Total time: 14:32
Lily Tu: Hello everyone and welcome to today's podcast. I am Lily Tu, Vice President of Business Development and Consultant Relations at Sage. For those of you who do not know me, I moved my family from New York to Austin and joined Sage at the peak of COVID—fun times. In many ways, I think this podcast is extremely timely because COVID has changed the way in which we live, how we view the world, and effectively how we invest. Today, we will be discussing the nonprofit world and investment solutions in today's environment. I am excited to “sit down” with the CIO at Sage, Bob Smith. Don't worry folks, we are socially distant in our respective homes. Bob has worked with so many iterations of nonprofits and brings a lot of context to this conversation. I would say the one thing I know about working with nonprofits from my prior experience is that each endowment and foundation is unique. So Bob, let's get to it. Sage has had a long history of working with nonprofit organizations. What would you say are important factors to consider when working with nonprofits?
01:06
Bob Smith: Well, good day Lily, it's nice to be talking to you about one of my favorite subjects. With regard to COVID-19, obviously, for you it was a tough move and I’m very happy that you've finally made it to Austin. But, you know, this is something that has significantly disrupted economic activity around the world. Everybody's kind of been affected by this, and COVID-19 has been very central to the not-for-profit community in a lot of different ways. Now, if I were to sit here and examine how the not-for-profit community has come into the sustainable investing experience, I would kind of break it down into about maybe three different examples. The first one I would draw upon is that we see that there are organizations that are looking at sustainable investing and ESG, or environmental, social, and governance integration, to kind of express through their investment process their institutional values, either in the way of divesting from companies or really gravitating more towards certain companies that are emphasizing a particular value that they feel is really core to their organization.
2:30
Bob Smith: Another way that we see people approaching sustainable investing at this point in the not-for-profit community is that they're attracted to ESG integration really for its investment risk mitigation aspects, and this is helping these organizations to avoid long-term investment risks that might be associated with issues like exposure to overvalued carbon-based investments or investments in companies with low diversity and poor community relations. I think the last way that we see them getting involved in sustainable investing is that everybody is concerned about growth and development of their organizations. We are, and the same is true for not-for-profits, and some of these organizations may be more concerned about giving their donors more of a choice in how they actually invest their money. And thereby through ESG integration, they may be able to better incorporate actual donor values into their investment values and as a result, potentially generate future endowment contributions that prior to their move towards sustainable investing might not have come their way.
3:55
Lily Tu: That's great input, Bob. I think it would be helpful for those listening to understand how one would optimize a portfolio with some concrete examples? Can you provide a few?
04:06
Bob Smith: Well, I think that there are a few things that you have to think about as you look at the challenges and look for solutions and so forth. I mean, if you're going to be looking to build a sustainable investment focus, first and foremost, what you have to do is define—what is the organization's range and depth of its sustainable investing focus? What do we want to align with? Is it going to be a broad focus? Are we going to align with perhaps, an accepted framework, like the Sustainable Development Goals or the UN PRI (Principles for Responsible Investment)? So, there are lots of questions that I think organizations need to think about—whether or not you're going to incorporate negative, socially responsible screens, as well as positive screens, supporting social justice or environmental sustainability, human rights, healthy communities—whatever those issues may be that are most important to you. So, those are the things that you have to do first.
5:14
Bob Smith: The second thing is, you've got to identify the scope of your sustainable investing effort, by asset class—not only asset class—but also by how much money or share of the reserves of the organization are going to be devoted to this. Is this is going to be 100%, is it going to be 10%, or somewhere in between? So, again, what is the size of our commitment to this? I think the other thing too, that's important, you know, if you're going to go out and do this, you want to identify the organization's ESG requirements, kind of what are their minimum, commonly accepted standards that can be monitored? We want to be able to identify, what are the minimum requirements that if I'm going to invest in this way, what are my basic minimum standards that I hope to get from an ESG standpoint, from a sustainable investing standpoint, that I can see, I can measure and that I can, at least over time, see that progress being made.
6:18
Bob Smith: And then the last part of this, I think, is that you have to be active. This is not a passive game. You have to embrace active stewardship through proxy voting and engagement with companies and governmental bodies and regulators and other stakeholders, other likeminded organizations, there is strength in numbers. So it's really, really important that that you do have this engagement across many different channels as you move into a greater sustainable investing process. So it really is something that has to be constructed with intention, that has to be executed with consistency, and there has to be a degree of adaptability, in terms of what life throws at us and the markets throw at us.
