To many of the visitors to the UU Common Endowment Fund (UUCEF) booth at General Assembly 2017, one of the main questions their congregations have is about the relative performance of SRI [Socially Responsible Investment] versus standard funds. In the past, we have always argued that it does not damage performance, as demonstrated by a number of academic studies. The performance penalty was a myth.
Now, however, markets are increasingly placing a higher value on ESG [Environmental, Social, and Governance] stocks and managers. From the Financial Times [subscription required] https://www.ft.com/content/9254dfd2-8e4e-11e7-a352-e46f43c5825d?segmentId=080b04f5-af92-ae6f-0513-095d44fb3577 Investors are finding that if they are good to the planet and to people, they also end up, on average, benefiting themselves. There is mounting evidence that funds which observe environmental, social and governance (ESG) standards in their strategies tend to outperform those that don’t by a significant margin. “It is time for ESG investing to become mainstream,” says Isabelle Mateos y Lago, global macro investment strategist at BlackRock, which manages $5.7tn in equities, fixed income, real estate and other assets worldwide. “It is no longer just something for a few tree-hugging individuals to get involved with. In the research process of every team at BlackRock, we are increasingly ensuring that they take ESG into account.”’
This past year, for instance, the UUCEF has performed admirably, returning 12.3% percent gross of fees, performing in the top 5th percentile of the universe of endowments from $50 to $250 million. The UUCEF doesn’t only compare itself to other SRI funds – we compete with all funds tracked in this universe regardless of whether the others implement SRI principles or not.
After years of work to increase the amount of the UUCEF that is managed with SRI principles in mind, the UUA Investment Committee has increased that portion to an astonishing 82%. This large portion has become possible due to the increase in managers that employ ESG factors in their selection process, an increase in the amount of managers that have signed on to http://www.unpri.org UNPRI principles, or the hiring of managers that employ UU principles in a separate account – something that only large funds like the UUCEF have the opportunity to employ. As these changes continue to sweep the financial industry, we look forward to adding additional ESG-mindful managers and funds to our portfolio.
Many of the largest funds are getting involved in assessing the risks associated with E[nvironmental], S[ocial], and G[overnmental] factors that can drive returns in ways that haven’t in the past been considered financially material. By including these risks in their corporate evaluations, money managers are highlighting the need for corporate responsibility. Increasingly, mainstream funds care about ESG factors because they see the damage to corporate revenue streams, profitability, and potentially the removal of their charter to continue doing business if they do not mind these factors. The article details the various aspects of why these factors matter: https://www.ft.com/content/9254dfd2-8e4e-11e7-a352-e46f43c5825d?segmentId=080b04f5-af92-ae6f-0513-095d44fb3577.The rationale behind such investing is multi-faceted. It seeks to capture the opportunity represented by clean technologies, such as renewable energy — made more cost effective by mass production in China — and electric vehicles but is also designed to guard against the downsides of the green revolution, insulating portfolios against the decline of smokestack polluters. It is also an attempt to manage risks from the increased incidence of devastating weather events including tropical storm Harvey, which hit Texas and Louisiana last week, and the flooding that has devastated parts of South Asia over the past fortnight. From a social perspective, the aim is to weed out companies that show scant regard for workers’ welfare and return little to the communities that serve them. For governance, the goal is to filter out state-run companies that engage little with minority shareholders, businesses with opaque disclosure standards and those riven by conflicts of interest and other abuses.’
While ESG concerns have often been considered not serious by more traditional investors, we at the UUCEF (and other like-minded investors such as www.iccr.org ICCR and http://www.ceres.org CERES) would argue that taking more factors into account when considering financial return performance is a wise thing to do. Again from the Financial Times: https://www.ft.com/content/9254dfd2-8e4e-11e7-a352-e46f43c5825d?segmentId=080b04f5-af92-ae6f-0513-095d44fb3577 . There is a necessity to protect a portfolio against downside risks and this is the number one aspiration of our clients,” says Ms. Mateos y Lago. “This is about not losing a tonne of money. If you had invested in the US coal sector in June 2014, you would have lost 85 per cent by the end of 2015.”
So, to answer the question of more SRI-skeptical congregants that are involved in managing your congregation’s endowment, recent history shows that ESG considerations can in fact boost your performance. It seems the performance penalty is on the other foot – and it may be time to ask your skeptical colleagues about the performance penalty they are taking by not investing in ESG stocks and managers.
— David Stewart, Co-Chair of the UUA Socially Responsible Investment Committee and Member of the Investment Committee; member of Northwest Unitarian Universalist Congregation in Sandy Springs, GA