Divestment and the ABC of responsible investing

For universities, divestment has often been a starting point for investing responsibly – but where does it fit in with other approaches? We use an ‘ABC’ framework when working with universities to build portfolios which reflect their values and motivations:

Higher education institutions in the UK have historically prioritised the ‘A’ of screening out investments in industries associated with social or environmental harm. While this can help to reflect values and protect reputations, we think greater emphasis on the ‘B’ and ‘C’ of the framework offers universities an opportunity to align their investments more closely with both their sustainability ambitions and their very long-term investment horizons.

What is stewardship and why does it matter for universities?

Acting as responsible stewards of capital through active engagement – part of the ‘B’ of the ABC framework – should be a key consideration for universities looking to drive more sustainable investment outcomes.

The UK Stewardship Code defines stewardship as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”.¹

What activities fall within this broad definition? For asset owners – like university endowments - this could mean building stewardship criteria into tenders, or holding their investment manager to account on their stewardship activities. For investment managers like us, our activities in this area focus on our engagement with companies to understand and manage ESG risks which materially affect our investment on behalf of clients. Across the whole investment chain, stewardship means accountability to beneficiaries who want to know how ESG factors have determined how investments are being managed.

What does stewardship good practice look like?

We believe informed and constructive engagement builds better companies and contributes to long-term sustainable investment returns. Engagement can potentially be structured through a five-step lifecycle:

 

Engagement lifecycle

 

This structure allows shareholders to identify ESG risks which are poorly managed, to use their influence with companies so that they take appropriate action, and to escalate where the issue is unresolved. We believe engagement should be a long-term process, but that divestment can be the right response where a company is unwilling to take timely, appropriate action.

Case study: voting on climate change resolutions

Alongside engagement, voting is an important tool which investors can harness to influence companies on issues like climate change, a key focus for the sector with over 1,000 universities globally committing to 2050 net zero targets at COP26.²

Resolutions at company shareholder meetings related to environmental and social topics have grown in recent years, as Figure 1 shows. Investors have made sustainability and climate transition the priority, as shown in Figure 2. However, effective stewardship shouldn’t simply mean blanket support for all climate change resolutions, but looking at each on its merits. In fact, in 2021, of the 99 climate-related resolutions presented for a shareholder vote, we supported 55% of them. We base our vote on whether we believe the company is taking necessary steps to address key issues and operating with effective climate-related strategies.

Investing for impact – what to consider?

These examples of active engagement and voting show how stewardship – done globally, at scale and with sufficient resources – can be a powerful tool for long-term responsible investment. But many universities are looking to go further and target measurable, positive social and environmental impact – the ‘C’ of our ABC of responsible investing – alongside financial returns through their investments. From 2016 to 2020, surveys from Cambridge Associates found a 146% increase in the number of investors making sustainable or impact-related investments.³

But it can be difficult to pin down what a positive impact really means. To help determine the right impact investment vehicle to suit their needs, universities should consider asking six key questions of an existing or potential impact investment, detailed below. 

Above all, the impact of the investment must be intentional, measurable and regularly reported. If not, it hasn’t earned the right to be called an impact investment. But aside from this, universities will find a variety of different styles of impact investing. For example, those linked to the UN Sustainable Development Goals (UN SDGs), or prioritising either financial return or impact. It will therefore need to decide which approach is right for them.

The opportunities beyond divestment

With universities and colleges looking to further their net zero and sustainability ambitions after COP26, investment portfolios have a critical role to play as part of their overall sustainability strategy. Divestment is well-established as an approach. However, for universities to make the most of investment as a key area of most sustainability strategies, it’s important to drive more effective stewardship of assets. Many institutions should also look at impact investments as a way of targeting quantifiable positive environmental and social outcomes alongside financial returns.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.