Responsive Investing Video Series

No matter where you are on your investment journey, FEG can help. As an investment advisor to a wide range of institutional clients, we recognize that each client has different needs, goals, challenges, and resources. This video series breaks down the different aspects of responsive investing into accessible and actionable steps that your organization can take. 

We encourage you to watch the videos that are most relevant to your organization. You can navigate to the different modules through the playlist in the upper-left corner of the video. We hope you find them insightful.

Click below to view the transcripts

We at FEG believe a nonprofit organization should have the opportunity to do good with 100% of its assets. So, we created a series of videos to help charitable organizations connect their mission with their investments. These videos will cover fundamental principles, such as what is responsive investing and several practical examples of how cause-based organizations truly represent their mission throughout their entire investment portfolio. We want to meet you where you are in your investment journey, so we encourage you to watch the videos you find most relevant and interesting to your organization. Thank you for working tirelessly to better the communities and constituencies in which you serve. We hope to help you create even more impact through this series.

Responsive investing, or RI, can be described as aligning your investments with your values. We often refer to this as a double bottom line where an investor considers both financial and social return criteria which can include environmental interests, moral values, and investing for the common good. At FEG, we define the philosophy as responsive because we know from our experience that investors often have their own uniquely defined values and principles. The social criteria can vary based upon their own values. However, there are several generally accepted categories of RI which I'll go over in more depth.

Socially responsible investing, or SRI, can be considered a forerunner to today's commonly used ESG and faith-based terminology. This approach most often utilizes negative screening. For example, excluding sin stocks or tobacco stocks in a portfolio coupled with a desire for generating market rate returns.

I mentioned ESG, which stands for Environmental Social and Governance. This is a commonly used term focused on these three aspects in a company which are often viewed relative to the United Nations 17 different Sustainable Development Goals.

There's also faith-based, or what is known as faith-driven investing, where investors seek to integrate and promote specific values of their faith group. We also see some faith groups continue to utilize socially responsible to broadly define their philosophy.

Impact investing is another term you may have heard, which can be either a market rate or below market rate investment that supports an investor's mission by generating a positive social or environmental impact.

Program-related investing, or PRI, is a mission-aligned investment that serves as a component to an organization's grant-making.

Yet another term is sustainable investing, which is an investment discipline that considers sustainability factors for companies. A primary example of this type of investment is renewable energy.

FEG has deep experience guiding clients and building and maintaining successful investment portfolios for decades through traditional consulting and OCIO relationships.

We have developed RISE, or Responsive Investing Solutions Exchange, as a partnership with our clients to provide investors a clear opportunity to align their investment portfolios with their own unique responsive investing goals. Through RISE, we focus on your organization's unique mission, facilitate discussion and decision making, provide dedicated market and manager research, along with ongoing education on responsive investing opportunities.

This is an exciting time for those interested in aligning their values with their investments. We look forward to sharing our ideas and solutions with you.

The mission of virtually any charitable organization is to maximize the positive impact on society. Now, how you go about doing that varies. Is it through arts and education? Is it addressing hunger and housing? Is it working to have a clean and healthy environment? So regardless of your approach, your organization is seeking to maximize positive impact and there are investment options aligned with that goal, whether it's adding a single ESG manager to your portfolio or encouraging your manager to vote proxies in a way that are aligned with your beliefs and mission. Or is it full integration of ESG concepts into your total portfolio? We see and have helped many organizations build standalone ESG portfolios in response to the desires of their donor base. So by doing so, an organization offers a solution that expands the donor base, but more importantly, expands their reach and impact.

We've also seen a growth of organizations and investment manager using tools like the United Nation's Sustainable Development Goals, also known as the UNSDGs to benchmark their portfolio. And the SDGs are 17 goals that address large systemic issues around the globe. Things like hunger, poverty, gender and racial equity, climate. So if your organization is addressing climate change, then through the SDGs, you can get a better sense of how your portfolio's aligned with the climate related goals. So no matter where you are on your journey, there are opportunities for you. And this whole process is built on a curve. Your step can be the first of many, as you continue through time. You can start relatively small. And as your comfort and sophistication grows, so does the sophistication of your impact investments.

