How endowments and foundations can align Investment portfolios with their missions

Fidelity’s Erika Murphy discusses some key considerations for endowments and foundations looking to align their portfolio investments with their mission. To support nonprofits’ mission-alignment, Fidelity can provide education, invest in sustainable public market strategies with strong shareholder engagement, offer specialized satellite investments, and design custom portfolios for larger clients.

Values-alignment does not have to be an all-or-nothing objective

Advancing the mission is the ultimate goal for endowments and foundations. Yet for many nonprofits, mission-alignment is mostly fulfilled in their grant-making or through their support of annual operating budgets. Interestingly, value-alignment does not always carry through the nonprofit corpus. Our E&F survey1 shows that 43% of nonprofits believe it is important to align the investment portfolio to the mission of the organization. However, only 8% said their investment portfolio is fully aligned to their organization’s mission. According to our survey, when nonprofits do implement mission-focused values, they tend to do so through exclusionary screens, impact investing, or an integrated approach to sustainable investing.

Our experience with nonprofit clients and prospects corroborates our survey results. We do see interest in mission-aligned investing, but we see much less implementation—often due to limited experience in sustainable investing, lack of nonprofit board and investment committee agreements, and/or worry that mission-aligned investment may be inconsistent with a nonprofit’s return—maximizing objectives.

Importantly, when organizations implement mission-alignment, they can decide to do so in a way that is non-concessionary—in other words, a way that does not sacrifice return at the expense of mission-alignment. Putting this “stake in the ground” can be helpful since it may allow organizations to take incremental steps toward values-aligned portfolios without requiring an all-or-nothing decision.

Watching the scoreboard

For clients who are interested in aligning their portfolios more closely to their missions, we start with portfolio exposure reports to orient our discussions. This is an important first step because it is hard to align something if you are not measuring it in the first place. We aggregate all public equity and corporate fixed-income portfolio positions and use our proprietary and third-party data vendors to identify how much exposure is held in companies that are well-aligned with each client’s mission, and how much exposure is held in companies that have been flagged by external vendors as being more controversial (examples include tobacco, semi-automatic firearms, and for-profit prisons).

We also can measure how well-aligned, or misaligned, portfolio exposures are to each of the 17 United Nations Sustainable Development Goals (SDG).2 Examples of UN SDGs include good health and well-being, quality education, responsible consumption and production, clean water and sanitation, among others. When measuring these types of exposures, we can show clients not only how aligned or misaligned their portfolio exposures are to these categories, but we can also measure how much benchmark exposures fall into these categories.

If you are getting into the game

We do have clients who are just starting to align portfolio exposures with their mission. In doing so, we can work with clients to determine a certain portfolio percentage or identify exposures in a handful of asset classes to implement in a more value-aligned way. Our team then identifies investment strategies that are competitive versus traditional market benchmarks and that favor companies that stay out of controversial business practices. The investment teams managing these strategies have an investment philosophy that generally characterizes controversial market segments as having greater financial downside risks. We have identified numerous strategies across asset classes that meet both criteria—compelling returns vs. traditional market benchmarks, and exposure that skews more ‘sustainable’/less controversial vs. traditional market benchmarks. The fact that these two features can co-exist can be surprising to some clients and prospects.

At the other end of our spectrum, there are some organizations that aim to have as many investments as possible that align with their mission. From our experience, these are rarer, but to help these clients go deeper, we can layer in satellite investments in thematic strategies that may be aligned with nonprofit missions. For example, we can make allocations to dedicated public-market climate funds, water funds, education, or health care-focused funds to ensure a certain proportion of the portfolio is invested in companies developing innovative solutions in these market segments. For our larger clients, we can also create customized thematic portfolios.

Importantly, before making these investments we research the opportunity and speak to our bottom-up analysts to verify that the theme offers above-market growth characteristics. We believe this type of growth can help drive outperformance relative to traditional market benchmarks. We also carefully monitor and size these positions as thematic funds tend to be more concentrated and volatile than traditional market benchmarks.

Clients are in control

In our role as an outsourced chief investment officer (OCIO) we are a co-fiduciary. As such, we are guided by our clients’ respective return objectives, risk tolerances, constraints, and preferences. We do not have a singular approach or a “house view” on values-alignment. Rather, we are a partner that can offer education, reporting, and a range of implementation options as needed, including more traditional implementation as well as varying degrees of mission-aligned implementation. Our aim is to meet clients and prospects wherever they are and help them get to where they want to be.

1. Fidelity's survey of nonprofits polled chief executive officers, chief investment officers, treasurers, and other investment executives at 100 nonprofit institutions in the United States. Respondents were asked a range of questions about their portfolio objectives, market perspectives, asset allocation, investment philosophy, and investment process. Fidelity conducted the survey in August 2024. The survey was executed in association with global research consultancy CoreData Research. All respondents completed an online questionnaire, which was then supplemented by 5 in-depth qualitative interviews with survey respondents.
2. United Nations. “United Nations Sustainable Development Goals.” 2015. https://www.un.org