What nonprofits should know about ESG investing and governance

July 2, 2019

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Jeremy Tennenbaum

Jeremy Tennenbaum

In striving to meet their mission, nonprofits have helped drive demand for environmental, social, and governance (ESG) investing to more than $30.7 trillion global ESG assets, as of December 31, 2018, based on data from Global Sustainable Investment Alliance. Industrywide, ESG funds and ETFs brought in $5.5 billion in 2018, the third straight year of record net inflows, according to Morningstar.

As more nonprofits seek to align their behaviors with their values through ESG investing, they face key governance questions.

Vanguard's latest research paper, ESG Investing—A Governance Guide for Nonprofit Fiduciaries, delves into complex issues nonprofit fiduciaries should consider when contemplating an ESG investment approach, including:

  • Laws, statutes, and fiduciary responsibilities that guide nonprofit investing.
  • The relationship between ESG investing and the organization's mission.
  • Issues around evaluating and monitoring different types of ESG investments.

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"Anyone helping to run a nonprofit's endowment and other pools is considered to be a fiduciary and is bound by the fiduciary duties of obedience, loyalty, and care (prudence)," according to Jeremy Tennenbaum, senior nonprofit strategist in Vanguard Institutional Investor Group and author of the research paper.

ESG investing requires careful consideration, not only of your fiduciary responsibilities but also of the mission of your nonprofit and the latitude your nonprofit has to invest using ESG products, Tennenbaum explains.

In the paper, Tennenbaum describes the heated debate within the legal community as to whether and when various approaches are consistent with a nonprofit fiduciary's obligations. Complicating the issue is the fact that different types of organizations and even separate investment pools within the same nonprofit may be governed by alternative rules.

"Your choice of what ESG strategy to pursue depends on your nonprofit's mission as well as its willingness and ability to cope with the organizational challenges," Tennenbaum writes. These strategies include portfolio screening, impact investing, ESG integration, and active ownership. As fiduciary law continues to evolve, Vanguard research has found that it is incumbent upon nonprofits to follow robust processes for governance issues relating to ESG.