The news for North Carolina State University in 2013 couldn’t have been bigger. The Raleigh public school would receive one of the largest single private gifts in its history: $50 million. Yet the cash came with a catch: Every cent of it had to be invested in a “socially responsible fashion.”
NC State followed those parameters, and its parallel fund, currently valued at $13 million, has outperformed the school’s larger $1.1 billion endowment -- 20 percent vs. 12 percent -- in the year through June 30, 2017.
Investors have been experimenting with environmental, social, and governance, or ESG, strategies for years. A number of college endowments have been applying responsible investing screens to weed out companies that don’t meet certain ethical standards. What NC State’s investment team has been charged with doing, however, is just the opposite: It’s building a separate fund from scratch, beginning with an initial $10 million installment that came in 2013.
The $50 million donation to NC State is coming from the Park Foundation, established by Roy H. Park Sr., a graduate of the school in 1931. The foundation specifies that the donation must be spent on need-blind, merit-based scholarships for undergraduates.
The fund so far invests 50 percent of the first $10 million in screened stock funds. The other half is in a pool managed by former Vice President Al Gore’s Generation Investment Management, a London-based money manager that focuses on sustainability. When the school receives the remaining $40 million, the money will be invested in responsible ways under seven general principles: environment and natural resources; labor rights and supply chain management; human rights; community impact; product quality and safety; corporate governance; and companies that don’t test on animals for nonmedical purposes.
It’s unusual to create a separate portfolio with different investing criteria. One of the benefits of NC State’s atypical arrangement is its simplicity. “It would be more difficult to do this for an entire portfolio,” says Mary Peloquin-Dodd, associate vice chancellor for finance and the school’s treasurer, who oversees the area that manages the endowment. “It was actually easier to create the portfolio alongside our long-term portfolio than to actually take out all the socially responsible risk.”
Schools are trying a number of socially responsible investment strategies. A common way is to create filters in stock funds to avoid what they don’t want, such as screening out gun manufacturers or tobacco companies. They also seek investments that score high on goals such as environmental conservation and board diversity.
Money managers have also worked with endowments to create funds. BlackRock Inc. created a “low-carbon” index fund (ticker CRBN) that holds companies such as Apple, Microsoft, and Johnson & Johnson. Seed investors included the University of Maryland and the United Nations Joint Staff Pension Fund.
“There’s a lot of interest from endowments to do things in this space,” says Jessica Huang, a director in the sustainable investment team with BlackRock. She says some endowments are also facing pressure to divest from fossil fuels. “They don’t want to divest, but they do want to address the student concerns and climate awareness in their portfolio.”
The Claremont Colleges, a consortium of five undergraduate and two graduate schools in Southern California, has faced calls to dump assets linked to climate change. Its richest school, Pomona College, resisted shaking up its $2.2 billion endowment, and trustees at less wealthy Pitzer College decided to pull the trigger. Pitzer in 2014 began the process to divest from fossil fuels, which ultimately led to the liquidation of its nine stock funds and all of its direct holdings of individual stocks, says Donald Gould, chairman of the investment committee at Pitzer, whose endowment is now valued at $136 million. It reinvested the proceeds into a new fund that BlackRock created.