Sustainable & Impact Investing
July 01, 2021
Fiduciary Considerations in Sustainable and Impact Investing
Aligning one’s values and investments was once considered an ambitious yet challenging financial goal. Investors questioned whether they would have to sacrifice returns to pursue investments with positive societal outcomes. But the world is changing. Interest in allocating capital to companies seeking to solve environmental and social challenges such as climate change and racial inequity continues to grow. Meanwhile, the number of tools available to investors to do so without trading off performance has significantly increased, given the rise of environmental, social and governance (ESG) data availability and research linking ESG data to corporate financial performance.
As such, sustainable and impact (S&I) investing is no longer a discipline rooted in sacrifice of returns to produce impact. Rather, it is a spectrum of investment approaches that use ESG information in an effort to make better investment decisions and create impact. Today, investors have more options when pursuing the dual goal of maximizing financial returns while achieving a positive impact.
What is preventing clients from investing in ESG?
Despite the surge in popularity of sustainable investing, investor adoption rates have not reached their full potential due to two major challenges: confusion over the muddled landscape of ESG-related terminology and a lack of clarity on how, and if, these approaches fit within a fiduciary framework. In our view, these challenges can be addressed by advisors taking a more proactive approach to educating clients on the key differences or considerations.
According to a recent CFA Institute study, confusion over vernacular and definitions is the number-one challenge preventing investors from allocating to S&I investing. Glenmede has developed a means of classifying S&I investing strategies — the Glenmede Sustainable and Impact Investing Taxonomy — based on extensive analysis of the competitive market and regulatory landscape related to the sector.
A fiduciary framework
Following close behind vocabulary as a challenge for investors is a lack of clarity for how fiduciary duties affect an investor’s use of S&I investments in various types of accounts. To set the context for this issue, an investor making decisions for their own portfolio is free to incorporate their values into their personal investment holdings. However, when an investor is making decisions in a fiduciary capacity, such as a trustee, different considerations arise.
Trustees are generally subject to laws that require they invest the trust’s assets “solely in the interest of the beneficiaries.” A key issue for trustees is whether investing solely in the “interest” of the beneficiaries just means their financial interests, or whether it could also mean investing in a manner that considers their personal values. Any fiduciary considering S&I investments needs to have a clear framework in which to evaluate this issue and apply the appropriate fiduciary guidelines.
To help address this challenge, Glenmede has developed an applicability framework that accounts for various types of fiduciary roles, such as investment manager for non-retirement assets, trustee of a personal or charitable trust and fiduciary for tax-favored retirement assets (e.g., ERISA accounts). The framework incorporates allocation limits for some S&I investing approaches and account types, as well as suggestions for how one may seek to document the inclusion of approaches on relevant investment policy documents. The framework is guided by a four-step process based on rigorous risk-adjusted return analysis, clear documentation procedures, allocation limits and oversight guidelines for ongoing monitoring and systemization.
When professionals with fiduciary accountability reconcile S&I’s multiple legal considerations, a healthy equilibrium can be attained: Asset managers are able to seek high-quality, risk-adjusted returns, and fiduciaries can feel confident incorporating these investments without compromising their legal responsibilities. We believe this and similar frameworks for fiduciary applicability will help drive continued adoption and create ongoing growth in the industry.
This writing is an unconstrained review of matters of possible interest to clients and friends of The Glenmede Trust Company, N.A., The Glenmede Trust Company of Delaware and Glenmede Investment Management LP (collectively, “Glenmede”). Nothing contained herein should be construed as investment, tax or legal advice, or as a recommendation or solicitation for the purchase or sale of any security, investment or product, or as an inducement to enter into a relationship with Glenmede. Glenmede provides investment advice to clients based on their individual circumstances, which may differ substantially from those depicted in this report. Any companies, securities or strategies identified herein are provided solely for illustrative purposes, and Glenmede portfolios may not have had investments in them. Alternative investments, such as private equity, are only available to investors who meet specific eligibility criteria and can bear certain risks, including those relating to illiquid investments. Opinions or projections provided herein are based on information available at the time of publication, are subject to change and ultimately may not be accurate. Information obtained from other sources is assumed to be reliable, but has not been independently verified so its accuracy is not guaranteed. Outcomes (including performance) may differ materially from expectations herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. Investments involve risk and past performance may not be indicative of future results. Clients are encouraged to discuss the information discussed herein with their Glenmede representative.