Over the years, the foundation has evaluated several environmentally friendly infrastructure funds and has finally approved one for inclusion in its portfolio, further increasing its allocation to Values-Aligned Investments. In addition to desirable financial targets, this investment also generates and tracks its positive non-financial returns, which I’d like to highlight.

When speaking with the fund’s leadership team, they explained that impact is part of their ethos. Naturally, the fund produces a product that meets a fundamental need, like electricity, energy savings, or water, and is cleaner, more resilient, and more cost-efficient than legacy infrastructure.

The fund focuses on solar energy, creating environmental justice, and reducing inequality. For example, solar energy is a renewable alternative to environmentally unfriendly coal, and coal mines are generally found in low-income areas. In 2020, as a result of the firm’s 39 MW of solar projects, 10,274 tons of CO 2 were not emitted. Another example of environmental justice is community solar because it has no income restrictions or credit requirements, which is what has historically contributed to education and housing inequality.

In addition to the impact being at the firm’s core, the investment team qualifies and quantifies the impact generated by each investment. For example, in 2020, the firm estimated that its projects would create 650,000 job hours over their useful lives. In other words, the fund’s sustainable infrastructure investments, like a solar farm, create a variety of new jobs, such as design, engineering, construction, accounting/legal, and operations/maintenance, which combined are forecasted to total 650,000 hours of work over approximately 25 years. In essence, the fund indirectly creates job opportunities even though the fund’s primary purpose is to generate a positive financial return through renewable energy investments.

We are excited about the foundation’s new sustainable infrastructure investment, and we look forward to relaying progress updates over the coming years.

Nuveen, a global asset manager, began it’s responsible investing (“RI”) journey in 1970 when clients asked them to engage on product safety and social issues. In 2020, Nuveen asked me to join their RI Leadership Council, representing an elite group of professionals identified as thought leaders who come together to share perspectives on RI developments, market opportunities, and ideas to better investor outcomes and the overall RI industry.

Recently, Nuveen hosted our second formal meeting, and the most significant takeaway for me pertained to Nuveen’s stewardship report. Given RI is a core tenant across the firm, Nuveen proactively engages with portfolio companies to enhance the RI industry as a whole. Before Nuveen evaluates a portfolio company, it considers the company’s level of maturity about its unique RI journey.

For example, a company just beginning its RI journey would primarily focus on reporting on environmental, social, and governance (“ESG”) issues. For this company, Nuveen would concentrate on evaluating this company’s transparency, or disclosure of ESG-related issues, such as climate risk.

Over time, as a company fine-tunes its ESG reporting capabilities, then Nuveen would add a layer of assessing a company’s accountability in addition to transparency. For instance, a company launches an initiative focused on its workforce demographics, demonstrating a desire to incorporate ESG into business strategy and culture.

As more time passes and a company’s ESG evolution continues, Nuveen would measure a mature ESG company’s impact in addition to this company’s transparency and accountability, as outlined above. When it comes to impact, an example would be a company that demonstrates it intentionally reduced its carbon emissions in alignment with a commitment to do so.

In summary, Nuveen’s stewardship report has three focus areas: transparency, accountability, and impact. Nuveen evaluates each portfolio company across one, two, or three categories depending on where each company currently stands on its unique ESG journey. Ultimately, Nuveen’s expectation is for all companies to move beyond disclosure to build ESG into all aspects of the business intentionally.

After evaluating five Program-Related Investment (PRI) opportunities for the past three years, we are excited to announce the first official PRI for The Gambrell Foundation effective August 2020! Previously, the Foundation passed on PRI opportunities for various reasons, including excessive fees, concerns regarding repayment, and a lack of follow-through from the PRI applicant. 

We define a PRI as a recyclable, interest-bearing grant. Separating the Foundation’s recyclable PRI pipeline from grants ensures the PRI program is self-sustaining. Also, we believe that PRI due diligence requires three sets of skills: programmatic, financial, and legal. Now that I’ve set the stage, I’d like to elaborate on the PRI we just executed.