Faith-based or faith-driven investing is a unique segment of investors within the arena of responsive investing. Historically, faith-based groups commonly referred to this as Socially Responsible Investing or SRI. While faith-based investing has been around for many years, the ability to align your own values with your investment portfolio has never been greater.

At FEG, we believe that investors do not have to sacrifice their performance goals in order to integrate their values. FEG has been serving faith-based institutions for over 30 years. While some have a longer history than others, the core concept is about encouraging and promoting their social values and faith principles through the investment portfolio. Some examples include Catholic values, Christian values, and Jewish values among others.

When looking at the Catholic faith, the United States Conference of Catholic Bishops, commonly referred to as USCCB or The Conference, advocates for investors to exercise faithful, competent, and socially responsible stewardship. The USCCB initially released their guidelines in 2003. These guidelines are currently under review, and FEG was among a group of advisors selected to provide input on the potential revisions.

Christian values can include groups such as Evangelical, Baptist, Methodists, or Nazarene, to name a few. A common theme among these faiths is an emphasis on no sin stocks, which includes screening out companies on alcohol, tobacco, gambling, pornographic materials, and abortion industries.

While there is no Jewish equivalent to the USCCB guidelines, some key considerations of the faith often include righteousness, duty to repair the world, justice, fairness, kindness, compassion, and hope.

Some key questions for all of these investors are, does our faith drive our investing? What values or viewpoints do we want to adopt and promote? Ultimately, how do we think about implementing them in an investment portfolio? We've seen significant growth in the investment options available to align your portfolio with your faith-based values from ETFs and mutual funds, customized direct indexing and separately managed accounts, as well as a wide of private funds, all designed to promote human flourishing.

FEG offers deep experience in managing investment portfolios for faith-based investors. We look forward to sharing our ideas and solutions with you.

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 of kind of 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.

All the various terms surrounding responsive investing can leave folks a little confused. What are the differences between SRI and ESG? Is one better than the other? Which should I use? My opinion is don't overthink it. All of these terms have far more in common than not. It's less important what a strategy is versus what a strategy does. And you can have impact in so many different ways, ranging from investing in a venture capital portfolio of companies owned and operated by women, to a mutual fund investing exclusively in companies focused on renewable energy, or even as simple as having your checking account with a local credit union.

All of these are seeking both that financial and social impact, but they run the gamut in terms of level of risk and level of reward. So don't think of responsive investing as an asset class. It's an additional arrow in your quiver that runs up and down the asset class spectrum. But probably the two most commonly known terms, are SRI and ESG, and certainly the older of the two is SRI, which dates back decades and has kind of historically been defined as strategies that excluded particular stocks or industries, things like alcohol or tobacco or gambling or investments in South Africa a couple of decades ago. The idea being get rid of the things that we disagree with, starve the industry of capital, and you can reduce its negative impact and force change.

ESG carries with it a bit more holistic process. So it certainly will exclude stocks or sectors, but also takes into consideration what that excluded stock brought to the portfolio. Was it yield? Was it diversification? Downside protection? So where can we find a different security that offers those characteristics? ESG will identify a problem, say excluding fossil fuels, but will also proactively look for investments that may have the solution to those problems. Over the past 10 or 15 years, we've seen a deeper look at responsive investing by strategies, not just excluding the negative, but also including companies that have positive social trades. Companies that have a positive work environment, companies that have a strong environmental record, companies with diversified boards. These characteristics may very well give a company a competitive advantage. So there is an increased return potential and maybe traditional financial analysis doesn't fully take these things into account. So a portfolio manager that factors in ESG criteria may have a competitive advantage over other managers.

