Higher Education

Endowment 101: socially responsible investing

It’s been an unprecedented and extraordinary few weeks to say the least, and the weeks ahead are likely to prove similar as we continue to do our part to flatten the curve, slow the spread of COVID-19, and provide world-class patient care. 

Although we have many of these things on our minds right now, I think it’s critical that we continue to move forward with much of the important work we had been doing before — especially as it allows each of us to unplug from the current news cycle for a bit and feel a bigger sense of purpose that is both long-sighted as well as short-sighted.  

To that end, as promised, I want to share the third installment of my endowment 101 blog. In the last two installments, I shared an overview of what an endowment is, how it works, how we utilize and allocate our endowment funds here at Washington University, and how the endowment is managed. 

In this installment, I aim to provide a lens into some of the specific and strategic steps the Washington University Investment Management Company (WUIMC) is taking to continue on our trajectory of socially and ethically responsible investing.  

But first, a quick reminder of what our endowment funds support, which — simply put — is our people and our programs of distinction. It supports scholarships for first-generation college students and families that otherwise can’t afford a WashU education. It supports diversity, equity, and inclusion through recruiting and retaining the very best and most talented students, faculty, and staff. It helps address issues around disparities in economics, health, and education through faculty appointments and research. It supports our efforts to mitigate the effects of cancer and research to find a cure for Alzheimer’s disease. It provides sustainable research and teaching funding to support our efforts to be an anchor institution and cross-sector partner as we continue to find ways to practice sustainability. It even helps us support school and department-level emergency funds, which many areas are using as we speak to support student success during this time of crisis. And so much more! 

But what about the actual endowment funds themselves? How does WUIMC utilize those funds to practice ethically responsible investing?

Washington University’s core mission — to provide a world-class education, conduct path-breaking research, and deliver compassionate and effective patient care — is a force for greater social good.  As a direct partner with WashU, the WUIMC Board believes the university’s endowment has the greatest potential for impact when its investments support the university’s mission. As a result, ethical considerations naturally play a part in every aspect of WUIMC’s efforts to evaluate investment opportunities on behalf of the university.  

When it comes to investing in businesses that make decisions based on best ethical practices and environmental, social and governance (ESG) improvements, WUIMC operates under an “engagement model” rather than a “restrictive” one.  In other words, the WUIMC investment mandate does not specifically limit the types of investments that can be utilized to financially support the university through systematic negative screening or similar processes. To that end, the WUIMC Board views divestment from certain industries or companies as an ineffective way to promote ESG initiatives.  In addition, the board believes investment restrictions introduce adverse selection and could directly impair WUIMC’s core mission to provide maximum financial support to the university.

Instead, the WUIMC team uses an “engagement” approach to investing, where it looks for partners with a long-term investment orientation and works to find managers whose framework broadly aligns with the university’s mission. In addition and according to the WUIMC’s recently adopted investment principles, “the university’s commitment to core values related to diversity and sustainability are also emphasized during the selection of external investment managers.” 

As these managers consider the implications of various operational and strategic factors for a prospective investment, ESG matters become an important component of their evaluation.  That’s because, undoubtedly, ESG factors play a critical role in determining the long-term success and viability of any individual investment. A portfolio company’s progress toward best ESG practices is generally consistent with a company’s increasing tendency to generate sustainable earnings and appreciate in value over a long-term investment horizon.  On the flip-side, while investments with identifiable ESG risks may not experience the immediate consequences of ESG shortfalls, over multi-year time periods, a weak approach to ESG matters can negatively affect investment outcomes. Hence, WUIMC’s general strategy to invest with partners who take a long-term, price-sensitive approach towards investing in companies with sustainable and defensible business models tends to limit exposure to underlying investments with poor ESG practices.

That may have sounded like a bunch of technical jargon, and so you might be thinking, “What exactly does this mean for WashU?”  In a nutshell, it means that WUIMC has a natural tendency to invest our endowment in businesses that show a trajectory for long-term social responsibility — because socially responsible businesses tend to have better outcomes.  For example, currently our portfolio includes investments in companies devoted to issues such as: financial inclusion and access to unbanked populations; healthcare advancements; scientific innovations in manufacturing waste reduction; access to housing, food, and sustainable agriculture; product and labor safety; clean technology and waste recycling; job creation; education; and more. To date, our portfolio has an estimated one in five dollars (20%) invested in positive SRI/ESG themed areas. 

Because WUIMC believes a business’s weak approach to ESG matters can negatively affect investment outcomes, this also means that our endowment currently has absolutely no exposure to “ESG challenged” industries such as private prisons or weapons manufacturing.

But what about fossil fuels? 

That said, at WashU there is often talk about fossil fuel divestment.  This is an issue we continue to take seriously as we communicate regularly with groups and individuals on campus who are devoted to this cause.  It is true that currently our endowment has limited exposure to non-renewable resources (which includes energy, materials, and mining) and high carbon emission sub-sectors (which includes auto/air transportation and certain industrials/capital goods).  However, I would like to emphasize that this exposure is, in fact, quite limited, especially when compared to the broader market (using the All Country World Index, also known as ACWI index, as a proxy). 

Simply put — this is our current reality.  While it’s not exactly the reality our entire community aspires for our endowment practices, I want to be very clear that the university does not require its investment partners to maintain any particular social or policy agenda.  The university welcomes and encourages robust debate on these topics, but we cannot risk jeopardizing the financial support of the university’s mission by restricting its universe of investments to a subset of managers. Furthermore, we firmly believe our best contribution to the advancement of the greater social good is through the financial support of the university’s mission.  In return, that mission’s impact on the students, faculty, and staff is what will ultimately improve the world. As such, the university maintains a strong presumption against using its financial resources to express any particular social or policy agenda through exclusionary practices.  

So what’s next?

All this being said, I for one am proud of the immense progress we are making to invest in industries that align so closely with our mission, with a strong tendency to shy away from those that might serve to detract from it.  And moving forward, we will continue to make even greater strides to invest in businesses with positive ESG practices. Because of the nature of our partnership with WUIMC, their long-term horizon approach to investment, as well as their engagement model, we’re confident we will continue on this path. 

In addition, just as we are committed to enhancing ESG practices, we are equally committed to being more transparent about the endowment. That’s why, for the first time in WUIMC’s history, we have created an Annual Report that provides ample details about these and other topics related to the endowment. We are also working on creating a more robust website to share real-time information about the endowment, and we will share that website as soon as it becomes available. In the interest of full transparency, WUIMC has also recently adopted a set of investment principles and ESG metrics

Furthermore, I’m pleased to share that the WUIMC investment staff will continue to augment its own ESG diligence and monitoring. WUIMC is taking initial steps to explicitly review the ESG policies of all existing and prospective managers, incorporate ESG questionnaires into the team’s diligence process, and monitor the status of material portfolio companies that have been identified as having either positive or negative ESG attributes.  Going forward, the WUIMC investment team will also rely on WUIMC Board guidance before implementing additional ESG investment or screening practices.

These are the immediate next steps, but there are also long-term steps.  In order to achieve some of our most ambitious goals and aspirations for the university — especially as it relates to our commitment to academic distinction, educational access, and our role and impact in St. Louis and for St. Louis — we must focus on growing our endowment and doing even more to invest in the people who make this university what it is today and what we hope it will be tomorrow.  As I said in my inaugural address, these things will not be inexpensive, and it’s going to take a concerted, strategic, and financial effort to ensure Washington University continues to be a place of distinction in education, research, and patient care for centuries to come.