return objectives that are reasonably suited to the fund. So even if ESG investing isn't perfectly aligned with the mission, that does still mean that those investments would be permissible if, purely on a risk and return perspective they're expected to improve the risk adjusted return.
09:55 - 10:26
Got it. So it's interesting, because as Travis mentioned, with so much growth in the responsible investing community globally, right, there are the strategies out there now, right, that can align in some way with the very broad mission of various institutions out there. So to ignore those strategies, if the risk and return metrics are equivalent to a certain extent or better, would actually, it could be considered a breach of fiduciary duty.
10:26 - 10:57
I think the key is to think about the investment decision through a lens that acknowledges that risk and return is still very important, that you're focusing on delivering returns that are similar to traditional strategies at a level of risk that's similar to traditional strategies, but with some measurable improvement in responsibility. Got it. So I have a question. We've talked a lot about the industry growing and evolving over time.
10:57 - 11:21
Are there any changes to policy or the regulatory framework out there that might be at play? I'll start with Chris. Yeah, Clare, I would first say that the different types of fiduciaries are subject to different laws and different regulations. And admittedly, here in the United States, there have been some mixed messages. there.
11:21 - 11:55
But globally, I think the trend is very clear that regulators are recognizing that ESG factors are fundamental to a company's long-term performance and investment success. And when you really look to the experts out there, most of them believe that ESG factors should be incorporated in rigorous investment analysis because these ESG factors, again, they are material to the financial future of an investment.
11:55 - 12:19
One of the experts I'll bring up, basically the law professor who was the primary author of UPMIFA, Susan Gary. She's argued that ESG factors should be considered. And, all in all, look, I agree with you that given the financial relevance that ESG factors have on investment performance, I think the bigger danger is that ignoring them could be seen as imprudent.
12:20 - 12:35
I think one thing that has perhaps muddied the waters on this question recently, just this summer, the Department of Labor released some proposed changes to the way that ERISA plans have to evaluate ESG investments.
12:35 - 13:04
And so, again, we don't know what the final outcome will be of that. I think they've received almost 9,000 comments, most of them in favor of the continuing inclusion of ESG strategies into 401K plan lineups, or at least not erecting additional barriers to have ESG strategies on 401K lineups. But we don't know how that's going to turn out. Of course, that really does only apply to ERISA plans at this point.
13:04 - 13:33
But I know people tend to look towards what's happening in one area of the regulatory environment for clues of what might be coming in other areas. You do see that in terms of different areas of regulatory legislation, that others borrow from it, so to speak, and think about it. So, you know, Travis, you mentioned, and we've started to just use ESG or environmental and social and governance factors almost interchangeably with responsible investing.
13:33 - 14:02
Right. But we know that that's really only one part of a much broader universe. So I'm going to shift gears a little bit, because one of the things that a number of organizations and foundations have asked me about, and I'm curious to get your take on it, is, I'll give an example. So I'm a foundation. I work in a very specific geographic area, and I may have a very specific mission. I want to invest in, I don't know, small businesses that are supporting that local community. Right.
14:02 - 14:25
I want to use my assets to do that kind of true direct impact investing. Travis, as a senior investment specialist, how do you think about those types of requests and how might you advise an institution on that? Clare, that's one of the questions that I've received most often as I talked to endowments or foundations or just individuals who are responsible investors.
14:25 - 14:59
You know, the fact is that I live here in Washington, DC. And so, you know, many of the organizations that are based here want to do things that have a direct impact on our community. And so for some portion of their portfolio, generally, it's in the single digits, you know, five percent or something in that range, perhaps 10 percent of their portfolio, they may look to do things that are really direct, invest in startup companies, invest in startup not-for-profit organizations, make loans that may be tied to various initiatives that are consistent with the mission, which is all great.
14:59 - 15:27
And I think our job is to help build an asset allocation of core investments around that, that are sensitive to the overall risk return characteristics that are desired in the investment policy statement. And so that's the first point is to provide help in thinking through how those investments impact risk and return and what you need to do in the rest of the core portfolio in order to make adjustments, in order to make sure you're consistent with your investment policy statement.
15:27 - 15:58
I think the second piece of it is to really help think through measurement, like, one of the keys to having responsible investing, or environmental, social, and governance investing, really continue to become a mainstream way that people invest, is to focus on measurement. And so with those investments, what exactly are you trying to achieve from a responsibility return standpoint, that should be measured right along, beside the risk and return for those types of investments.
15:58 - 16:26
And by the way, the same thing is true for those core stocks and bonds, right? If you're, again, an environmentally focused organization, then you want to know what the carbon footprint of your portfolio is and how the investments you're making result in a carbon footprint that's different from a, you know, an index like the S&P 500 And so I think paying attention to risk return and then measuring responsibility is really one of the keys,
16:26 - 16:52
when you're talking about those direct investments that many of our organizations and direct individuals tend to make. That's a great point about building the core portfolio around some of those very direct investments from a mission perspective or an alignment perspective. One of the things I will also mention, though, because I have been on boards of directors where we went down the path and folks really wanted to do some of these direct investments.
16:53 - 17:16
One critical thing to consider is the cost, right, that may be associated with some of those direct investments. Of course, like any sort of alternative investment, you want to think about the illiquidity, right. That you might be locking up some funds for a while. But sometimes you need legal counsel and you may not have internal expertise in underwriting loans or collecting on loans or any of those sorts of skill sets.
