Sustainable Endowment Management
Conservation Trust Funds – Sustainable Investment Management for National Parks
Background – How I Got Involved
In July 2005 I found myself barreling down a dirt road with Francis Sabuni, Executive Director of the Eastern Arc Mountains Conservation Endowment Fund in Morogoro, Tanzania1. He was talking with animation while I asked him routine questions from an investment suitability questionnaire. “What time horizon should we consider for investment — 3-5 years, 5-7 years, 7-10 years?”, I enquired.
Mr. Sabuni answered with conviction: “500,000 years!” Then he expounded, “This national park endowment is not for us, it is for our grandchildren, and their grandchildren’s grandchildren.”
I protested that 500,000 years was not an option on the form. He said, “Put it in because that is the truth.” So, I filled in 500,000 years as the investment period, and I have heard no objection from my firm’s institutional consulting department.
It is rare for a national park to have an endowment, but they do exist. We like to think of our clients as jaguars in the forests of Suriname, dolphins in Caribbean, red pandas in Bhutan and mountain gorillas in the forests of Uganda. However, it is the human executives of these organization with whom we do our investment work.
What are Conservation Trust Funds?
In the most remote areas of many less developed countries there are rare endemic species that populate national parks and protected areas. Unlike in wealthy countries that can afford to pay to maintain parks from general revenues, these national parks need to be funded by tourism and some are too unstable or remote to attract tourists.
So, years ago, leaders from organizations including Wildlife Conservation Society, Conservation International, The Nature Conservancy, and World Wildlife Fund asked how we fund protection of nature for national parks with no revenues. The answer has been to place money into permanent endowments for nature. The governments of the Netherlands, Germany, France, the United States and Japan have joined conservation organizations and contributed tens of millions of dollars for endangered species and their habitats.
These endowments are held by Conservation Trusts, formed as non-profit organizations independent of local governments. They assist country governments and help pay for conservation activities, including community education, park guide training, ranger hiring, anti-poaching efforts and scientific research. There are more than 60 such organizations around the world.
Meeting Investment Needs
From an investment perspective there are three key drivers:
- Cash flows are needed every year to fund essential conservation programs;
- The principal value of the endowment should keep up with inflation; and
- Long-term sustainability should be accounted for in investments as in conservation activities.
Each Conservation Trust’s Board of Directors defines the terms of investment in an Investment Policy Statement (IPS). An absolute return target is defined (e.g. 6.50% annual net return) and is separated into a Spending Policy (e.g. 4.00% for annual distribution) and an inflation offset (e.g. 2.50% reinvestment). In addition, guidance on asset allocation parameters and constraints, such as to avoid low-quality bonds, are specified.
Sustainable Investing
Sustainable investment requirements are also set by the Board and spelled out in the IPS. There may be environmental, social and governance (ESG) exclusions, such as to avoid companies involved in damaging environmental processes like timber, mining or fossil fuel extraction.
Preferences may be articulated for investing in companies with superior pollution management and leadership in reducing greenhouse gas emissions (GHG). Conservation Trusts often ask for reporting that highlights the alignment of investments with the United Nations Sustainable Development Goals (SDGs).
Reporting and Monitoring
Services for Conservation Trusts include a rigorous quarterly review process which is carefully documented by each Trust’s Board. National park endowment Boards are prestigious and Board members are often leading lights in their country, including company executives, non-profit leaders, political figures and conservation scientists. They not only want good returns for the budget cycle, but also proficient and competent documentation of the investment process; they know that a large donor considering making a grant will demand such documentation, as well as evidence of adherence to sustainability standards.
The typical account for a national park endowment will hold twelve separate account strategies in a portfolio. A quarterly monitoring report assesses each investment strategy against its benchmark, and the entire portfolio is compared with a composite benchmark as well as to the total return target.
In most investment categories we combine the use of passive (index) and active (managed) investments. This allows for close tracking against the strategic benchmark with potential for outperformance. We explain to Board members that index investing guarantees underperformance to indexes, as all index managers charge a fee and performance will be reported in terms of index return less the index fee. Best-of-class active managers have the ability to outperform, due to manager style, industry weighting and security selection.
The Big Picture
For conservation endowments with blended income and growth requirements, overall asset allocation is the most important driver of performance. However, we know that keeping fees low, using a blend of passive and active investment and using sustainable investment criteria can all contribute to return. This is where a team approach helps, as specialists, including our sustainable investment analyst, provide valuable inputs.
All team members are based on the West Coast and are hikers, skiers, kayakers and outdoor enthusiasts. We are also conservationists that contribute and volunteer outside of work. Working with Conservation Trust Funds involves grueling travel, working at all hours, and engaging with demanding clients for accounts with low fees. Working for these stewards of the “last great places on Earth” is heart work for us, and for the Arbor Group team and myself, it gives meaning to our work as investment professionals.
Article by John Adams, CFP®, CIMA®, Senior Portfolio Manager, UBS Financial Services. John leads The Arbor Group in Seattle, Washington, a team at UBS Financial Services that specializes in providing fee-based, multi strategy asset management to Foundations, Endowments and high net worth families. The Arbor Group Portfolio Management Team is directed under the UBS Portfolio Management Program (PMP) and provides socially and environmentally screened, global investment portfolios for clients. The Arbor Group Institutional Consulting Services provides multi-manager investment consulting worldwide for conservation endowments.
Disclosures
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ in the U.S.
CIMA® is a registered certification mark of the Investments and Wealth Institute in the United States of America and worldwide.
Sustainable investing strategies aim to incorporate environmental, social and governance (ESG) considerations into investment process and portfolio construction. Strategies across geographies and styles approach ESG analysis and incorporate the findings in a variety of ways. The returns on portfolios consisting primarily of sustainable investments may be lower or higher than portfolios where ESG factors, exclusions, or other sustainability issues are not considered, and the investment opportunities available to such portfolios may also differ.
John Adams is a Financial Advisor with The Arbor Group at UBS Financial Services Inc., 925 Fourth Avenue, Suite 3100, Seattle, WA 98104.
Any information presented is general in nature and not intended to provide individually tailored investment advice. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc. As a firm providing wealth management services to clients, UBS Financial Services Inc. offers investment advisory services in its capacity as an SEC-registered investment adviser and brokerage services in its capacity as an SEC-registered broker-dealer. Investment advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements. It is important that clients understand the ways in which we conduct business, that they carefully read the agreements and disclosures that we provide to them about the products or services we offer. For more information, please review the PDF document at- https://www.ubs.com/relationshipsummary.
Footnote
[1] The Eastern Arc Mountains Conservation Endowment Fund is a client of the Arbor Group at UBS Financial Services Inc