NonProfit News Trends: Impact in ESG Market

Michael McMurray, Senior Consultant, Pavilion Advisory Group Ltd., was interviewed by NonProfit News.  Below are some highlights from the article about how a growing number of investment consultants are integrating environmental, social and governance, and impact metrics into their manager research processes.  The complete profile is available here.

Consultants, OCIOS look to make more impact in ESG Market
By Kelly Carroll and Lindsay Saienni
NonProfit News, June 23, 2016

A growing number of investment consultants are integrating environmental, social and governance and impact metrics into their manager research processes in recognition of a growing interest from institutional clients.

Consultants are focusing on implementing enhanced research frameworks to assess the risks and opportunities presented by impact and ESG factors at a time when investors plan to increase impact investment commitments by 16% and the number of deals by 55%, according to 2015 data from the Annual Impact Investor Survey by the Global Impact Investor Network.  Investors committed $15.2 billion to 7,551 impact investments in 2015, which included ESG and socially responsible investments, GIIN said. The consulting space has been paying close attention to climate change, as it has the potential to materially impact the economy and poses a new risk that institutions such as foundations and endowments may not be necessarily paying close attention to at this point.

Wilshire Consulting and Pavilion Advisory Group are among the consulting firms that have recently announced new initiatives as part of their ongoing efforts to integrate ESG factors into their manager research processes.

Pavilion, along with many of the investment managers it works with, is increasingly eyeing the risks involved with companies that don’t meet their standards during their respective research processes.

“It’s pretty difficult to find a manager that doesn’t cover ESG issues at all, as headline risk is becoming much more important to them – climate change and supply chain being two examples”

“Of the roughly 1,000 managers that have signed [the United Nations Principles for Responsible Investment], a majority of them are doing what they’ve always done, with more focus on ESG as a source of risk,” McMurray said.

Pavilion Alternatives Group has integrated ESG factors into their manager research and due diligence processes, the firms said.

“Assessing managers’ ESG policies has always been an important part of our overall due diligence process. We also analyze how managers, specifically in the alternative asset market, integrate ESG factors into their investment processes and monitor ESG-related risks within their portfolios,” President and Managing Director Donn Cox said, in a statement.

There are a handful of foundations, universities and state retirement plans that have recently made decisions to integrate ESG into their portfolios.

Most recently, the $29 billion State of Connecticut Retirement Plans and Trust Funds issued an RFP for a general investment consultant wherein the plan noted that the firm will be responsible for looking over the ESG factors of each  money manager, as reported in NPNews sister publication fin|daily.

Specifically, in the scope of services for money manager research, the plan requires evaluation of each manager’s ESG capability and performance and also requests an annual report assessing ESG performance of existing money managers including “an evaluation of a manager’s utilization of ESG factors in its investment process as a metric based upon a questionnaire from the Office of the Treasurer,” according to the RFP.

In December, the University of Massachusetts Foundation announced plans to divest its endowment, valued at approximately $770 million, from direct investment in coal companies and sought to manage the endowment in alignment with ESG principles and moved toward an ESG-style approach.

On June 15, the university’s board of trustees endorsed the foundation’s decision to divest its endowment from direct holdings in fossil fuels. Chairman of the UMass Board of Trustees, Victor Woolridge, who also serves on the UMass Foundation board, said the endowment had direct holdings in fossil fuels in the vicinity of $5 million.

In the same vein, last summer the Ball State University Foundation approved the pursuit of an alternative investment portfolio within its endowment pool that adopts ESG strategies. To do so, the foundation asked its managers and consultants to incorporate ESG investment strategies.