Maximizing positive factors, like treating employees well, treating the environment well, recognizing blind spots and working to reduce them, if all of these can improve society and can improve shareholder return, then there should be efforts to dialogue with corporate management and try to use your voice as a shareholder to maximize that positive impact. The last several years, we've seen an explosion of investment opportunities within the responsive investing network, everything from a passive S&P 500 fund that excludes tobacco to venture capital focused on global hunger and racial diversity. What's clear is that the investor base is demanding new and innovative ways to align their mission with their investments.

The industry has responded by providing investment solutions for sure, and that's been a plus and it's been a negative. ESG strategies are truly seeking to address societal challenges and are disrupting portfolios in a manner to see measurable financial and social return. There are other strategies that are perhaps a bit more marketing driven versus impact driven. That can lead to some tough questions to answer: Are my managers actually seeking to affect change? Is their process sound and is it repeatable? Is this just greenwashing?

Whether you're looking for a single manager to add your portfolio, or you're looking to outsource your entire portfolio management to an impact investing specialist, the decision of who to partner with is vital. So you have a greater chance of accurately answering these questions.

The role of asset managers is paramount in integrating responsive investments. Simply put, their role is to reflect the values of an organization through a well-managed portfolio. Since that's pretty broad, there's really not a one size fits all approach in describing the ideal manager. A good starting point for assessment is on materiality. A few simple questions to ask when meeting with an ESG manager include: what environmental and social considerations are being integrated, are those factors financially material, and do they lead to a better outcome for the company and for society? Any ESG manager should be able to answer those questions.

The next step is measurability. Are the manager's objectives measurable and are outcomes reported to investors? The best way to hold anyone accountable is to measure and monitor their actions. You should also assess how active a manager is outside the investment process. Is the manager taking additional steps and engaging with company management to push them to achieve net zero emissions? Are they filing shareholder resolutions when engagement efforts become unsuccessful? These efforts create shareholder value by affecting real change in companies which further aligns investors' missions.

The most necessary aspect we look for in managers is intent. More and more strategies are marketed as ESG or impact, but that doesn't automatically mean they're intentional. Does the firm believe transitioning to renewable energy adds shareholder value over the long term, or are they just trying to capitalize in recent sustainability trends? Greenwashing can be hard to decipher unless you're in the weeds talking to these kinds of managers on a regular basis. At FEG, we meet with hundreds of managers a year and have resources focused specifically on responsive investing strategies. Our job as a consultant is to recommend intentional, materially driven, measurable investments for our clients to help serve their mission.

Over the past year, Diversity, Equity, and Inclusion or DEI has become a headline topic for nearly every industry, with organizations considering DEI implementation in everything from internal practices to investment processes. Asset owners are looking specifically for ways to make an impact, and improve racial and gender equity through their investment portfolios. For example, investing in minority asset managers or impact strategies targeting economic growth through job creation.

The process of aligning your mission and values with DEI is a journey that can look different for each organization. The process we follow at FEG is fairly straightforward. First, we start with setting objectives, essentially, your investment objectives should reflect the mission of your organization. In our experience, finding common ground among the investment committee, staff, and board around DEI criteria is paramount to ensuring buy-in. Having a trusted partner like FEG through this leg of journey can be invaluable for additional support, guidance, and best practices on how to navigate these sometimes difficult conversations.

There's no standard definition, so we at FEG set a starting threshold at 40% or more composition of at least: firm ownership, firm leadership, or strategy management. This is across diverse dimensions such as women, BIPOC, which is an acronym for black indigenous people of color, LGBTQ+ individuals, veterans, and people with disabilities. Your criteria may differ, so we survey key stakeholders and conduct a debriefing to help organizations identify areas of shared interest.

The second step is develop a plan that includes a timeline for implementation and a clear strategy of goals. FEG can help assess DEI key performance indicators or KPIs. Next, we help you execute the plan which may include full or partial reconstruction, seeking out impact solution investment opportunities, taking an ad hoc approach and investing in new opportunities as they arise, or implementing a Rooney Rule, which at least one strategy in any investment search includes a DEI component.