17:16 - 17:39
Right. And so just to be having that transparent conversation up front, and I love going back to what you were saying, Travis, about what are we trying to achieve here. Right. So setting yourselves up for success, that you have the right expertise and everyone's on board in terms of how to implement this in order to set yourself up for success to achieve that outcome over time is so important.
17:39 - 18:10
So thanks for that, because we all get that question often. So we have now walked through a bunch of different types of investments that organizations could consider, different considerations from a fiduciary perspective, including if you are managing an account that is subject to UPMIFA. So, Chris, I'm going to ask you, I'm a committee member. What are my next steps, if I want to start to explore responsible investing, what should I do?
18:11 - 18:18
I think the process should start with the charity's mission. What is the mission?
18:18 - 18:47
How does responsible investing fit with that mission? Right. Just because a responsible portfolio achieves some broad social goal, that doesn't necessarily mean that it's relevant to the mission of the nonprofit. I would have your board or your investment committee reaffirm the mission of the nonprofit and vote to authorize the organization to invest in purpose-driven investment.
18:48 - 19:05
As you pointed out, it never hurts to check with legal counsel to make sure that the organization will be OK doing this. And I would definitely document the charity's environmental, social, and governance goals in their investment policy statement.
19:05 - 19:31
Of course, you'll need to evaluate the responsible investment options and find a manager that has the appropriate expertise and approach for you. But maybe, the last point, once you've selected an investment manager, you want to monitor those investments, not just by the traditional metrics of risk and return, but also on how are those funds delivering on their responsible objectives.
19:32 - 19:59
That's a really good point. And it piggybacks on Travis's comment earlier. Right. The measurement of these metrics or the impact or the results that different strategies are having with regard to these environmental, social, or governance factors is so important. I think there are a lot of strategies out there. We've had a proliferation of product over the last several years that dubbed themselves responsible. Right.
19:59 - 20:20
But what does that really mean at the end of the day? So holding your advisor, holding them accountable for that is important. So thank you. Travis, I'll turn it to you, just to see it from an investment perspective and asset allocation perspective or even a process perspective. You have anything to add to Chris's comments? If I'm an investment committee member, how do I get started?
20:20 - 20:42
Yeah, I think Chris covered the most important points, which is you want to have a really clear indication of what the ongoing reporting will be on those ESG metrics or ESG measurements for the investments and set up some regular interval over which you'll review those ESG metrics with
20:42 - 21:02
your adviser, because very often what happens is that you hear a lot about the ESG performance of a particular investment when making the initial investment decision, but then for the years that follow, you only get risk and return performance delivered to you in your reporting.
21:02 - 21:23
And so you have to make it clear up front that this is going to be something that you expect on an ongoing basis to focus on the risk and return in addition to the responsibility metrics. I love that. And I would add to that, Travis, that that's a plug for reviewing your investment policy statement on an annual basis as a collective.
21:23 - 21:54
Right. Because there should be some language or could be some language around what you decide, what you mean by responsible investing, and what you would like to see over time. And if you're reviewing the investment policy, then likewise you will be reviewing the asset allocation, the risk, the profile, the responsibility metrics, and looking at how things are being implemented to ensure that everything is in sync, right, in a very prospective way. So I guess, look, we've covered a lot today.
21:54 - 22:00
I'd love to just wrap up. Chris, if you have any final tips or Travis, either one of you can start. Yeah, Clare, just this.
22:01 - 22:29
I've noticed that organizations that incorporate responsible investing principles into their portfolio generate a whole new level of excitement and fulfillment from the results of their investment portfolio. I think it can be a great conversation point on which to engage donors and maybe younger stakeholders with the organization.
22:29 - 22:39
So, again, if this is something that you have not yet discussed at a board or investment committee meeting, I would add it to your next meeting agenda.
22:40 - 23:13
So, Chris, that's actually a perfect lead in to what I was going to say, which is that I think that boards, committees, they have an opportunity now to gather information and learn about all of the significant changes and improvements that have been made in responsible investing over the last 20 years. Because I've talked to so many people who say, you know, we looked at that in 2002 and things didn't look so good, so we didn't make the decision to move in that direction.
23:13 - 23:47
Well, a lot's happened since then. And so I would say that it's worthwhile to make the investment of time to get up to speed on the significant growth that we've seen and not just the number of strategies, but also in the types of approaches that are available to you. Right. You can invest in ways that are consistent with the UN Sustainable Development Goals and in all of the good things that are included in those 17 development goals. And so this responsible investing today is not what it was 15 or 20 years ago.
23:47 - 24:09
And so I would just encourage committees to give themselves some time to gather information, call in experts so that they can have a much better appreciation for what their options are. And then, as Chris said, you know, work through the IPS and do all of the important blocking and tackling you need to do to make sure that you're meeting your fiduciary responsibilities.
24:09 - 24:22
Great tips. Travis and Chris, thank you both so much for being here today. Thanks for having me, Clare. It was a pleasure. Thank you, Clare. I'm glad we had the conversation. Happy to come back any time to continue.
24:23 - 24:51
Awesome. Careful what you wish for. I may have you back very soon. Thank you all to our audience for listening. If you liked what you heard just now, please spread the word. And do not forget to subscribe to Inspired Investing on Apple podcasts, Google Play, Spotify, or wherever you listen to podcasts. Bernstein: Making money meaningful for individuals, families, and foundations for over 50 years. Visit us at Bernstein.com.
- Clare Golla
- National Managing Director—Philanthropic Services