In May 2019, the Charlotte Center for Legal Advocacy (“Charlotte Legal”), a local non-profit, reached out to The Gambrell Foundation. Our Executive Director met with Charlotte Legal’s leader, who was soliciting grants to fund the renovation of a new office building. At this initial meeting, Charlotte Legal was looking for a new space, but it took them longer than expected to find a facility that fit their needs. They had found a new location, but then the Covid-19 pandemic hit. Consequently, this project was paused for several months. 

In early 2021, Charlotte Legal reached out with updates on their progress. Our Executive Director proposed that the Foundation make a PRI instead of a grant during these renewed conversations. Charlotte Legal was receptive to that concept, but they acknowledged that this would be their first experience with PRIs. We reassured them that we would learn this process together. 

On May 12, the Foundation provided its PRI application link to Charlotte Legal. Charlotte Legal submitted their thoroughly completed PRI application back to the Foundation by May 24. After an initial review, our financial team had a handful of follow-up questions, which Charlotte Legal quickly and sufficiently answered. Through the PRI application and subsequent conversations, the Foundation agreed on an unsecured loan to Charlotte Legal for the principal amount of $500,000 at half the market rate, or 2%, with a 5.5-year term. Both parties agreed on quarterly interest payments with a principal balloon repayment upon maturity on January 31, 2027.* Charlotte Legal will use the Foundation’s below-market-rate loan in combination with a commercial loan from Towne Bank for $3 million at 4% to renovate its new office building. 

By late June, the Foundation formally completed due diligence, and outside legal counsel drafted documents by July 8. Both parties executed the loan agreement and promissory note by August 3. The Gambrell Foundation cut a check to Charlotte Legal for the loan amount deposited on August 19. This marked the official execution date of our first PRI. Like other investments, the Foundation will monitor its PRI with Charlotte Legal on an ongoing basis until maturity. 

*Note: One of the essential lessons from this experience was that PRI principal repayments must go out again in the same calendar year they are received through either new PRIs or grants. We were mindful in coordinating a loan maturity date in January as opposed to December. For example, if this loan matured on December 20, 2027, we would only have 11 days to get $500,000 back out via another PRI or grant.

Wellington Global Impact Fund is one of our long-standing impact investments. I would like to highlight one of the fund’s individual holdings to showcase the manager’s due diligence process and investment philosophy.

YDUQS is an international equity position that facilitates access to quality post-secondary education for low- and middle-income Brazilians. Completion of a post-secondary degree can lead to increased earnings potential, while also enhancing broader economic growth. YDUQS targets United Nations Sustainable Development Goal #4, Quality Education. This goal seeks to ensure equal access for all women and men to affordable and quality technical, vocational, and tertiary education, including university, by 2030.

Wellington’s qualitative assessment of the company states, “YDUQS management has executed effectively, increasing the company’s reach while offering higher-quality products without unduly raising costs for students.” Wellington’s quantitative analysis shows that 761,200 students are enrolled in YDUQS, and the company awarded 101,018 degrees in the calendar year 2019. The key performance indicators that Wellington aspires to track over time are the employment rate for YDUQS graduates as compared with peers and the increased career success compared with peers.

As we know, all investments are associated with varying degrees of risk. The primary risks associated with YDUQS are:

• Exogenous Factors
  • Income or employment is determined by the job market
• Goal Alignment
  • YDUQS does not make a sufficient effort to include diverse students
• Negative Impact
  • Cost burden for students
  • Environmental impact of operating facilities

As a proactive and sustainably focused firm, Wellington prioritizes engagement with its portfolio companies and notes that YDUQS is very willing to engage with them. The primary focus of engagement at the present time is addressing the changing nature of distance learning.

