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Bonnie Foley-Wong: Overcoming investment dislocation with ESG strategies

01 Dec 2022 Expert insight

There is room for not-for-profits to embrace change towards a more sustainable future while proliferating their core beliefs and values, writes Bonnie Foley-Wong, Sustainable Investment Leader, Mercer Canada

 

This content has been supplied by a commercial partner.

 

As environment, social and governance (ESG) factors have become more widely integrated into the economy and society, and indeed legislation and regulation, their purpose has become increasingly clear.

In Mercer’s 2022 Global Not-for Profit Investment Survey, 83% of survey participants said they are incorporating ESG into their investment decisions or plan to begin doing so in the next 12 months. For 67% of respondents, aligning their portfolios with their organisations’ missions and values is the driving factor behind incorporating ESG while 47% said it is to reflect stakeholder views.

Many endowments and foundations, significant stewards of assets, have been early adopters of sustainable investment and ESG integration, a relationship that may seem obvious given these not-for-profits’ focus on the betterment of humanity, society, or communities, in one form or another.

However, Mercer’s survey also found these organisations face challenges in aligning their mission, values, and their investment strategies, to sustainability principles and ESG factors.

So, where does this dislocation stem from?

Endowments and foundations operate with a diverse set of stakeholders to whom they are responsible and accountable. One example is beneficiaries or recipients of funding for services such as education, research, social and charitable programs or grants. Funders and donors are often interested in how they are using and investing the funds. Investment returns are an important source of funding and cashflow for not-for-profit organisation’s operations and its ability to serve its beneficiaries.

Over the last 15 years, the conversation has increasingly been about the contrast between a not-for-profit’s mission and the activities enabled through the organisation’s investments.

  1. ESG over returns

A foundation’s investments in carbon-intensive industries or businesses with questionable supply chain practices may generate returns and funding to deliver grants, but may be at direct odds with its mission. By applying a robust framework for integrating ESG factors and omitting certain sectors from investment, there may be a feeling that as an organisation may be prioritizing ESG over managing risk and generating investment returns to deliver on their mission. 

Mercer’s survey uncovered a systemic shift towards aligning environmental and social issues with asset allocations – a move that can be beneficial for the organisation’s reputation, stakeholder’s expectations, and diversification of returns.

  1. Current NFPs face economic challenges

The current economic climate for many not-for-profits has become increasingly challenging, with the global pandemic, rates of inflation, and pressure to increase disbursement rates each playing a factor. As a result, some not-for-profits are potentially in survival mode, and the worry of sacrificing investment returns or taking on more risk to invest in opportunities that reflect positively weigh heavily on the minds of not-for-profit leaders.

  1. Mix of views on investment committees

We find that many of our endowment and foundation clients have a mix of leaders with deep expertise in the investment industry and in the field of change on their investment committees. This diversity is an asset, not a barrier. As our clients search for investment opportunities and solutions to the world’s most difficult challenges we believe they benefit from the different experiences, skills, and perspectives.

Solutions to overcome investment dislocation

Not-for-profits that are keen to integrate ESG factors into their investment approach may be hesitant to do so for fear of harming their missions. They could also be unsure where to begin, are getting additional information, training, or education for boards, investment committees, and management teams. However, there a range of solutions available for not-for-profits by partnering with an outsourced or delegated chief investment officer.

  1. Establish investment beliefs

They may find that there are different perspectives on the beliefs that guide the not-for-profit’s investments. We have assisted not-for-profits through surveying key decision-makers on the sustainable investment beliefs with respect to the assets they steward and helped them update their responsible investment policies and establish a strong foundation for good governance and stewardship.

  1. Prioritise stewardship

No matter their size, endowments and foundations can establish sustainable investment policies. For some not-for-profits, particularly smaller organisations, implementation might take the form of outsourcing or delegating some of the investment process to a partner that aligns with those policies. More consistent data and disclosure from companies means improved monitoring and the ability to set goals.

Stewardship strategies and collaborative engagement group’s means opportunities to influence change as an asset owner. Investment innovation and new opportunities means balancing risk, returns, and impact while investing in focused sustainability and impact themes is increasingly possible.

  1. Take it one step at a time

Not-for-profits can take one step forward on their sustainable investment journey, no matter at what stage they are. It can help to focus on specific aspects at a time as opposed to seeking wholesale alignment. Whether it’s education on ESG investing or the introduction of net zero, there is room for not-for-profits to embrace change towards a more sustainable future while proliferating their core beliefs and values.

Important Notices: This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.
Mercer provides recommendations based on the particular client's circumstances, investment objectives and needs. As such, investment results will vary and actual results may differ materially. Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications. This does not constitute an offer to purchase or sell any securities.

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