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.

Kathleen Mellody, Senior Government Affairs Officer with the Investment Company Institute, and Julia Enyart, Vice President of Sustainable and Impact Investing at Glenmede, presented on potential Environmental, Social and Governance (“ESG”) impacts from a Biden presidency with a specific focus on diversity, equity and inclusion, climate change and shareholder rights.

President Biden is building one of the most diverse Cabinets in history as exemplified by the following sample of nominations:

• Representative Marcia Fudge: Secretary of HUD Nominee
• Miguel Cardona: Secretary of DOE Nominee
• Representative Deb Haaland: Secretary of DOI Nominee

The importance of climate change has been emphasized by President Biden naming Gina McCarthy, former administrator of the Environmental Protection Agency under the Obama administration to a new position that coordinates domestic climate policy amongst government agencies. McCarthy will serve as a counterpart to John Kerry, who President Biden chose as his special ambassador on climate change. President Biden also appointed Brian Deese, formerly BlackRock’s Head of Sustainability, to lead the National Economic Council.

The party that controls the White House determines the chair of the U.S. Securities and Exchange Commission (“SEC”), an independent government organization with the primary goal of protecting investors and preserving the integrity of the U.S. banking system. New highly ranked appointments at the SEC have voiced their desire for greater SEC-required ESG disclosures, and so it is likely the SEC will be more engaged on ESG matters than in the past. For instance, the SEC could require corporate issuers to disclose material ESG risks, such as quantifying and qualifying a company’s contribution and exposure to carbon pollution.

President Biden’s support of ESG issues should provide a tailwind for ESG investments.

The Nasdaq is the second largest securities exchange in the world, behind only the New York Stock Exchange (“NYSE”). An exchange is a platform in which investors buy and sell securities, like stocks. Unlike the NYSE, the Nasdaq has no physical location and instead all of its trades are executed electronically. Created in 1971, the Nasdaq got its name as the acronym for the National Association of Securities Dealers Automated Quotations. Generally speaking, the Nasdaq has a technology tilt, and some of the major stocks that trade on it include Apple, Amazon, Microsoft, Facebook, Starbucks, and Tesla. In addition to being an exchange, the Nasdaq Composite is an index of approximately 3,000 stocks that is a commonly used benchmark for U.S. equities with a technology focus.

Throughout history, the Nasdaq has a track record of paving the way. For example, the Nasdaq was the first exchange to offer electronic trading, launch a website, and store records to the cloud. In December, the Nasdaq continued to prove itself as a leader when it announced that it is pushing to enhance board diversity on the companies listed on its exchange. Specifically, the Nasdaq filed a proposal with the Securities and Exchange Commission (“SEC”) that would require companies listed on Nasdaq to have at least one woman on their boards, in addition to a director who is a racial minority or one who self-identities as lesbian, gay, bisexual, transgender, or queer. Companies that do not meet this standard would be required to disclose why. As a reminder, Nasdaq has an extensive reach, touching approximately 3,000 companies with its recent proposal.

According to the Wall Street Journal, Nasdaq carried out an assessment over the past six months and discovered that more than 75% of its listed companies would have fallen short of the proposed requirements. Approximately 85% of companies had at least one female director, but only about 25% had a second director who would meet the diversity requirements. In its findings, Nasdaq clarified that it was difficult to analyze diversity due to inconsistencies in the way companies report such data. For instance, Nasdaq uniquely defines underrepresented minorities as individuals self-identifying as Black, Hispanic, Asian, Native American, or belonging to two or more races or ethnicities.

If Nasdaq’s proposal is approved by the SEC, then companies would have to disclose board diversity statistics within one year. Larger companies listed on Nasdaq would have approximately four years to satisfy board diversity requirements, whereas smaller companies would be given five years to do the same.

Given the market volatility that occurred this year provided the global pandemic, I’d like to highlight one of our values-aligned investments (VAI), which proved to generate both a positive non-financial return, while also outperforming financially throughout a turbulent year.

The Gambrell Foundation invests in the Wellington Global Impact commingled fund, which is classified as an impact investment within the foundation’s VAI bucket. As of November 30, 2020, Wellington Global Impact generated a net return of +23.95% year-to-date, beating its benchmark, the MSCI All Country World Index (+11.60%) by 12.35%. Since the foundation initially invested in this fund on October 31, 2018, it has earned a net return of +22.13%, outperforming the MSCI All Country World Index (+15.13%) by 7.00% over this two-year period.

This year, Wellington Global Impact’s outperformance is attributable to the positive momentum surrounding clean energy, including American and European Green Deals and the European Union’s Climate Target Plan, which aims to decrease carbon emission by 55% by 2030. The fund’s alternative energy and resource efficiency holdings have benefitted from the world’s increased support of climate control, giving further conviction to the portfolio manager’s impact insight.

Impressively, Wellington Global Impact was able to relatively outperform while not owning the FAAMGs (i.e. Facebook, Apple, Amazon, Microsoft, and Google), which are driving approximately 20% of U.S. equity market outperformance. According to the portfolio manager, this positioning is unlikely to change provided Wellington continues to believe that these companies are not aligned with their impact investing objective.

Not only has Wellington Global Impact achieved absolute and relative outperformance in financial terms, but it also aligns with the foundation’s mission by investing in companies that seek to solve the world’s greatest environmental and social issues. From the foundation’s standpoint, this investment is a win-win.