7:06
Lily Tu: We've talked to many endowments and foundations over the years, it's clear that a lot of these non-for-profit organizations are really starting to focus on ESG strategies and it sounds like it's a really great way for advisors or consultants to really engage with some of these organizations and be a differentiator. Bob, I know you've seen a lot of data points and seen a wide adoption of ESG within this world. Can you talk a little bit about that?
7:42
Bob Smith: Yes, I have seen a lot of things go by in time, and I think you're referring to perhaps the fact I might be a little bit older than you at the moment, Lily. But I think that looking at adoption trends is very important because those trends can really give you a lot of different indications in terms of the strength and the vibrancy of a movement. One thing I would say is that since the 2015 IRS notice that really permitted endowments of U.S. private foundations to consider the relationship between their investments and the foundation's mission, all we have seen has been a significant increase in interest in Responsible Investing in essentially the aftermath of that decision. For example, now in 2019, FEG, Fund Evaluation Group, did their community foundation survey of 112 foundations across 35 states, and they found that the interest in Responsible Investing had almost doubled since their 2017 survey, and that, indeed, the number of organizations that invested in this way had nearly tripled to almost half of all the respondents in the survey. It is almost exponential growth. And so, when you sit there and look at it and say, “wow, this is really meaningful,” community foundation's in particular, which is one slice of the not-for-profit community, are evidently targeting ESG investing strategies to complement the positive effect of their charitable grant programs. And, you know, the assets allocated to ESG strategies, they believe, I think may enable community foundations to invest in stocks and bonds and all kinds of asset classes based on these ESG principles. It’s a very powerful connection for them in terms of “what are we trying to get done as an organization?” And how can we really amplify or leverage our ability to accomplish that through our investment process.
10:01
Bob Smith: I'll give you one other, CAPTRUST, who is a reasonably large investment consulting organization, just this May reported in their second annual endowment and foundation survey of more than 130 organizations across a broad variety—they had religious guys, they had educational, they had charitable missions— all different groups in there. They found that 30% of the respondents were committed to ESG investing, and indeed another 9% plan to become involved or increase their allocation to ESG funds. This is a fairly significant group in terms of the absolute dollars that they control. I think that there were a couple of notes that came out of this, and one was that their researchers found that several national grants, as I had said before, are now only awarded to foundations that invest in ESG—only awarded to those who invest in ESG funds. We haven't seen this before, and by not investing in those funds, they believe the research has said that the foundations could inadvertently be restricting which grants that they can access and essentially diminish their mission. That's an important consideration. Now, you know, it's a big world out there. And there are now reportedly over 86,000 foundations in the U.S. today. They represent something in the order of around $2 trillion of investable assets. But only nine percent—nine percent—of that community, or that universe, have over $10 million in assets. So very often you find in the foundation end of the not-for-profit community, that their resources are very constrained—particularly when it comes to being ready and really embracing ESG and ESG knowledge—they just don't have the resources. So, they are looking to move in this direction, they want to build up their missions, they want to build up their donor base, their ability to access grants. The only way they can get this done and a growing number of cases now is through the ESG channel. So it really is a growth area and from an investment management and consulting service perspective, we believe that this is where growth is going to occur from a financial services standpoint, in terms of the interaction with the not-for-profit community. And so, as we go forward, the ability to really engage in terms of sustainable investing is going to be an important part of Sage’s business, but we think that this will be a growing interest within the financial community as well.
12:44
Lily Tu: Those are some great statistics and great data points. So, there you have it, guys. If you don't start engaging with organizations on the ESG front, you'll be missing out on a large swath of the market—86,000 foundations. That's incredible. We encourage everyone to really learn a little bit more about ESG, get started with a lot of those organizations that Bob mentioned. Otherwise you'll be left behind. So Bob, just wanted to thank you for your time today and thanks to all who have tuned in today.
13:20
Bob Smith: Thank you Lily, and thank you all for listening.
13:23
Lily Tu: You can find us at sageadvisory.com, @sageadvisory on Instagram, and on our Sage Advisory LinkedIn page. See you next time.
13:31
Disclosures: Sage Advisory Services is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This podcast is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.
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