The CFA Institute hosted its Alpha Summit, or annual meeting, at the end of May with the tagline, “a meeting of the minds that propels finance forward.” One of the conference sessions titled “The Next Frontier of Sustainable Investing: Measuring Impact” addressed ESG implementation amongst the following panelists:

• George Serafeim – Charles M. Williams Professor of Business Administration and Faculty Chair of the Impact-Weighted Accounts Project at Harvard Business School
• Linda Zhang – CEO of Purview Investments
• Melanie Adams – Vice President and Head of Corporate Governance and Responsible Investment at RBC Global Asset Management Inc.

The panelists’ conversation began with reconciling materiality with ESG issues. For instance, water is material for a food and beverage company, while cybersecurity is material for a financial institution. Furthermore, you can drive performance forward inside an organization by improving the organization’s human capital through enhanced workforce diversity.

In order to monitor ESG matters, the panelists agreed in their preference of tracking raw data over time, identifying improving or declining trends as opposed to a less optimal reliance on ESG scores. Unfortunately, and as many of us already know, the ESG data space is nascent and does not have the same infrastructure as accounting information. There also tends to be more noise within ESG data instead of indicators, which can be distracting. In order to combat these challenges, the panelists recommend maintaining a sector-specific lens. For example, although technology companies do not have direct emissions, they do have indirect emissions via employees’ frequent travel and keeping data centers cooled.

Consensus found engagement as more effective than divestment. Specifically, fossil fuels will be used for years to come and so it’s preferred to have a seat at the table with the companies transitioning from high carbon emissions to low in order to learn about the technologies they will use. This insight will make clear industry leaders and laggards. Moreover, there needs to be “teeth” in an engagement approach. For example, if a company falls short of achieving its carbon emissions reduction goal, then there needs to be a consequence. Time-bound milestones are helpful in monitoring progress. As an investor, given the price you paid for an investment or the current holding price of the investment, quantify the financial and non-financial risks and ensure you are being compensated appropriately.

As the session drew to a close, the panelists shared the following ideas for finding purpose in your work, which I found helpful and hope you do too.

• Position your career for where the growth will be in the industry (e.g., climate change).
• Wherever there is disruption or innovation is where the opportunity exists for alpha generation.
• When you do ESG investing right, you can generate alpha, but ESG analysis is challenging and so it needs to be done correctly.

Although my full-time job is working as the Investment Advisor to The Gambrell Foundation, I also give back to the community by serving as Vice President on a board of directors for a non-profit. The CFA Society of North Carolina (“CFANC”) was established in 1971 to provide education and support to the area’s investment professionals. It currently has approximately 1,300 members statewide consisting of portfolio managers, security analysts, investment advisors, and other financial professionals.

 

As VP of CFANC, my primary responsibility is programming. This week, we hosted a panel of three highly respected and successful investment professionals, who engaged in an open dialogue discussing the topic, “Let’s Shape the Future Together – Success Stories of Inclusion.”  Our panel included:

 

• Ernie Dawal, the Chief Investment Officer (“CIO”) of Truist Financial, the bank resulting from the merger of SunTrust and BB&T, which has approximately $300 billion in assets under management.
• Dennis Johnson, CFA, the former Chief Strategy Officer for the Public Investment Fund, the sovereign wealth fund for Saudi Arabia with approximately $347 billion in assets under management.
• Tina Williams, CFA, the CEO, CIO, and Founder of Xponance, a $12 billion multiple strategy investment company, which is one of the largest diverse and women-owned investment firms in the world.

 

The conversation began with Dennis describing the current environment in regards to inclusion, which admittedly has its shortcomings. For instance, the CFA Institute provides gender and age metrics surrounding its global membership, but neglects to track race and ethnicity. In order to fix any problem, Dennis suggests that we first have to acknowledge it, which requires data and measurements so we can track and evaluate progress over time.

