This outcry was long overdue.
And not just because the killing of Palestinian civilians is harrowing and wrong.
As the person in charge of designing and implementing some of the investment industry’s most stringent ethical guidelines, I can say with some authority that the world’s capital markets are full of ethical catastrophes that defy easy comprehension.
In other words, it would be something else if not Palestine.
And it will be something else after Palestine.
Your investment staff probably are not yet equipped to adjudicate the many complexities that come with managing money morally. But your student stakeholders are calling out for clearer moral lines about what their endowment stands to profit from.
I don’t have to tell you that we’ve been down this road before. With fossil fuels and for-profit prisons, tobacco companies, and plenty more. And this time around, I am urging you: take the students seriously, not just literally.
The operational challenges of managing a modern endowment portfolio necessitate long-term planning. You’ve got to pace the maturation of your holdings to coincide with spending plans, produce a steady stream of consistent quality opportunities to match with incoming cash, and manage the complex communications associated with your own oversight.
I suggest you situate this entire discussion within that oversight process. The most effective way to take the students seriously is to build a moral oversight process and reporting framework that passes their muster. With such a thing in place, you will be able to make genuine long-term commitments without worrying about subsequent challenges from stakeholders.
There isn’t one right way to build something like that: you will need to build and refine your own approach.
But we’ve learned a few things over the past few years that might be helpful to other long-term investors thinking about how to merge a little more morality into the way they do money management.
Here are a few suggestions that may be helpful.
Embrace the Challenge
Even if they’ve been operating under an ESG policy for years, deeply integrating ethical criteria into investment decision making will be new for most investment offices.
So was crypto. But unlike the blockchain stuff, building competency here is all but guaranteed to pay dividends for your organization. Think about it: this will not be the last moral issue you have to contend with. As you prune and populate your portfolio, wouldn’t it be nice to have a handle on things that may impede your ability to act as a true long-term investor?
If you are thoughtful, earnest, and perhaps lucky, you will find a way to engage with your stakeholders that becomes a source of positive idiosyncrasy. That’s a big part of what makes this firm special: our clients know that I want to hear about their moral concerns ASAP. As a result, we’ve got our ear to the ground in ways that would be difficult to replicate for folks who are just feigning interest.
Make a Living List
You will want a living document that describes the conduct and products that your stakeholders consider to be objectionable.
To make this easier, we have made our own policy available under a Creative Commons license that allows others to build upon it however they’d like. Our own policy has never felt like my property, as it has been iteratively refined in collaboration with our clients and was built upon the work that organizations like NBIM had done before us.
Our approach is unusual in that it allows me to overrule any of the individual criteria if I see an opportunity for constructive dialogue with the company or another means for the shareholding to manifest positive impact. This gives me substantial flexibility to use the tools at my disposal to drive impact, and avoids making ethical oversight into a box-ticking exercise.
You Won’t Miss the Stuff You Exclude
I’ve overseen our process for almost three years at this point, and I’m still surprised how little I miss the companies that we’ve excluded for ethical reasons.
There are almost 3,000 issuers on our exclusion list for all manner of conduct and product-related sins. Of those companies, there are only a handful that I would consider sensible investments. The majority are on there for more than one reason. And when we update our exclusions to include new criteria, we often find new and exciting reasons not to miss them.
I believe there is an existential link between governance, ethics, and investability. And if you manage to identify that companies have endemic ethics problems, why wouldn’t you remove them from your investable universe?
Aquiesce to Active
Ethical investing is active investment management. It is foolish to pretend otherwise.
You can spend a lot of time and effort worrying about how to mean-variance optimize your holdings so that their volatility patterns match those of a broader index, but you’ll miss a profound opportunity to recontextualize your investment program in the process. Your required rate of return is likely your ultimate benchmark, so why not use it instead of legacy indices?
After all, if you embark on an honest and searching divestment journey, it’s likely that your holdings will look a lot different than the S&P 500. And it will be a journey. I wrote an essay reflecting on my own path a few years ago that may be useful.
Harness The Energy of your Stakeholders
I can’t remember a time when young people were this interested in what’s happening inside of their University’s endowments. If I were working in one of these offices, I would be looking for ways to listen to these folks on an ongoing basis.
Why not survey students on a wide range of ethical issues to see where they stand? Or work to identify types of investments that would appeal to these stakeholders?
It can’t be that hard to hire a facilitator to tease out the things that would be seen as exciting or equitable, and that idea generation work may lead to tangible opportunities.
Ask for Help
I probably only have the bandwidth to engage in-depth with one investment office on this outside of facilitating access to our flagship strategy. But there are plenty of others out there who could be helpful, and I happen to be friendly with a lot of them.
Send us a note if you’d like us to provide some ideas confidentially. But this suggestion goes far beyond anything I, my firm, or our community can do for you.
After all, the broad debate about divestment can get heated. But you’ve risen to the height of our profession, and likely have wise people whose counsel you rely on. As I said above, you’ll need to evolve your own response to these student demands. Don’t deprive yourself of their counsel.
For more of our thoughts on divestment, click here.