Millennials and Gen Zers are fed up with the mess earlier generations have left them. They see a climate emergency that’s crying out for immediate – and substantial — action. In addition, they fear today’s social and economic injustices will rip the nation apart if not effectively addressed. These younger generations are turning to impact investing as a powerful way to address the environmental and social problems handed to them by older generations.
According to a survey by Morgan Stanley, 95% of all Millennials are interested in sustainable investing and 67% have made at least one sustainable investment. Moreover, they want colleges and universities to be more environmentally and socially responsible when it comes to the investments the schools’ endowments make. Millennials and Gen Zers are targeting their schools and threatening to pull current and future donations if said schools don’t divest investment holdings in fossil fuel companies and increase the number of ESG investments in their portfolios.
Millennials want colleges and universities to be more environmentally and socially responsible when it comes to the investments the schools’ endowments make.
University administrators and endowment managers can expect the heat from Millennials and Gen Zers to increase as they take over the workforce and inherent wealth from their Baby Boomer parents. According to Brookings Data, by 2025, the workforce will be made up of 75% Millennials. And by 2030, Millennials will hold five times as much wealth as they have today. They are expected to inherit over $68 trillion from Baby Boomers over the next 30 years in what’s been called “The Great Wealth Transfer.”
Of course, university leaders in general, and endowment managers specifically, aren’t completely tone deaf on this subject. There have been some positive developments regarding impact investing. Some universities have taken their first steps by implementing a fossil fuel divestment approach. Currently, the number of educational institutions has grown to 226.
In addition, there have been more than 25 signatories of the Principles for Responsible Investing associated with North American universities. Signatories believe sustainable investing is consistent with their school’s mission to positively impact society long term.
Also, a growing number of university endowments are including ESG analytics in their investment philosophies more broadly. According to the Association of Governing Boards of Universities and Colleges (AGB) this “investment philosophy resonates well with students, faculty, and broader stakeholders, and aligns with the mission of higher education in preparing students for long-term value creation.”
One particularly positive development is that several universities are developing a variety of impact investing programs — including direct impact investment funds in some cases – in which students are heavily involved in the due diligence and investment decision-making processes. Stanford has a student-managed GSB Impact Fund that is designed to expose students to the process of impact investing. UCLA’s Anderson School of Management also has a student-led impact investing fund, called Anderson Venture Impact Partners. The fund makes minority investments of at least $50,000 in early-stage ventures that have the intention of generating social/environmental returns as well as competitive financial returns. Duke’s Fuqua and Penn’s Wharton have similar student-focused impact investing programs in which students can experiment while learning about impact management and measurement.
These are all positive developments. But a majority of college and university endowments remain hesitant to make more than token investments in the ESG space. The most common reason for this ESG hesitancy is a fear that ESG financial returns won’t match those of traditional investments.
This fear exists despite the fact that funds with “above average” or “high” sustainability ratings outperformed comparable funds with lower sustainability, according to a Barron’s report. In addition, a Morgan Stanley study compared the performance of sustainable funds with traditional funds from 2004-2018 using Morningstar data. A total of 10,723 funds were studied. Researchers found that sustainable funds provided returns in line with comparable traditional funds while reducing downside risk.
A majority of college and university endowments remain hesitant to make more than token investments in the ESG space.
Of particular interest to college and university administrators, a 2017 study done by the National Association of College and University Business Officers revealed that college and university endowments that use socially responsible investing (SRI) strategies can produce long-term returns that are approximately equal to those of non-SRI users. (See “Seeing SRI in Context”.
The bottom line is ESG investments aren’t in conflict with a desire to achieve competitive financial returns. And potential ESG investments today have grown beyond basic mutual funds and ETFs. ESG options now include impact investments that flow directly into companies and projects that address social and environmental problems as their primary mission. The ESG Investing Formula is straightforward: ESG Investing = Value-Aligned + Social Purpose + Financial Performance.
That’s a powerful formula for college and university endowments moving forward. And as Millennials and Gen Zers are increasingly pointing out, it’s time to pick up the pace.
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