RI Video Series [5]: How to Incorporate RI

Making changes, like introducing ESG to a portfolio, often require inertia. There needs to be a first step. So how do you gain consensus from stakeholders and determine what that first step should be? In this video, FEG Senior Vice President Tim O’Donnell shares several examples of how an organization can take the first step in implementing investment strategies with outcomes designed to maximize social and financial impact. He will also walk through one client's journey of integrating responsive investing in their portfolio construction process—from ESG integration to fossil fuel divestment.

Making changes, like introducing ESG to a portfolio, often require inertia; there needs to be a first step. That first step is often the hardest because there may not be a solid consensus of what that step should be. We often suggest, as a beginning, to define what success looks like to you. Why are you doing this? What do you hope to achieve? Then, give yourself permission to include responsive investing in your portfolio. That might require a revision to your investment policy statement, for example. Then, as a next step you may make the decision to include an ESG manager anytime you do a manager search, something kind of like the Rooney Rule. Or perhaps it's to start with adding an ESG manager to a portion of your equity sleeve. Maybe it's as simple as having a checking account at a local credit union.

Regardless of what form your first step takes, it should lead to an additional step. To give you an example, there's an organization that works with us with a very clear environmental mandate. 10 or 12 years ago, there was very little connection between the mission of the organization and how their dollars were allocated. The first step we proposed was to introduce an ESG specialist firm to manage a portion of the assets. Then, we systematically continued to add ESG managers until virtually the entire portfolio was managed by several ESG managers across most asset classes.

The organization then opted to move toward fossil fuel divestment, and we worked with all of their managers to move out of their fossil fuels while simultaneously looking to find investments that were focused on positive environmental solutions. Now, that prompted making public and private investments align with the client's mission. Then, recently the organization began to tackle concerns surrounding gender and racial inequity. It's particularly at the crossroads of how poor environmental conditions affect economically disadvantaged communities.

Then, through those efforts the organization excludes investments that are contrary to the mission of the organization while maximizing investments that are aligned and truly moving the needle in terms of impact. But that didn't happen overnight and it didn't happen in one step. That organization went through the exact same decision process that many organizations are doing or contemplating doing. As comfort level and expertise grew and the first step was taken, there was the realization of, "Hey, we can do this. We're seeing financial return, the donor base likes what we're doing. We're seeing social benefit from what we're doing so what should we do next?"

It's that continuation along the implementation curve, with outcomes designed to maximize social and financial impact, so don't think of this as a major change of how you built your portfolio. Think of it as a logical evolution of portfolio construction and at each step you get to decide what to do next, plus there's no one single way. You can introduce these concepts in many different ways with your portfolio, which is great. There's no wrong answer. It gives you the flexibility to do this the way that's best for you. Be original but don't be afraid to ask for help. We've helped many organizations start their journey and we can help you too.