Endowments and foundations embrace ESG investing


Sponsored by Mercer and Mark Longbottom


But not-for-profit investors face a range of additional considerations

For trustees of endowments and foundations, constructing a portfolio that delivers on objectives while enduring the ups and downs of financial markets is a task requiring a clear focus on long-term investment horizons. Increasingly, trustees are turning to the opportunities presented by sustainable investment strategies, aligning the ethos of long-term investing with the wills and ambitions of the endowment or foundation.

Today more than ever, not-for-profit investors are looking to ESG strategies to fulfil their investment needs while addressing issues such as diversity, equity and inclusion (DEI), climate risk, healthcare and social development.

Expanding outcomes

As of 2022, Mercer works with more than 250 not-for-profit clients, helping them construct portfolios, policies and practices. This means we deeply understand the day-to-day considerations trustees face. It is this understanding that guides our beliefs on why sustainable investing goes hand-in-hand with the objectives of endowments and foundations.

ESG, is a type of investing that considers the potential risks from factors like climate change and seeks to address them. For endowments and foundations, this also lends the opportunity to engage in positive change beyond the organisation’s stated objectives.

Not-for-profit investors are embracing ESG. Globally, 83% of not-for-profit organisations are incorporating ESG into their investment decisions, or plan to do so over the coming year. The finding, from Mercer’s 2022 not-for-profit survey, outlines how broadly the investment approach has already been adopted. Primarily, this is driven by the wish to align investments with a mission or value and to reflect stakeholder views and preferences. Other factors include the belief it is a part of an organisation’s fiduciary duty to invest along ESG lines, while some not-for-profit investors opt for an ESG strategy to reduce reputational risk.

Leighton Evans, chief executive, Rātā Foundation noted in the survey: ‘At Rātā Foundation, our purpose is to strive for an equitable and sustainable society, and we do that in collaboration, to make a meaningful and positive difference.’

‘Aligning our investment objectives to our values and purpose is crucial, and we are proud to be integrating ESG factors into all our investment decisions,’ he added.

Doing the right thing

Many view ESG investing predominantly as a vehicle through which they may ‘do the right thing’, but scepticism remains concerning its potential impact on investment returns. To meet their ESG investment objectives, 39 per cent of respondents to Mercer’s survey said they will make compromises, and of that group, 57 per cent believe they will have to compromise on absolute return.

But that stance does not truly reflect the opportunities sustainable investing can offer to endowments and foundations. Drivers of sustainable growth are emerging in the wake of the broad shift toward sustainability through net-zero commitments.

Looking again to Mercer’s research, 65 per cent of respondents are gaining exposure, or are planning to, over the next 12 months, through ESG investments that overlay broad market exposure. This is followed by low-carbon (54 per cent), fossil-fuel-free (53 per cent) and climate-change-related (52 per cent) investments.

But it is Mercer’s view that climate change is a global risk that demands a total portfolio response.

Some assets will not survive the transition to a low-carbon economy and are unlikely to reward investors over the long term. The climate transition will not happen in a straight line, requiring trustees to embed flexibility into strategic climate transition plans, all while maintaining long-term investment horizons.

Opportunity for change

Beyond ESG, Mercer’s endowment and foundation clients are already invoking meaningful change through targeted investment strategies.

Impact investing approaches seek to generate returns, comparable with broad markets, while also making a positive non-financial contribution to society.  By setting an explicit intention on what the organisation wishes to achieve alongside its investment, a measurable social or environmental outcome can potentially be delivered on top of a financial return.

For example, a healthcare-related foundation may seek to improve access to essential health services within marginalised communities, alongside a return on investment in line with the needs of the organisation. Similarly, DEI has become an increasingly important topic for society and markets, and the theme is beginning to manifest in clear targets for endowments and foundations. Both the ethical aspects of DEI, as well as the growing evidence of improved performance, are driving this change.

Meanwhile, acknowledgement of the value of stewardship and engagement is evident among not-for-profit investors. Mercer works with its clients to exercise active ownership, voting on resolutions with underlying companies to steer them towards a more sustainable future.

For endowments and foundations, it is imperative to establish clear processes, policies and frameworks to integrate ESG considerations into their investments. This can be through manager selection, investing in thematic strategies, negative screens, impact strategies or net zero, but all approaches require expertise and clear objectives – aspects we believe Mercer is uniquely placed to provide.

Mark Longbottom is Responsible Investment Specialist at Mercer New Zealand.

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