Taking into account ESG factors in the investing process is on the rise within the not-for-profit space, resulting in a need for a new kind of investment expertise.
There is a clear trend of non-profit organisations incorporating environmental, social and governance factors into their investment journeys, yet barriers surrounding terminology and the ESG investment process are resulting in a need for expertise and guidance that go beyond the traditional remit of non-profit organisations.
That’s the view of Georges Dyer, executive director at Intentional Endowments Network & Gilles Lavoie, not-for-profit investment consultant, Mercer Canada, speaking on the Critical Thinking, Critical Issues podcast with host Paul Fleming, Mercer’s UK head of endowments and foundations.
Dyer’s day-to-day role sees him support endowments in positioning investment policies with institutional mission, values, and sustainability goals. The network consists of over 200 members, including leading universities, foundations, outsourced CIO firms and consultants, investment managers, and nonprofit partners.
Lavoie offers a complementary expertize , specialising in optimising risk-adjusted returns for Mercer’s institutional investors and is a part of the global not-for-profit team that collated this year’s global not-for-profit investment survey. In a wide-ranging discussion, the two industry experts outlined the need for non-profit foundations to deeply consider the change they can invoke by leveraging ESG expertise and frameworks to expand on non-profits’ principled approaches to financing.
In a practical sense, looking at ESG factors is about evaluating financial risks “explicitly and systematically,” Dyer explained. If not-for-profits can be effective in “identifying the risks and opportunities” than come through a scrutinous ESG lens, then the outcome is simple: “better long-term investing.”
Lavoie echoed this sentiment, noting that “virtuous” organisations now have an opportunity to reflect their intrinsic values in their investment programs and present a more coherent alignment to their key stakeholders.
Increasingly, such organisations are turning to ESG factors as they see it as being aligned with their overall fiduciary duty. As such, 72% of non-for-profits intend to increase their exposure to ESG-focused investments over the next 12 months.
But Lavoie said that ESG investing within the not-for-profit space goes beyond fulfilling fiduciary duties – it’s about spearheading meaningful societal change, particularly in the interconnected areas of climate change and diversity, equality and inclusion.
The demand from non-for-profits for such strategies is so prevalent that attitudes to risk and returns are being altered. Now, 36% of respondents believe they will have to make compromises when closing the gap between ethics and investment returns, and of that group, more than half believe that compromise will have to come in the form of limited absolute returns.
“If we're talking about risk, we're talking about returns being somewhat impacted, but they're still putting these opportunities out there,” Lavoie said, noting a recent example of a discussion with a colleague, noting how the “decisions and practices” being made around ESG investing can impact factors as prevalent as searing heatwaves seen globally this year.
“But the opposite is true as well,” he said. “If you don't do anything, climate change will have an impact on your portfolio, because the companies you're investing in will be impacted by climate change. Irrespective of what it is that you do, there will be an impact. It's important to understand the issue from these two perspectives: how your portfolio is affecting climate transition and how your portfolio is exposed to climate transition, and then see how you're able to adjust this if you're uncomfortable with the risks involved,” he added.
For not-for-profits, understanding where they sit on the risk spectrum while considering the non-financial outcomes they hope to invoke is paramount and demands a scope of expertise that goes beyond traditional portfolio management.
56% of respondents to Mercer’s global not-for-profit survey view climate change as an investment opportunity over the next three years and is the second-greatest opportunity identified overall. But on the back of that, portfolios have ratcheted complexity, with 44% stating their portfolios are more complex today than they were three years ago. As a result, seven in ten not-for-profit groups have already turned to external investment support to bolster their ESG capabilities.
Dyer pointed to some of the challenges facing not-for-profit groups, namely around “data access, lack of standardization, fees, and greenwashing.”
As asset owners, the best way to overcome these issues is by “doing due diligence, working with portfolio managers, before and after the selection process and engaging with existing leaders to help address some of these issues.”
Similarly, Lavoie said the evolving nature of consultancies and managers will place not-for-profit groups in good stead, having already had to learn from and “navigate the pitfalls” of ESG investing for specialised clients.
“It is going to be interesting to see how the market will continue to evolve further and meet the demands of clients,” he said.
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