ESG investing an alternative to grant-making, Hirtle Callaghan execs say

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OCIO firm Hirtle Callaghan & Co. sees ESG investing as a potential alternative to grant-making for private foundations seeking to apply some level of mission-based thinking to their investment management.

The firm has been providing outsourced chief investment officer services for family offices, and endowments and foundations since 1988. The firm was founded by Jonathan J. Hirtle, currently executive chairman, and Donald E. Callaghan, now retired, after they left Goldman Sachs Group, where they had advised families and institutions. The firm was originally a joint venture with SEI Corp. as SEI Wealth Management.

Now, the business splits its $20 billion in assets under management evenly between family offices, and endowments and foundations.

Endowments and foundations have been increasing their utilizations of environmental, social and governance factors in recent years; specifically, the idea of mission-based investing has been gaining significant traction among private foundations. Mr. Hirtle; Brad Conger, deputy CIO; and Garrett Wilson, managing director and ESG specialist, said in phone interviews that their approach to mission-based investing has been to provide a kind of alternative to pure grant-making.

“I think our view is a little bit heretical in the ESG world, because we think the missions of our clients are best served by achieving the highest return adjusted for risk and that trying to execute a mission within your investment process muddies the waters and can lead to suboptimal outcomes for the entire organization,” Mr. Conger said. “We have many clients who want to align their investing with their missions. We encourage them to think of themselves as the mission rather than try to prosecute a mission within their investment program so I know that’s counter to the whole ethos of ESG.”

Mr. Hirtle gave an example of how the firm can approach ESG so it does not harm outcomes.

“For foundations that are making grants, if they’re making a grant to a homeless shelter, some charity organization, they could — instead of making the grant — they could make a loan to that same organization, and that would be an investment that would be the equivalent of purchasing a bond,” Mr. Hirtle said. “They understand that if the client defaults on that loan, that would just be part of their grant-making.”

Mr. Hirtle also noted that ESG investing makes sense when evaluating two different companies that are priced the same. As an example, he said, “one had a supply chain that fairly treated people — an ‘enlightened supply chain’ — and the other one was not an enlightened supply chain — bad working conditions and so forth — if they’re priced the same, we would much rather own the company with the enlightened supply chain because it’s a much better operating organization.”

While the firm does consider ESG scores when evaluating companies, which depends primarily on their prices, that represents what Mr. Hirtle calls “naive ESG.”

“This goes back to the notion of the constituents, and what’s defining risk, and when we do our risk-defining work with our clients and our board, they almost always say ‘mission failure.'”

Mr. Wilson said Hirtle Callaghan serves as the OCIO for about 90 non-profit organizations, and those missions differ widely, from organizations dedicated to education and medical research to botanic gardens.

The first part of the firm’s ESG framework is to “think about managers that utilize or have some understanding of ESG risk and opportunities and embed that into their decision-making,” Mr. Wilson said. “It is really intended to really understand how managers think about those material risks associated with ESG issues. The fact of the matter is that the best investment decision-makers out there are going to try to consider every possible externality that is not being effectively priced into a business, whether that’s supply chain transparency, carbon risk or understanding their workforce in totality.”

The second is engaging with clients to understand what their mission is, ask why they are pursuing it, and how they can advance their mission through investments. One client, he said, is a Midwestern performing arts organization that wanted to align investments with its mission of serving a very diverse community, and ultimately decided to make an impact with their dollars through loans to local diverse businesses.