St. Paul investment officer focuses on diversity, ESG because it's good for business

Shannon O'Leary, chief investment officer of the St. Paul & Minnesota Foundation, continues to be a trailblazer with her growing $1.9 billion investment portfolio.

Before COVID-19, O'Leary increased investment in U.S. manufacturing and distribution companies to guard against the supply-chain disruption and other threats posed by excessive outsourcing to Asia. That has paid off.

And she worked with Peregrine Capital, one of the foundation's outside investment managers, to develop a related fund.

O'Leary also is urging the investment industry to diversify its ranks and to embrace more environmental, social and governance (ESG) considerations in investment decisions. She wants portfolio managers to demonstrate improvement in those areas over time.

Growing research reveals that companies that strive toward ESG and consider community and environment as well as stockholders perform at least as well as market indexes, according to Morgan Stanley Institute for Sustainable Investing, based on the performance of nearly 11,000 mutual funds from 2004 to 2018.

Moreover, Morningstar, the mutual fund analyst, reported that 80% of Morningstar-rated ESG indexes with five-year histories outperformed non-ESG counterparts through 2021.

O'Leary also for several years has asked fund managers with which the foundation contracts to evaluate their diversity, equity and inclusion practices.

"I was not surprised to find that the majority of the funds we were invested in were not led by diverse teams, and a number of them did not have effective DEI policies," O'Leary recalled. "At the foundation, we are committed to advocating for equity, knowing that we can't meet our vision for a just and vibrant state otherwise."

So, knowing diverse decisionmaking teams consistently outperform others, the foundation created a framework to evaluate DEI practices and consistently and clearly communicate "where we expect to see improvement." If the practices are not improved, the foundation will terminate the contract.

A growing number of "talented investment managers" in all types of asset classes are increasingly taking DEI seriously, and there's "no need to work with folks who are not aligned with our values,'' O'Leary said.

Recently, the St. Paul & Minnesota Foundation became the first U.S. community foundation to become a United Nations Principles of Responsible Investing (UNPRI) signatory. And the foundation's work on DEI evaluation was incorporated into its recently released UNPRI diversity, equity and inclusion due diligence protocol.

That kind of notoriety has led to engagements for O'Leary, said Casey Shultz, a 15-year veteran of technology startups, entrepreneurship and venture capital organizations, who joined the foundation last year as director of investor relations.

"Shannon has completely redone our investment practices,'' Shultz said. "Shannon is being asked to tell how she's done it. The investment industry has been slow to change."

The St. Paul & Minnesota Foundation, Minnesota's largest community foundation, has posted superior returns over the last five years compared with its benchmark of the MSCI All Country World Stock Index and the Bloomberg U.S. Aggregate Bond Index.

A recent Bank of America Merrill Lynch study found companies that perform poorly in ESG metrics are more likely to go bankrupt. In fact, 15 of 17 S&P 500 companies that went bankrupt between 2005 and 2015 scored poorly on ESG five years earlier.

Part of the problem is that the investment industry is still set up as a high-charging, 80-hour-a-week schedule to advance. That atmosphere tends to draw professionals in traditional household set-ups where one spouse stays home.

Recently, a Los Angeles fund contacted O'Leary over an investment manager — a high-potential woman of color, a mother, who was resistant to the long hour culture.

The solution: Less can be more.

"You ask the men who [advance], and they are not happy that they missed their kids' childhood," O'Leary said. "If we change there will be more diversity. And diverse groups make better decisions because they are less inclined toward 'group think.'''

Consulting firm PWC reported recently that growing stakeholder interest in ESG and DEI results is rooted in doing the right thing that "can drive better outcomes."

"The D&I initiatives aren't simply an add-on to a company's objectives; much like the rest of ESG, they go beyond sustainability officers," PWC concluded.

Corporate leadership needs to communicate the ethical and performance imperative, enshrine it in the strategic plan, and tie it to management objectives and consequences. The proof is in the financial results of those that do.