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The conversation: Money with a mission

Mission-based investing has a long history and continues to evolve. Exchange spoke with Commonfund’s Assistant General Counsel and ESG Policy Officer Lauren Caplan and Commonfund Institute Executive Director John Griswold about the changing world of SRI, ESG and impact investing.

Exchange: Responsible, or mission-based, investing is more than a passing trend. Perhaps we could start simply by defining some terminology?

Lauren Caplan: The terms socially-responsible investing, mission-related investing, impact investing and environmental, social and governance investing – all frequently grouped under the heading of responsible investing – have become a familiar part of the vocabulary of institutional and retail investors. Just what these terms mean in practice, however, has often been less clear.

Socially responsible investing (SRI)

A portfolio construction process that attempts to avoid investments in certain stocks or industries through negative screening according to defined ethical guidelines.

Impact investing

Investing in projects or companies with the express goal of effecting mission- related social, economic or environmental change.

Environmental, social and governance (ESG) investing

Integrating ESG factors into fundamental investment analysis to the extent that they are material to investment performance.

These investment approaches serve very different purposes. SRI and impact investing use funding and investment activities to express institutional values or advance the institution’s mission. In contrast, ESG integration aims to improve investment performance, thereby making additional resources available for mission support.

John Griswold: SRI was for a long time the most widely used of the three approaches. In recent years, however, although negative screening can be a useful tool for institutions desiring to express ethical, religious or moral values through their investment portfolio, for many it may prove too restrictive. ESG analysis takes a broader view, examining whether environmental, social and governance issues may be material to a company’s performance, and therefore to the investment performance of a long-term portfolio.

The ESG movement is fairly strong and continuing now in areas like climate change, development of alternative energy, proxy transparency in corporate voting and independent directors, social issues of all kinds, child labor laws, etc. And the objectives that an investor is trying to achieve based on each of those strategies; they’re actually very different.

Caplan: The move towards looking at some of these issues in terms of their materiality and link to performance has been a significant development in the responsible investing area. ESG integration, which basically says there are social issues, governance issues and environmental issues that directly impact companie’s performance, and thus your portfolio’s performance, and therefore ought to be considered as part of any fundamental investment analysis, has made the consideration of ESG factors applicable to a broader range of institutional investors because it is directly related to performance. The link to performance removes the questions around fiduciary duty that give many endowments pause when considering SRI.

Exchange: What are some of the challenges?

Griswold: I think the challenge for someone interested in impact investing is to pursue the social goal that you are trying to achieve while maintaining your performance against a benchmark so that the impact investing does not lower one’s return or increase the risk of the portfolio.

There is the debate still within the foundation, endowment, and pension worlds as well as to whether one can have a divided interest, if you will, or duality of interests in terms of managing a fund.

One of the difficulties of doing any of this, of responsible investing generally, is that it requires extensive resources. And frankly, that’s maybe why it’s been slow to take hold. We see in our research 17-18% of college and university endowments, private foundations, social service organizations have done some kind of SRI or ESG or impact investment activity.

Exchange: How do these investors measure progress or success?

Caplan: I think that the measurement question is really important, and one a lot of investors are still struggling with, rightly so … The first challenge is to come up with what exactly is the goal that you’re trying to achieve – are you trying to lower the carbon footprint of a portfolio or increase investments that support clean technologies; improve a portfolio’s ratings for labor practices of the companies it holds; screen out tobacco companies from the portfolio … there are many goals an investor may have and defining those goals clearly is a complicated project for investors and their stakeholders. Once you define the goal of the institution’s responsible investing efforts, measuring success becomes clearer in terms of knowing what you’re trying to measure but the second challenge is making sense of the various measurement systems available and mapping those systems against the types of factors the institution has decided to focus on … which is actually a big challenge.

Griswold: For instance, if your goal is around carbon emissions, there are providers that can help you value and measure what those emissions are. But in that example, if you’re trying to lower the footprint of your portfolio, there may be differences between measures of gross emissions of your portfolio or net.

And there are companies whose gross emissions may be high, but the product that they’re making helps lower emissions in other processes, and you might account for that. So, there are really complicated questions in terms of measuring success, and there are a lot of groups working on it.

Caplan: Yes, there are disagreement and different approaches. And so you really need to do a detailed analysis on an investor, almost investor by investor basis based on what the objectives are.

Griswold: I think there will be a coalescing around benchmarks and standards. And that will probably evolve to a narrower and more accurate set of standards and purposes eventually. But it may take many years to do that.

About the interviewees

Lauren CaplanLauren Caplan is the Assistant General Counsel at Commonfund Institute. Prior to her current role, she practiced law at Chadbourne & Parke, worked in the United States Senate and was the director of a nonprofit organization working to break the link between poverty and poor health. Currently, Caplan is a member of the Sustainability Accounting Standards Board’s Advisory Council. She holds an A.B. from Harvard College and a J.D. from Georgetown University Law Center.
John S GriswoldJohn S. Griswold is the Executive Director at Commonfund Institute. Joining the Institute in 1992 as the head of Client Services, Griswold initiated and supervised the Commonfund Benchmark Studies®, annual surveys of the investment performance and governance practices of educational endowments, foundations, operating charities and nonprofit healthcare organizations. More recently, Griswold also joined with the National Association of College and University Business Officers (NACUBO) to produce the NACUBO-Commonfund Study of Endowments® (NCSE).

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