UVIMCO Embraced ESG Investing. How Has That Worked Out?

A University of Virginia student group, UVA Apartheid Divest, is petitioning to hold a referendum demanding that the University of Virginia Investment Management Company (UVIMCO) divest itself of investments in corporations implicated by Israel's "apartheid" regime.

The petition brings attention to the practice of socially responsible investing adopted by UVIMCO, which manages an endowment portfolio of roughly $14 billion for the university and affiliated organizations. States the website: "UVIMCO promotes ESG [environmental, social, and governance] integration across its portfolio and with its investment managers."

UVIMCO doesn't invest in individual securities. It puts its money in the hands of money managers who invest in individual securities. Rather than picking stocks, UVIMCO picks money managers. As part of that process, UVIMCO evaluates a prospective manager's ability to incorporate ESG priorities into its investment practices.

According to UVIMCO's 2023 Investor Responsibility Report, the fund takes into account factors ranging from "arms trade" and "child labor" to "diversity and inclusion," "use of harmful materials," and "workers' protection."

As a practical matter, however, UVIMCO's primary focus is climate change. It has invested $1.5 billion in public companies with "science-based, net-zero targets;" another $215 million in renewable power, innovative climate technologies, reforestation and carbon markets; and another $135 million in climate solutions such as clean technologies, renewable power, electric vehicle batteries, and sustainable waste management. All told, those investments equate to twelve percent of the market value of the portfolio.

The fund has committed to the ambitious target of transitioning the University’s endowment portfolio to "net-zero by 2050." Net-zero refers to the goal of reducing the net output of carbon dioxide emissions to zero.

We believe that investments in climate solutions that help to mitigate the systemic risks of climate change will generate long-term returns for UVIMCO. Between 2021 and 2023, UVIMCO committed $215 million to climate solutions investments, including renewable power, innovative climate technologies, reforestation, and carbon markets.

However, ESG investing, once the rage on Wall Street, has come under scrutiny in recent years as fossil-fuel companies have out-performed market averages and renewable energy companies have under-performed. After several years of explosive growth, ESG funds experienced a net outflow of dollars in 2023.

A big challenge for UVIMCO will be developing a means to measure the carbon intensity of its investment portfolio. Its Investor Responsibility Framework, released in March 2022, promised to develop metrics for using an ESG lens backed by quantitative and qualitative research in time for its 2022 ESG report. By 2023, that goal still was proving elusive. States the report:

Over the last year, we considerably deepened our understanding of how to best achieve net-zero through emissions reduction, manager engagement, and investments in climate solutions. Looking ahead, we will continue to review and consider improvements in data quality and availability, advocate for enhanced emissions disclosure by managers and companies, analyze our public equity carbon footprint for benchmarking, and reassess our ability to set interim portfolio emissions targets in spring 2024.

The report provides no analysis of whether its ESG emphasis has boosted or diminished its return on investment.

The fund's  performance compared to peer institutions over five years, ten years, and twenty years has been superb.

But 2023 was a bust. States the website: "Fiscal year 2023 was challenging for diversified institutional portfolios with significant allocations to private investments. UVIMCO’s Long Term Pool gained 2% and underperformed the 12.3% return generated by its policy portfolio."

UVIMCO out-performs its peers by wide margins for twenty years, then it allocates twelve percent of its portfolio according to environmentally sustainable criteria, then it massively under-performs by ten percentage points. An unrelated coincidence? A one-year blip? Perhaps brighter financial minds than mine can shed light.