University endowments are sums of money or other financial assets that are donated to academic institutions. Endowment funds are important in supporting the teaching, research and public service missions of higher education establishments, and of late they are increasingly embracing environmental, social and governance (ESG) criteria, with a particular focus on committing to sustainable investments and walking away from fossil fuels.

Harvard University, the University of California, Boston University and Georgetown University in the US, and Cambridge University and Oxford University in the UK are among the high-profile educational institutions that have divested their endowments away from the fossil fuel industry.

This doesn’t come as a surprise as fossil fuel divestment has been on the list of the leading ESG criteria among educational institutions, according to a report published by the US SIF foundation, a US-based forum for sustainable and responsible investment.

In addition, the 2020 report on sustainable and impact investment trends in the US reiterates that climate change and carbon emissions are the leading ESG criteria for educational institutions, ahead of conflict risk, human rights, sustainable natural resources and agriculture, and equal employment opportunity and diversity.

How does ESG impact on investment returns?

While embracing ESG is rising as a priority among endowments, the impact of ESG adoption on investment returns among the institutional asset management community is also garnering a great deal of attention.  

A survey by Captrust Financial Advisors shows that there is a difference in views on how ESG strategies might impact performance among adopters and non-adopters. The 2021 Endowments and Foundation Survey reveals that 48% of the endowments and foundations that have adopted ESG believe that ESG strategies enhance returns. This is twice the rate of non-adopters.

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In addition, the survey states that “new adopters allocate to ESG strategies that incorporate a best efforts approach to their core values rather than a fixed approach to avoiding companies with specific business practices”.

Do endowments incorporate ESG for different reasons compared with other institutional investors?

The growth of ESG incorporation reported by institutional investors has been steadily increasing since 2005, according to data from the US SIF.

This shows the growing interest of institutional investors in ESG as a topic. However, this doesn’t mean that all types of institutional investors have the same approach towards ESG. In fact, a 2021 survey by consultancy Callan reveals that different types of institutional investor embrace ESG for different reasons.

More specifically, the survey shows that fiduciary responsibility and improved risk profile are among the top reasons why endowments incorporate ESG factors.

Fiduciary duty seems to be a key driver for decision-making among endowments when it comes to ESG. Harvard president Lawrence Bacow cited fiduciary reasons when explaining the university's move to divest from fossil fuels.

“Given the need to decarbonise the economy and our responsibility as fiduciaries to make long-term investment decisions that support our teaching and research mission, we do not believe such investments are prudent,” he wrote in a letter published on the university’s website.

Other reasons that endowments incorporate ESG include aligning a portfolio with their values, higher long-term returns and utilising the investment fund to make an impact.

The data reveals that stakeholder concerns are not among the reasons why endowments incorporate ESG, as opposed to public pension funds and foundations that incorporate it for such reasons.

Apart from stakeholder concerns, aligning portfolios with values is another top reason for public pension funds.  This is also the top reason for corporate pension funds (41%) but to a lesser degree compared with the public pension funds (75%).

Despite there being different reasons why each institutional investor decides to embrace all things ESG, the most important thing is that each sees it as part of a long-term commitment, and not just an exercise in greenwashing. University endowment investments may not come with the stakeholder pressures that other forms of investment come with, but no one wants to be involved with an institution that associates itself with unseemly, environmentally damaging practices.