Established in 1913, this healthcare-oriented foundation (based in Atlanta, GA) was created to eradicate tuberculosis. In 1988 its mission was broadened to include ‘all lung related diseases.’ Since its inception, the foundation pioneered social hygiene programs, led the movement for nursing services in county health departments, and became the forerunner of the modern Lung Association. With an initial investment of $50,000, the foundation’s portfolio has grown to roughly $4.7 million and has distributed $3.1 million in grants since 1971.
During the fall of 2014, the organization’s Board began to evaluate the investment portfolio to determine whether invested securities were properly aligned with the foundation’s mission. The Board did not want to invest in any company whose principal business had a negative impact on air quality. During that same time, Stanford University was making headlines as the first large university to publicly commit to divest its endowment holdings in publicly traded companies whose principal business was coal mining for energy generation. Stanford’s decision was in response to student protests regarding climate issues such as global warming. The foundation’s Board felt that if Stanford University could divest from securities that harm the environment, then they should also consider making the same adjustment—especially in light of the organization’s mission.
At the time, the discretionary investment portfolio was managed with no restrictions and had a long-term strategic target of 60% equities, 30% fixed income, and 10% alternatives. As fiduciaries, the Board decided they had an obligation to align the investment portfolio with the mission of the organization.
As their long-standing investment advisor, Truist’s Foundations and Endowments Specialty Practice team met with the Board to facilitate an exhaustive discussion. This included developing a clear understanding of what the Board wanted to ultimately accomplish. We facilitated a thorough discussion around the potential trade-off of meeting a social obligation versus maximizing portfolio investment returns, as well as the types of social investing screens we could potentially deploy to meet the organization’s objective. Those social investing screens included:
- Negative/exclusionary screening—the oldest type of screening, this approach removes investments which could be engaged in undesirable products, services, or even actions.
- Positive/affirmative/best-in-class screening—a much more proactive approach, this seeks to support companies that uphold socially responsive philosophies and practices, rather than seeking to exclude companies based on their business practices.
- Environmental, social and governance (ESG) integration—is based on a practical belief that a company’s approach to ESG factors will be a strong determinant as to its overall longevity. Analysis can focus on one or all three factors, and there are many smaller issues in each category that can be designated as an area of particular focus.
Ultimately, the Board decided on negative/exclusionary screening for domestic equities, and ESG integration for international equity and fixed income. Additionally, due to the lack of socially responsive liquid alternative vehicles, the Board allowed the usage of non-screened liquid alternative strategies. For domestic equities, the Board designated that the portfolio would not actively invest in the following:
- Tobacco Restriction—excluding manufacturers of tobacco products such as cigarettes, electronic cigarettes, cigars, pipe tobacco, snuff, or chewing tobacco. Investments would also be excluded in companies deriving any identifiable revenues from the manufacture of such products.
- Fossil Fuel Restriction—eliminating investments in companies that derive revenue from the exploration, extraction, refining, or distribution of fossil fuels such as coal, petroleum, and natural gas.
Once we memorialized the Board’s socially responsive objectives in their Investment Policy Statement (IPS), we implemented the strategy for the portfolio. The domestic mutual funds were eliminated, and we hired two active managers to invest in Large Cap and Small/Mid Cap using individual securities filtered through the negative screens. In the International and Fixed Income asset class, the Board agreed to utilize mutual funds that focused on ESG (Environmental, Social, and Governance) screening. Given the magnitude of the portfolio transition, however, the Board wanted to track the restricted sectors going forward to affirm their decision.
The Board was extremely happy with their decision when evaluating their 2015 performance. The restricted sectors performed poorly that year, so the portfolio benefited greatly by not having that exposure. When evaluating 2016 performance, however, the Board began to question their restrictions. All the poor performing restricted sectors from 2015 turned in strong 2016 returns. Yet despite their concerns about giving up some performance, the Board reaffirmed their stance regarding the restrictions and decided to stay the course based on the strong belief that the portfolio should be aligned with the organizational mission.
But in the 4th quarter of 2017, the Board once again questioned performance. While performance within the restricted sectors was mixed, they were concerned that the active Large Cap manager was not allocating the portfolio correctly given the run-up in technology stocks.