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Serving on Boards: Fiduciary Responsibilities & ESG

I began my last blog with Ben Franklin’s sage advice: “When you’re good to others, you’re best to yourself.” In keeping with this theme, in this blog I’m going to take a look at the fiduciary responsibilities of being on a board. Specifically, the fiduciary obligation of financial oversight. And, even more specifically, I’ll share some thoughts on fulfilling this obligation as it relates to the area of Environmental, Social and Governance (ESG) investing, which is also referred to as socially responsible, sustainable, value-aligned, or impact investing.

Before We Begin

A few points to keep in mind before we begin. The first is that for purposes of this blog, I’m speaking about the fiduciary responsibilities of boards of non-profit organizations. (Although much of what I write about could relate to ESG investments of for-profit companies, as well.)

Like the fiduciary responsibilities associated with other roles — such as a financial advisor or retirement plan sponsor — fiduciary obligations for those who serve on non-profit boards ensure that they put the needs and objectives of the institution first. BoardSource, an organization whose mission is to “inspire and support nonprofit boards and executives to lead justly and with purpose,” provides a good overview of financial fiduciary obligations for nonprofit boards here.

And a brief but important caveat: In this blog, I’m sharing my personal opinions and insights — not giving legal advice.

Some ESG Guidelines

If you’re serving on a non-profit board that has a pool of money to invest, it’s likely that you either are or soon will be diving deeper into ESG investing. It’s a natural fit. An organization that’s working on behalf of others would want to invest its financial assets in sectors or individual companies that are benefiting people and the planet, right?

Right — but there’s more to consider. For starters, nonprofit board members and foundation trustees have to remember their primary responsibility is to invest their organization’s assets to generate the returns needed for the organization to thrive and deliver on its primary mission.

Next, remember that ESG investing can bring out a lot of strong individual opinions or points of view from board members, which is understandable. When it comes to dealing with climate change or promoting greater equity in society, investment choices are going to be motivated by people’s passions. Which makes it even more important that your board take a rational and balanced approach to ESG investing.

To bring focus to ESG discussions, it may be helpful to get back to the basics. While many causes are important, in my view the ones that should be most important to a non-profit board are those that are consistent with its core purposes. For example, a non-profit with a mission of promoting greater economic equity in its home community would naturally gravitate more toward investing in companies focused on racial, social and economic advancement. That doesn’t mean that this board has to ignore the environment or not worry about corporate governance. But favoring investments that address and promote equality is more consistent with its own goal as an organization.

The next consideration is the size of the pool of investable assets. As a rule of thumb, if it’s less than $1 billion, you won’t have the time or the scale needed to diversify among a variety of single-company ESG investments. Fortunately, even with less than $1 billion, there are other resources boards can take advantage of.

First, there are investment advisors and consultants who offer an “overlay” with screens and metrics that create scores to measure a company’s or an entire portfolio’s ESG rating. These screens can also drill down to measure a company’s or portfolio’s “tilt” toward “E,” “S,” or “G.”

As a board member or trustee, you’ll want to do your own drilldown into the methodology behind the metrics. For example, how is the investment advisor/manager determining what a company’s “carbon footprint” is? How are they measuring success in social and economic equality? It’s also important to remember that ESG is an evolving dynamic. But the good news is that with technology, research and metrics are getting better and better — not to mention more cost effective.

And speaking of cost: the greatest efficiencies in ESG investing for most non-profits will probably be in ETFs. Another advantage with ETFs is that their research and investment methodology will be written out in a prospectus, simplifying the research for you and your fellow board members.

Investment Policy and Ongoing Monitoring

Before making any investments, a board will need to be sure its investment policy clearly articulates its ESG investment activities. And you’ve got to be very specific about the investment strategy and expected outcomes for those investments. On most boards, an investment committee will be responsible for setting down the ESG “rules of the road” as well as ongoing monitoring and reporting.

As a board, you want to have the ability to make an impact with ESG investments. That means that reviewing ESG investments — not just from the performance perspective, but also to make sure that they continue to meet your defined investment criteria — is more than just another agenda item that gets checked off once a quarter. With the right kind of oversight, you’ll do good to others and the best for your organization. And you’ll make Ben Franklin proud.

If you are interested in serving on a board and would like to discuss opportunities, Princeton Financial Consultants can help. Contact us for a personalized consultation today.

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