For beginners, Environmental Social Governance (ESG) means choosing to invest your financial endowments and assets into or (sometimes more importantly) out of different types of publicly traded companies. This includes stocks, bonds, electronically traded funds (ETFs) and mutual funds of issuers. “Environmental” obviously covers things like that corporation’s global carbon footprint, cost of manufacturing, percentage of recycled components reincorporated into finished product and more. “Social” is concerned with whether those companies pay their employees appropriately, provide appropriate working conditions at their factories, and if they promote core values similar to those of your nonprofit. And “Governance” reinforces whether that corporation’s board embraces diversity, if their shareholders are fair and reasonable, if their disclosures are open and transparent, and that’s just the tip of the iceberg.
Let’s take a look at a case example gone awry:
ABC-nonprofit champions healthy lifestyles. Their primary mission is to educate high school youth of the benefit of eating well-balanced meals, exercising, and avoiding drugs and alcohol.
ABC-nonprofit forgot to include ESG language in their Investment Policy Statement (IPS). Their financial advisor unknowingly grew endowment contributions by heavily investing in tobacco equities. Additionally, one of ABC-nonprofit’s board members owns a distillery.
One of ABC-nonprofit’s donors discovered these two discrepancies and decided to pull their annual financial contributions as well as create a political nightmare by involving the press.
In order to avoid the catastrophic losses the slight blunder of not including ESG policies can take on your organization, we recommend the following criteria when determining (or re-evaluating) the ESG portion of your nonprofit’s IPS:
- Expertise > How well-versed are your nonprofit’s board and finance committee members on ESG?
- Cost vs Value > How much performance is your nonprofit willing to compromise for issues that are important to your organization?
- Philosophy > Is your nonprofit agreeable to align with companies who push for progress in their respective industries?
- Messaging > Will your ESG decisions resonate with your donors?
Once your board and finance committee members decide which ESG criteria it does/doesn’t want to align with, it is important to choose which type of “language” your IPS will use concerning these principles. (Eg: Prohibitive “Under no circumstances shall any board member, finance committee, or trusted advisor invest in XYZ types of equities;” or Suggestive “It is recommended and encouraged that our organization’s trusted advisor, board members and finance committee consider ESG criteria when selecting financial assets.”) Additionally, it is recommended you include “vetting” criteria for succession planning of new board members based on their community and industry connections.
IMS Capital Management specializes in managing the financial portfolios of successful nonprofits in the Pacific Northwest. If your organization would like a complimentary set of eyes on your financials (to spot the true cost of fees, review the ESG portion of your IPS, or help develop your board’s finance committee) please reach out to our President, Mr. Chris Magaña. He has been serving on nonprofits boards for more than 20 years, and he has developed the portfolios of numerous nonprofit clients in Oregon and Washington. He is more than willing to share his knowledge and pay it forward so that your organization can continue doing great things in our community. Call today (503) 788-4200 to schedule your nonprofit’s complimentary review with IMS Capital Management.