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More universities looking to put ESG stamp on billion-dollar endowment funds

A growing number of college endowments are exploring more holistic approaches to sustainable investing amid the strategy's rapid expansion across the U.S.

U.S. university endowment funds were among the first institutional investors to explore environmental, social and governance, or ESG, investing. But a vast majority of those institutions have historically maintained relatively narrow approaches to sustainable investing, focusing on a single issue such as climate change, fossil fuels or tobacco.

That has started to change, as a swelling number of colleges create committees to weigh broader sustainable investment practices. At the start of 2018, more than 80 of the 93 educational institutions surveyed by the U.S. Forum for Sustainable and Responsible Investments, or US SIF, had created official investor-responsibility committees, roughly double the number of committees in 2016.

"By definition, an endowment is meant to be a perpetual asset, so we have the opportunity to think as very long-term investors," said Kate Murtagh, managing director of sustainable investing at Harvard Management Co. Inc., which oversees Harvard University's $39.2 billion endowment, in an interview.

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As a whole, the money management industry has been pouring into sustainable investments, which now account for 26% of all professionally managed money in the U.S., according to the US SIF's biennial sustainability report. Institutional investors held $5.608 trillion in assets linked with ESG criteria at the start of 2018, which was 18.7% higher than in 2016.

The educational institutions surveyed, which included Harvard University, the University of Michigan and Northwestern University, held $317 billion in ESG assets at the start of 2018, 8.2% higher than in 2016. While educational institutions, which also include some private secondary schools, held about the same aggregate amount of ESG assets in 2014, each institution held, on average, $3.41 billion in ESG assets in 2018 versus $2.94 billion in 2014.

The amount of reported ESG assets among college endowments fell from 2014 to 2016 due to a change in US SIF's classification of investments related to companies doing business in Sudan, said Meg Voorhes, US SIF's research director, in an interview.

The growing popularity of ESG products, which sometimes see higher returns than typical investments, comes as more investors, including college endowments, look to hedge their exposure to future, long-term risks. These risks can be related to everything from geopolitical uncertainty to climate change.

Historically, sustainable investing was tied to exclusionary practices such as removing investments in a specific company or industry. But endowment trustees were concerned that divesting was a costly mechanism that crimped returns, Georges Dyer, head of the sustainable investment group Intentional Endowments Network, said in an interview.

Some trustees and portfolio managers have worried that a focus on divesting could lead them to breach their fiduciary duties if doing so harmed returns.

While those concerns persist for some, many college endowments, much like the rest of the wealth management universe, have instead started to think of ESG more as a lens to assess the possible risks in a given company or asset that are not factored in through traditional investment tools.

The shift in thinking has prompted some universities to introduce broad sustainability principles across their portfolios.

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Hampshire College, a liberal arts school in Massachusetts, incorporates sustainable strategies across its more than $52 million endowment, which saw a 14.3% return in fiscal year 2018, said Dick Hurd, chairman of Hampshire's investment committee, in an interview. Yale University, which has an endowment of $29.4 billion, in August banned investments in retail companies that sell assault weapons.

The educational institutions included in the report said they allocated $12 billion to avoid investments in weapons and firearms by 2018, a figure that could spike in US SIF's 2020 report, Voorhes, the research director, said. With the report collecting data at the beginning of the year, the totals do not include any changes made by colleges in 2018 in response to the Parkland, Fla., school shooting. Following the Parkland incident, some of Wall Street's biggest banks and asset managers began reconsidering their relationships with and investments in gun manufacturers and gun retailers.

But Hampshire's former head of the investment committee, David Dinerman, said in an interview that the real "elephant in the room" is climate change, which educational institutions included in US SIF's survey had allocated $143 billion to by 2018.

For several years, campuses have been rife with protests calling for universities to divest from fossil fuels, but many of those institutions have not done so. The University of Pennsylvania, for example, in 2016 ruled against halting investments in fossil fuels. The committee reviewing the proposal unanimously found that the request, made by a student group called Fossil Free Penn, did not meet the University's criteria for divestment.

Still, the exponential growth of interest in single ESG issues such as climate change and firearms is partly why colleges are now looking at broader sustainable investment strategies, rather than zeroing in on separate issues. The switch marks a new stage in how college endowments think about ESG, Dyer said.

"[Endowments are] more interested in being proactive around a holistic approach when thinking about ESG factors," he said.

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