A trend, the importance of which can hardly be overemphasized is ESG incorporation by the world's biggest money managers, including BlackRock, Vanguard, Fidelity, State Street Capital Group and numerous others. And that's true for those who are involved fundamentally in indexing or in active management of investments. These asset managers are so big collectively and in some cases individually, they practically must own shares in nearly every public company, certainly in the United States. And some would say on Earth. And again, that's especially true for those who are involved in indexing broad market indexing, but also for money managers that are even boutique in orientation. Or who are not specifically focusing on passive investing. The growth of passive or passively index funds means managers of such funds have to own shares of all companies in the index. Historically, these large fund families, often again the largest owners by percentage of the largest public companies, have been reluctant to throw their weight around as shareholders. In part because, especially in an index context, understanding what underlying investors or holders of the assets really want is challenging. And as fiduciaries boards that govern those, for example, mutual funds and others, have fiduciary responsibilities that relate historically to the actual risk and reward of the investments. In other words, some investors may care about carbon footprint of underlying companies. Other investors may care about tobacco or alcohol or weapons production. And it's not clear that everyone cares about everything. And really, who cares about what? But not anymore. Black Rock, for example, which is the largest asset manager on Earth, now managing $9 trillion plus announced that sustainability will become an integral part of portfolio construction for its actively-managed portfolios. It's starting up to 75 new ESG exchange traded funds in the next several years, including ESG versions of some of its largest index funds. The first such exchange traded fund was launched on February 7th i 2020 and by February 11th, it had already garnered $600 million in assets. The firm says clients have expressed strong interest in sustainable strategies, and it's responding to that interest. Another very interesting institutional investor class to look at are professionally managed university endowments. With some exceptions mostly having to do with negative screening of firms having business with oppressive regimes in Sudan and South Africa in the Apartheid area. The pace of ESG adoption has been relatively slow until recently. Due to mostly the concerns about possible sub optimal returns, as well as reluctance to cede control of investment policy to activist or an outside agenda. However, this is now changing fairly rapidly as more endowments are committing to partial or in fact total fossil fuel divestment, with some well known large endowments leading the way. As well as an agenda or a focus on being carbon neutral by 2050. That said, critics suggests that for university endowments of substantial size, this approach is too little, too late. In any case, considering the endowments often must deliver on fairly high distribution rates. For the largest billion dollar plus endowments, let's just benchmark it at around 5%. Although it certainly does vary especially around market cycles. In the face of generally higher inflation, than we see in the headline numbers. Some say as much as a two-thirds of a percent or as much as 1.5% above headline inflation. The possibility that too much negative screening could lower expected returns, must weigh on the minds of endowment fiduciaries heavily. Nonetheless, over the last several years, university endowments have accelerated their commitments and attention to climate change mitigation. Two years ago, for example, it was only the number six ESG criterion, although it was already number one for other institutions. Currently, EEO and Diversity is number six. Based on recent events, could it be about to move up on the list? Well, here you see climate change mitigation coming in first, conflict risk, again repressive regime. And mostly divestment coming in second, human rights, product safety and so on number four and then sustainable natural resources, followed by diversity. Again, the leading ESG criteria for educational institutions from the 2020 NACUBO Study, which stands for National Association of College and University Business Officers. Has seen a shuffling which likely has to do with changing preferences in the marketplace. Now, university endowments have seen perhaps the first steps to establishing a responsible investing approach very often in the form of adding environmental, social and governance factors to their investment policy. However, responsible investing practices beyond this step are still limited. Only 16.1% of respondents to the 2020 NACUBO study have joined in ESG network, and just 5.9% have appointed a chief sustainability officer. But even that movement is substantial compared to the long term history of some of the larger endowments. And in some sense describes a kind of standing for the ESG issues here mostly focused on climate change and sustainability. As evidence of this movement, you can see that across the board, substantial portions of the so called endowment universe here, more than 700 endowments reporting and stratified for your perusal. From the total into the over $1 billion players, the 500 to $1 billion players to the 251 to 500 all the way down to the $25 million endowments. They all have some heavy proportion of endowments reporting ESG mentions in their investment policies. Overall from the entire NACUBO study, about 57% of institutions report having some kind of ESG consideration in their investment policy. And it's fairly flat with some variation across them. About 56% of the 501 to $1 billion assets under management endowments have them about 49% of the billion dollar players. Those billion dollar players are the actors that you see in the press very often. Harvard, Yale, Penn, Princeton, Caltech, Chicago, Notre Dame, Duke, MIT and others. I'm sure I'm leaving many off. So I'm injuring some party here. But the bottom line is that ESG is mentioned. Finally, it's important to mention proxy voting and having a proxy voting committee, which is an activist idea. But through the notion of ownership of assets, the concept of impact intentionality can be brought to bare even in public markets and in fact, across asset classes. When firms vote shares in ways that align with ESG considerations. Proxy voting, which is an extensive topic, is in a word, owners of shares who have the ability and the right to vote in enterprise decisions or what are called in proxy situations. They're called proxies because not everyone shows up. For example, the corporate meetings they send in their proxies is a pretty strong indicator and a way for firms owners to express their voice as owners. Again, the billion dollar players here report that about 15% of them have actual proxy voting committees and presumably have proxy voting guidelines even if they don't have a committee. Finally, university endowments report considering responsible investing as a factor in assessing investment managers as part of their due diligence and evaluation processes. Roughly speaking, the 40% that report, considering ESG consideration could be doing so from a number of different directions. For example, ESG considerations could be directly tied to mission related investments or purpose driven reasons for ESG consideration. It could be related to negative screening of irresponsible regimes, as we mentioned earlier. In addition though corresponding to what the institutional investment managers surveys report, they may be looking at managers who incorporate additional non accounting information in their investment process. Simply, as a way of thinking about the investment due diligence procedures for underlying investment selection. You can see here, especially for the large endowments 69% of which report this notion of looking into investment manager incorporation of ESG criteria is in place. It declines as you go from left to right, from the largest endowments to the smallest endowments. But just under 70% think that it's important for the selection of managers that they incorporate information related to environmental, social and governance considerations. In addition, just under 20% of institutions generally from the NACUBO study report thinking that a responsible investing approach can actually be a source of alpha in investment management. And if you recall how we defined alpha, it's essentially value added provided investment selection process, for example, relative to say, a benchmark or an index. So holding risk constant or benchmark exposure constant. Alpha represents typically net of fees, the value added or the percentage amount that the managers either expected or historically has beaten that benchmark. It looks like that notion of ESG Incorporation is targeted not just to the E and the S and the G sigh, but specifically targeted toward alpha production. And that's especially true for the larger endowments and less true for the smaller endowments. So overall, about 20% for the over $1billion players, those that typically have full time chief investment officers and investment staff and so on, it's about 30%. And If you go to the $500 to $1 billion players, it takes up to about 35% before declining to 25% for the $251 to $500 million in asset endowments. So, interestingly enough, it looks like many or at least some ostensibly sophisticated endowments. Think about ESG criterion as a pathway to value added. So to conclude it's apparent that large foundations that support university activity as representative or at least reflective of what institutions are thinking of and endowment managers are doing. They're adopting ESG and especially fossil fuel divestment today and almost surely along a glide path extending decades into the future. In this case, the chief concern is aligning investments with mission in a fiduciary context.
