Investor challenge
CHALLENGE
A university sought to divest from fossil fuels across its entire equity portfolio of active and passive managers..
SOLUTION
We implemented a fossil-free version of the portfolio while remaining invested in the existing managers.
RESULTS
The university was able to remain invested in its target allocation and achieve a consistent fossil-free mandate.
Challenge
Many institutional investors are under increasing pressure to consider their holdings’ environmental or social behavior. However, if they’re invested in commingled vehicles, they leave that discretion up to their investment manager—who may have a different opinion of what should be held in the portfolio.
In this case a Catholic university’s endowment board voted to divest from fossil fuels. However, the endowment was invested in commingled funds that held companies involved in fossil fuels. That meant they couldn’t remain in the active commingled vehicles and still uphold their pledge to be fossil free. What’s more, the board expressed to us a future desire to explore faith-based screens, something their current commingled funds couldn’t accommodate. Could we give the client control over its portfolio holdings while remaining invested with its active managers?
Parametric solution
Parametric proposed combining the underlying positions in each active or passive fund into a single account. Any environmental or social criteria could then be applied to this portfolio. The endowment directed each active manager to deliver a model portfolio (holdings and weights) to Parametric, which then aggregated these models, along with holdings from selected indexes, into a custom benchmark based on the endowment’s target allocation.Once the positions were combined, Parametric could use its ESG data sets in conjunction with its expertise in portfolio construction to build a portfolio that mirrored the client’s target asset allocation while remaining invested with the active managers the university had carefully chosen. To accommodate the fossil-free mandate, Parametric modified the custom benchmark to omit any owners of fossil-fuel reserves. We then invested in the underlying holdings of the now fossil-free custom benchmark.
Results
Parametric’s process helps investors remain invested in their active managers while also giving them complete control over the underlying exposures in the portfolio. This enhances flexibility, enabling investors to add ESG criteria and other portfolio customizations.For the Catholic university’s endowment, this approach meant it could remain invested in its preferred active managers while achieving its fossil-free mandate. And given the flexibility and access to comprehensive ESG data that Parametric provides, it also means the endowment can incorporate other faith-based considerations whenever it’s ready to do so. It was a solution that helped the endowment satisfy not just its board’s return objectives but also the preferences of multiple stakeholders.
This material is provided for illustrative purposes only and should not be construed as investment advice, a recommendation to buy or sell specific securities, or direction to adopt any particular investment strategy. This material is based on the experiences and observations of Parametric. No representation is made that a client will, or is likely to, achieve results similar to those presented. Actual results will differ and may differ substantially from the example provided. Client outcomes will differ depending on each client’s specific circumstances as well as changes in securities or financial markets or general economic conditions. All investments are subject to risks, including the risk of loss.
