Commonfund was founded in 1971 with the objective of helping nonprofit organizations, especially universities, to better invest their endowments. In the years since its founding, Commonfund had become a thought leader in the endowment world. The organization prided itself on working with its 1,300 clients to help not only gain better investment returns, but also to help university investment officers think through governance issues concerning their endowments and to disseminate best practices as it pertained to endowment management.
In 2015, Commonfund faced a challenge. ESG (Environmental Social and Governance) investing had become an increasingly hot topic in the financial community. ESG indexes and funds proliferated and corporations were working to improve their ESG rankings. At the same time, college campuses roiled with student and faculty protests over endowment investments in fossil fuel companies that were implicated in causing climate change. In this environment, could Commonfund offer its clients some investment vehicle that would satisfy ESG concerns while producing sufficient returns?
The first issue was definitional. How should Commonfund define its concerns in the socially responsible investment space? Given the fossil fuel divestment movement, should this fund emphasize the ‘E’ over the ‘S’ and ‘G’ or should equal weight be given to all concerns?
Then the organization had to consider in which asset classes an ESG fund would invest. There had been much activity in the public equity space, but investment manager track records were still short. There were a number of different strategies such as negative screening, overweighting and impact investing to be considered. There was relatively less activity in the fixed income asset class, but there were some interesting offerings concerning securities such as “green bonds.” There were also possibilities in the alternative investment class, including hedge funds and private equity deals.
Commonfund also had to consider measurement issues above and beyond those usually related to investment returns, risk and diversification. How could the organization measure the ESG of its investments to make sure it was meeting its commitments to providing a socially responsible offering? What were the relevant metrics of compliance?
Most importantly, Commonfund had to find a way to satisfy the concerns of its clients. In 2015, a survey indicated that only about a quarter of the organization’s clients were engaged in any kind of socially responsible investing practices and only about eight percent were integrating ESG considerations into their investment decisions. University investment committees were concerned about meeting their fiduciary responsibility to obtaining the highest possible returns. The research on the performance of ESG funds had been decidedly mixed when compared to benchmarks and endowment committees needed reassurances as to viability of an ESG fund.
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Jaan Elias and William Goetzmann, “Commonfund ESG,” Yale SOM Case 15-016, October 24, 2015.
- Higher Education
- Women in Leadership
- Asset Management
- Metrics & Data
- Social Enterprise
This Yale School of Management case has been made possible by the generous support of the Jane Mendillo YC ’80, ’84 MBA and Ralph Earle ’84 MBA Fund.