Responsible investment has come to prime time. Today, nearly one in five invested dollars is committed to the premise that sustainability and societal good should play a role in the investment process. Signatories of the United Nations Principles for Responsible Investment have a collective $18 trillion under management. Far from being limited to idealists without serious economic goals, global insurance companies and even private equity firms invest to reward their wallets and fit their environmental and social prerogatives.
And they are doing so in an innovative way.
In the 1970s, responsible investors focused on divestment from “bad” companies; today’s approach focuses on influencing the corporate policies of the companies they own, while simultaneously reaping the financial benefits of an investment. Those who manage the $18 trillion under UNPRI standards call this active ownership: engaging with companies and fund managers and pressuring them to improve their environmental and social practices.
In 1972, Yale demonstrated a commitment to responsible investing when it formed the Advisory Committee on Investor Responsibility — a group of students, alumni, faculty and staff responsible for overseeing the ethics of the Yale endowment. Unfortunately, while the practices of other responsible investors have evolved over the past four decades, Yale’s approach has not.
The ACIR cannot practice modern responsible investment because its tools are decades old. Most importantly, the committee can only review 1 percent of the Yale endowment — far too little to analyze its environmental and social impact and find opportunities for active ownership. Unsurprisingly, since the committee’s inception its major actions have all followed the antiquated model of divesting from “bad” companies rather than engaging with them to make real change. We can do better.
And we have good reason to want to. For example, in 2008 TIAA-CREF — a large financial services company — learned that 22 of the companies in which it was invested were doing business in Sudan. Through tax revenue, these companies were supporting a government that was committing genocide. TIAA-CREF began a dialogue with the management of these companies and gave them one year to leave Sudan, threatening to sell its holdings. Ten companies left and two agreed to create programs focusing on education, health and water services. This is but one instance in which responsible investment had a clear social impact. Similar engagement activity can focus on issues ranging from benefits for same-sex partners to environmental sustainability to preventing predatory lending.
While responsible investment is entering the financial mainstream, it suffers from the myth that it significantly underperforms traditional investments. But there is little evidence to support this view. The KLD 400 Social Index — made up of large U.S. companies selected for their environmental stewardship and respect for their workers, communities, and customers — has slightly outperformed the standard S&P 500 over the past twenty years.
There is also evidence that active ownership can create shareholder value. A 2006 study from University of California-Davis showed that when CalPERS — a California public employee pension fund — engaged with companies to improve corporate governance, it generated $3 billion in short-term shareholder value and may have generated almost $90 billion in the long-run. While this evidence is not in itself conclusive, it demonstrates that investing responsibly does not automatically lead to sudden or drastic loss of financial returns.
Now is a moment of great opportunity for Yale. The ACIR is currently working with The Responsible Endowment Project — a group I am part of — to update our approach to responsible investment for a modern endowment. We have proposed four main changes: emphasizing active ownership rather than divestment, providing the ACIR with a complete list of endowment holdings, increasing student membership and improving annual reporting. These changes focus on updating the ACIR and not on changing the work of Yale Investments Office. We believe that a modern ACIR can complement — rather than an impede — the work of David Swensen and the Investments Office.
Over 500 members of the Yale community have already signed a petition in support of our proposal. In just a few weeks some form of this proposal will reach the Yale Corporation. Their decision will ultimately determine whether or not Yale takes a leadership role among universities as a modern responsible investor. As this moment approaches, I hope you’ll join us in ushering in a new age for responsible investment at Yale.
Aaron Podolny is a sophomore in Jonathan Edwards College and a member of the Responsible Endowment Project.