A Conversation with Jessica Matthews, Head of the Mission-Related Investing Practice
Q: How does Cambridge Associates define Mission-Related Investing?
A: To us, mission-related investing is in the eye of the investor: it’s an umbrella term we use for a range of principles and approaches that are of interest to our clients – be they foundations, endowments, pension funds, single family offices or other institutions – that wish to align their investing approach with their missions. This could mean everything from screening out certain kinds of investments to integrating environmental, social and governance principles into investment portfolios, or even proactively investing toward solutions to some of the world’s most significant problems.
Q: Is mission-related investing different from, say, socially responsible investing, or impact investing?
A: Definitions are a bit fluid and often can be interchangeable. Historically, socially responsible investing had been associated with negative screening – for instance, screening out stocks like tobacco or weapons. A key reason we chose mission-related investing is that we were initially working with several foundation clients in this area. They felt the phrase mission-related investing (MRI) worked well for them because the strategy involved aligning their investment portfolios with their targeted missions. So, in a way, they saw MRI as an extension of their grant-making. Impact investing, although used somewhat interchangeably with MRI, tends to indicate more proactive investing – where an investment is made into an enterprise because that enterprise offers a market-based solution to a social or environmental challenge that the investor wishes to address.
Q: How would you describe Cambridge Associates’ approach to mission-related investing?
A: What distinguishes us in the MRI and social investing space is that we’re completely objective and unbiased. While we have the full set of MRI capabilities and significant resources to help clients in this area, we do not push or encourage any particular approach. We start by thinking with clients about what they want to do with a social or mission investing program, and what the key objectives might be. Then we discuss with them the kinds of opportunities that would align with those goals.
We are also distinguished, I think, because of our knowledge of the investment manager opportunities in the MRI space. Our MRI Practice is comprised of more than 30 people across six of our offices, we have studied the universe of opportunities across asset classes and in various regions, and we have done extensive due diligence on appropriate institutional-quality products of interest to our clients. In addition to performing due diligence on MRI products, we are encouraging all investment managers to incorporate environmental, social and governance (ESG) analysis into their investment process. We are doing this by expanding our standard manager evaluation to include questions on ESG integration; many of our clients view these factors as material to prudent investment management.
Q: What is the cost – in terms of both performance and fees – for mission-related investing?
A: Historically there has been the assumption among many investors that pursuing MRI or socially responsible investing necessitated some kind of trade-off in terms of financial return. The research on this notion continues to evolve. The view that we share with many of our clients is that mission-related investing, if done prudently, offers market-rate opportunities where there’s not necessarily a sacrifice in terms of returns or higher fees.
It’s worth noting that we apply the same rigors to our due diligence of MRI-oriented opportunities that we would in evaluating other funds or opportunities. And we do not go in assuming that the social component equates to a lower return. Manager selection is key in any investment strategy, and we do not loosen our standards when looking at funds with a social or mission component.
Q: What are among the strongest mission-related investing trends that you see today?
A: Though our clients invest across many missions and thematic areas, one of the most prominent trends today is a focus on climate change issues. Investors are thinking about it from a couple of perspectives. Some endowments are considering how they might invest in climate solutions – perhaps renewable energy, energy efficiency and energy infrastructure. Others are looking at climate change from a risk standpoint as well. For instance, there is a concern about stranded assets – the notion that oil and gas companies may not be appropriately valuing the reserves on their books today. Many large, forward-thinking university endowments are asking serious questions on that topic of their investment managers.
Q: What is Cambridge Associates’ perspective on the growing interest around fossil fuel divestment?
A: We do not take a position on fossil fuel divestment. Our role is to help our clients understand their choices and implement the strategy they choose to pursue. It is our longstanding policy not to push a client in any direction in a matter like this. We have clients across the spectrum – ranging from not making any changes to full divestment and everything in between. Once a client understands current portfolio exposures and evaluates its options, they can assess any desired changes, which may or may not include divestment. For institutions that elect not to divest – or who choose a limited form of divestment, such as coal divestment – there still may be interesting avenues to explore, such as investing in solutions to climate issues. We have a deep respect for our clients’ views and sensitivities on this topic, and we are proud to work with them on an individual basis to implement the solution that makes the most sense for them.
Q: If an institution or family decides to divest fossil fuel holdings, is it costly, straightforward or somewhere in between?
A: It wouldn’t be fair for anyone to characterize total portfolio divestment of all fossil fuels as an easy process or a flip of the switch, particularly for large investors with diversified and complex portfolios. Realistically, there are challenges inherent with divesting, particularly in the near-term. A key challenge is that many endowments and other institutions, even large ones, are invested in commingled vehicles, which limit their ability to control the individual fund holdings. So, if an investor finds that it has only a five percent allocation to fossil fuels across their total portfolio, that exposure could be spread across several commingled funds that comprise the majority of the portfolio. If that investor chooses to divest fully from fossil fuels, it might need to sell funds that have performed well and play an important role in the portfolio, potentially altering the portfolio’s overall risk return profile. In that regard, the portfolio construction challenges are significant when it comes to fossil fuel divestment.
Another consideration is that the opportunity set as it exists today for institutional-quality fossil-free investing is small. It’s growing, and we are actively researching appropriate options for our clients who wish to divest, but we are also honest with clients that today’s universe is small. It would be difficult for a very large, diversified endowment or portfolio to immediately transition into fossil-free vehicles.
That said, we’ve had clients that have chosen to go down the path of divestment. We’ve been happy to help them craft a plan to reasonably, appropriately and prudently unwind from those positions. In general, they are not doing anything too drastic right out of the gate; for example, they might be focusing initially on more liquid assets, such as public equities, and delaying further divestment until more opportunities become available. They, rightly, are thinking of themselves in the first innings of a longer-term game.
Q: Does Cambridge Associates have any fossil-free products, services or offerings for clients that wish to go down the path of divestment?
A: No. Our role is to support our clients in whatever choices they make and help them determine what, if any, portfolio implementation options they might pursue. While we are conducting due diligence on the small but growing opportunity set of fossil-free manager options, we do not offer a product or fund that is fossil-fuel free, nor are we currently developing one.
Q: Does Cambridge Associates see mission-related investing as a significant business opportunity?
A: We see mission-related investing, and our approach to it, as a way to serve and anticipate our clients’ needs. I recently went to a foundation conference, and there was standing room only in the session on impact investing. Mission-related investing is definitely resonating more and more with institutions and families. I am happy we have put in place the infrastructure to do the work and research to help these investors move forward with strategies that align with and advance their missions.