 

The highlight of the event for me was hearing the profound thoughts and innovative ideas that the panelists openly shared:

 

• Tina cited research conducted by the Knight Foundation which concluded that there is no discernable difference in performance between diverse and non-diverse firms; however, diverse firms have a greater ability to attract assets.
• At Xponance, Tina holds her team leaders accountable for diversity, equity, and inclusion targets. In her experience, this is the most effective approach to develop and maintain a diversified workforce, thereby increasing the likelihood of outperformance because you have a breadth of opportunities.
• Ernie suggested that when an employee leaves, an employer should proactively hire a replacement that does not look exactly like the departed employee, which would ultimately result in a more diverse workplace.
• Ernie underscored the importance of an inclusive corporate culture. For instance, do employees and students feel that they belong? Students need mentors to help develop their career path and gauge their feeling of inclusiveness.

 

I admire Ernie, Dennis, and Tina for eloquently discussing an important topic by sharing their insights and perspectives given their vast professional experiences. I am confident that these three leaders will continue to uplift everyone and everything around them, ultimately making the world a better place.

Sustainable investing is gaining in popularity. As a result, investment providers have ramped up their offerings of Environmental, Social, and Governance (ESG) products. However, investors must take a closer look and scrutinize anything with the ESG label to ensure it truly holds sustainable underlying positions.

For example, one index fund has “climate change” in its name while holding some of the world’s largest oil producers and multinational automakers as positions. A specific holding in this fund is carmaker Daimler, included solely because the company made a statement about the risks and opportunities posed by climate change and acknowledged the goals of the 2015 Paris Agreement. This somewhat contradictory way of thinking demonstrates the need to look more closely “under the hood” as you look for ESG holdings.

Investment providers need to label products more clearly. Increased transparency will reduce “greenwashing,” which is when a company misleads customers and investors by falsely marketing its products and services as environmentally friendly when, in reality, they are far from it. ESG investing is partially subjective based on the beholder’s viewpoint. Some investors prefer to own shares of an environmentally dubious company, such as Daimler, to vote at annual meetings to support sustainable initiatives and affect change at the company level.

One potential solution to greenwashing is policing sustainable investing. On March 10, 2021, the European Union (“EU”) introduced the first rigorous attempt to prevent this mislabeling practice. These new rules are part of a more comprehensive series of green finance regulations and will effectively categorize every investment product as either sustainable or non-sustainable. Managers who want to market their offerings as sustainable will be subject to strict disclosure requirements.

The impact of the EU’s recently released green regulations will affect change throughout the investment industry, hopefully for the better. It appears to be a step in the right direction, but only time will tell.

Since 2018, Barron’s has collaborated with Calvert Research & Management to publish an annual list of the 100 Most Sustainable Companies. Calvert’s process begins by taking the 1,000 largest publicly traded U.S. companies and then ranking them based on how they perform regarding shareholders, employees, customers, community, and the planet. Sample data points used in Calvert’s evaluation process include workplace diversity and greenhouse-gas emissions. According to Calvert, the top five most sustainable U.S. companies are:

1. Best Buy (BBY)
2. Agilent Technologies (A)
3. Ecolab (ECL)
4. Autodesk (ADSK)
5. Voya Financial (VOYA)

Best Buy tops this year’s list because it made the following proactive and ESG-friendly moves:

• Halted in-store operations for six weeks and utilized curbside pick-up and delivery methods instead.
• Increased employee compensation early on during the pandemic and instituted a $15/hour minimum wage.
• Permitted paid sick leave.
• Executives sacrificed a 20% pay cut and used these savings to create an emergency fund for furloughed workers.
• Reinstated 50% of furloughed employees by September 2020.

Agilent came in second place by acting in the following pro-ESG manner:

• Guaranteed jobs and safeguarded employees’ salaries.
• Utilized 3-D printers to make face shields for local healthcare providers.
• Purchased a separate company with its solar farm to enhance clean energy usage.

Overall, U.S. companies injected more than $1 trillion into the economy in 2020 via cash gifts, free masks, loan forbearance, etc. Impressively, corporate America’s contribution to the economy was on par with the federal government’s stimulus program.