The integration of environmental, social and governance (ESG) factors into the investment process is being recognized as a way to enhance value by mainstream investors. However, most trusts and foundations are falling behind when it comes to responsible investment, according to a recent report from the EIRIS Foundation Charity Project.
The recent financial crisis highlighted the significance of accountability, transparency, responsible ownership and long-term investing, the report notes. “Increasingly, it is recognized that these values should be at the heart of the investment strategy of trusts and foundations.”
This “extra-financial” approach is not new, the report adds, noting that a number of charities have included ESG in their investment process for decades. “Whether or not you agree with the mission case for incorporating ESG factors, there is growing evidence that this is an astute financial decision and can be used to safeguard and enhance financial returns.”
For example, poor corporate governance has been shown to have serious consequences for individual companies and the wider economy,” says the report’s author, Sam Collin. Similarly, there is a growing consensus that climate change will be financially significant to all companies.
Given the financial relevance of ESG factors, the report says, there is a danger that by not taking such issues into account, trusts and foundations could be seen as acting imprudently and failing to secure their long-term financial sustainability.
The report suggests that as a first step, trusts and foundations determine their beliefs and position in relation to responsible investment. “A simple next step is to look into the expertise and skills of your current investment manager(s) and determine if they could potentially meet your needs.”
“Trustees do not have to become experts in an array of ESG concerns. Rather, they should ensure that asset managers have such expertise.”
If trustees decide to follow the responsible investment route, they should ensure that ESG integration forms part of their contractual agreements with asset managers, the report suggests.
“Trustees need to integrate sustainability issues fully into their governance roles,” says Penny Shepherd, chief executive of UKSIF. “This is about investment beliefs and improved contractual relationships, not about usurping the role of investment consultants or fund managers. Quality of responsible investment must become a significant factor in the awarding and retaining of mandates.”
Trusts or foundations can also join collaborative initiatives, such as the Carbon Disclosure Project, vote their shares on ESG-related issues and invest in SRI funds.
Read the full EIRIS report.
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