No one understands the impact of a dollar like non-profit organizations. Often, an organization’s ability to change the world for the better relies so much on the stream of donations to fund their mission. However all too often, pursuing that mission stops when an organization’s funding outpaces their needs and they turn their attention toward investing. It is now easier than ever to affect positive change in the world while still getting a return on invested capital.
What are ESG Ratings?
The idea of ethical or sustainable investing is certainly nothing new. It has gone by many names in the past, but most recently everyone has seemed to settle on the acronym ESG. This refers to the system used to rate companies across Environmental, Social, and Governance metrics.
According to the Governance and Accountability Institute, while only 20% of companies were publishing sustainability reports in 2011, 90% of the companies included in the S&P 500 published sustainability reports in 20191. This has finally allowed companies -- like MSCI (Morgan Stanley Capital International), which is an American finance company and global provider of equity, fixed income, hedge fund stock market indexes, multi-asset portfolio analysis tools, and ESG products -- to give out ESG ratings for a huge portion of publicly traded companies and allowed fund managers to put together more ESG focused fund options than ever before.
For decades, the only option for investors, including nonprofit organizations, with ethical concerns was to apply negative screens to their investment portfolio. Investors would choose certain industries or companies to exclude from their portfolio and simply invest as usual using the remaining universe of investment securities.
For example, healthcare focused nonprofits would screen out tobacco companies, or religious organizations would screen out companies involved in gambling or firearm manufacturing. This was effective at ensuring an organization’s or investor’s dollars were not helping a company to which they were morally opposed, but without large institutional investors on board, it was unsuccessful at affecting real change.
By independently rating companies and applying a score, companies like MSCI now make it possible to place positive screens on an investment portfolio. Investors can now choose to only invest in companies that score highly across ESG measures compared to their peers. This is a huge shift in how both institutional as well as retail investors choose to invest and can truly put pressure on companies to change their practices. Since every industry is different, MSCI has developed specific criteria for each sector. All companies have some sort of governance. So, factors like board composition, accounting practices, and tax transparency are factored into every company’s rating. However, other factors like water usage, biodiversity, supply chain labor standards, or data security may be more or less relevant depending on the industry2.
Giving Power Back to the Investor
The obvious outcome of investing in companies that score better across ESG factors is that more attention and money is directed toward ethically responsible companies, but it also makes great fiscal sense. In an era when so much information is available, any corporate misstep can have a huge impact on investment return. At its heart, the ESG ratings are a way to measure that potential risk. This also cuts both ways. Large institutional investors are on board with ESG investing because it just looks good3, and that drives performance.
No longer do nonprofit organizations need to make a choice between investing in line with their mission or seeking higher performance to fund that mission. Finally, organizations can put their money where their mission is.
To find out more about ESG investing, or how your organization can ensure its investment portfolio is in line with its ethics, we invite you to visit the McKinley Carter website. Our team of fiduciary advisors work each day to make a difference for our clients and community, and we have a service line completely dedicated to meeting the needs and challenges of the non-profit community. Learn more.
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