REC recently began a substantial research project into the practice of responsible investment in universities. Already a few interesting numbers are surfacing.
While it is no secret that universities lost substantial amounts during the recent financial crisis, it appears that by 2009 endowments had shrunk on average by 26% from their 2007 peak. While some bounce-back occurred in 2010, endowments are still down on average about 20% on their 2007 levels. This equates to losses of tens of millions of dollars for typical endowments, a number which increases to upwards of ten billion for the largest ones. So, how should schools respond to these figures?
One possibility is to simply redouble their efforts doing the same things as they did before. Schools have a lot of ground to make up, and the habits of their investment managers, which have been ingrained over many years of training and practice, must be hard to shake. But, of course, it was arguably those habits, and the logic that informed them, that resulted in such unsustainable investments being made in the first place. From REC’s point of view, this is a concerning possibility as it may make schools less sensitive to the merits of responsible investing.
Alternatively, schools could allow this experience to prompt a radical rethink of investment practices. On the one hand, by investigating the social and environmental impact of specific investments, ethical considerations can become part of investment decision-making. But beyond this, schools will develop a greater pool of knowledge about the investments they are making, allowing a more informed and thus more accurate assessment of the risk to which they are exposed. Had schools traced their investments through to the unsustainable lending practices prevalent in the mortgage sector leading up to 2007, they could have been better placed to protect themselves when the house of cards finally tumbled.
REC’s research project is still in its early stages, and hopefully will yield some more profound insights as it progresses. Nevertheless, it is important to consider how the endowment losses it shows schools to have experienced could produce two quite opposing reactions. This provides an indication of the situation with which REC is faced. We must work hard to elevate the advantages of the latter interpretation of these losses above the temptation to pursue the former one.
How has your endowment responded?
Now that we are working on writing a community investment proposal at Tufts, we are also beginning to narrow down our list of banks. While initially searching for community development financial institutions (CDFIs), the most prevalent topic was the idea of “community”. There are so many CDFIs in the Tufts community of Medford and Somerville, not to mention Cambridge or even greater Boston. Therefore, should proximity to the school be one of the most important factors? Or would a bank with a wider community reach be most effective? These were questions we had to consider.
Next, we needed to research the banks themselves. What were their rates? Are these rates comparable to other banks (such as the bank that your school currently has its money in)? Ratings are also important, and we used independent assessment sites such as bankrate.com or bauerfinancial.com to investigate. On the other hand, try to get a real sense for your banks reputation with local residents. For example, a bank that we were looking at was voted “highly” by small business owners in a local poll. Those factors can be just as significant when choosing a bank. It’s also valuable to get a feel for the bank customer service. Is the bank responsive to your calls? When you arrive at the bank, is your presence acknowledged? One of the main reasons we are encouraging community development banks is their personal touch and commitment to the community, so make sure that you can really see this in a tangible way. Banking with a bank like this might also encourage students to move their money and make the school feel more secure with its decision.
Finally, assessing a CDFI’s community commitment is crucial. This isn’t very hard to do – community banks have a professed desire to work within the community, and they will provide evidence of their initiatives and programs. Once you begin comparing banks, those with exceptionally high commitments will stand out. If you are still unsure, or want to know more about their real impact, you could also independently research some of their community programs. A CDFI with a high and demonstrated community commitment is priority. It will signal to your school administrators the real value of their placing the endowment in the bank and will strengthen town-gown relations so much more than simply moving money into a local bank would. Furthermore, a bank’s extensive community commitments might signal their receptiveness at working with your school later on to create co-curricular opportunities between your bank, school, and the community.
There is a lot that must go into bank research, and it can get confusing. However, try to think about the two “R”s – Reach and Reputation. The bank’s reach refers to its commitment within the community and what that community is; while reputation refers to its literal financial reputation but also its relationships with the community. Your list will inevitably begin to narrow.
Good luck “shopping”,