After the plan has been implemented, we can help you monitor the portfolio's progress, sending detailed reports on progress and working with you to tweak the plan as needed. In our experience, making incremental changes over time can substantially increase the overall level of diversity in the portfolio.

Crafting a portfolio that reflects your organization's values will not only help further investment goals but can also help accelerate gender and racial parity in your community, as well as the world.

Like any journey, having the right tools and guidance will make this process easier, and FEG is here to help. If you're interested in learning more about our practices for including DEI in your organization's investment approach, check out our website where we've made a number of resources available.

There's a commonly held belief that investing in a socially responsible manner means sacrificing financial return. But over the long term, we expect managers, whether they manage holistic ESG, thematic, or impact strategies to perform in line with, or even outperform traditional peers.

Responsive investments measure performance, both financially and socially, which is often called a double bottom line return. Social measurement may be a newer concept. We're simply trying to measure positive change in society as a function of total return. A challenge we face in social investing is whether or not we're having the intended impact we thought we would. There are several databases available that provide ESG data and ratings, and MSCI and Sustainalytics are the two major players. We realize not all data is perfect and a single data source won't tell us everything we need to know, so we try to pull insights from as many sources as possible.

We also see a growing number of ESG managers map their strategies to the United Nation's Sustainable Development Goals, also called the SDGs. These are 17 goals that were laid out by the UN in 2015 to achieve a more sustainable future by 2030. Each goal has underlying targets that are deemed as investible by managers and are a good way to measure and monitor impact and mission alignment.

The next step for us is to take individual manager data and aggregate it up to the portfolio level. Just as we'd take a client's underlying strategies and provide a snapshot of what the allocation is to U.S. stocks or to the tech sector, we do the same attribution analysis for areas of a client's mission that are important. For example, we can show the portfolio's exposure to investments that address global hunger, or climate change, or diversity.

Whether a client's portfolio is intentionally ESG or not, we recommend assessing portfolio exposures as a starting point, because you can't design a roadmap of where you want to be without knowing where you currently stand. Measuring the portfolio and reporting on social performance will hold you accountable to your goals. Are there positive changes made over time? Are we maximizing the positive impact on society? This is all done, not in replacement of, but with financial return. We've measured social performance for a variety of client types, such as faith-based organizations, socially and environmentally related foundations and university endowments. We've generated reports for our clients to understand the impact of their investments. We'd be happy to discuss this with your organization as well.

At FEG, it's our mission to empower our clients to achieve their missions by being a good partner and investor. It was through close partnerships and conversations, truly listening to our clients' goals in their communities, and understanding what they're working towards that we understood the real power of responsive investing. Whether focusing on addressing environmental imbalances, social issues, or advancing diversity, equity and inclusion, we believe we can help nonprofit organizations make an impact beyond just financial return.

More than a decade since our initial conversations, FEG now manages a fully screened ESG portfolio with a nine year track record. But that is just one solution of many that we have since created. Our advisors help clients invest in turnkey mutual fund solutions, all the way to building custom impact programs that target their specific communities. We call this collection of mission-focused solutions RISE, which stands for Responsive Investing Solutions Exchange.

In addition to RISE, FEG recently became a UN PRI signatory, demonstrating our firm's commitment to responsive investing. Our work, though, is nowhere near finished. One of the biggest challenges that remains is finding quality investment opportunities that truly adhere to responsive investing principles. As the industry continues to grow and evolve, our RI and Diversity, Equity and Inclusion Committees keep a pulse on emerging trends and opportunities to help alleviate these challenges for our clients.

So, as a member of the RI Committee, I personally ask you, what is your biggest hurdle in aligning your portfolio with your mission? Our conversation may open a door to opportunities for your organization, but also many others. So I encourage you to reach out and talk to us.