Blog: Amplify

Responsible Investing and Foundations

This post originally appeared in the Philanthropy Journal on September 26, 2016.

There’s little doubt that impact investing has generated a lot of excitement, but has it translated into action? The Council on Foundations and Commonfund Institute conducted a recent survey to ask foundations about their understanding, implementation, and perceptions of four “responsible investing” strategies:

  • Carbon divestment;
  • Mission related investment in enterprises that align with charitable purpose (MRI);
  • Positive screening of firms with good track records on environmental, social, and governance issues (ESG); and
  • Negative screening of firms engaged in industries that might contravene charitable purpose (SRI).

Of nearly 200 respondents, about a third were using or considering one of these strategies when investing their endowed assets. Some of the trends echoed earlier research. Larger foundations were more likely to already be adopters, for instance. But when you move beyond those raw numbers, and look at some of the perceptions and motivations, you can draw out a few newer insights.

  1. There’s still a lot to learn.
    Foundation respondents frequently cited a lack of understanding of the products and strategies on offer in the responsible investing field. Amidst the flurry of new terms and products available, it’s an understandable predicament. For almost as many of our respondents who said they were using or considering a responsible investing strategy, just as many – 31 percent – said their board had “no understanding” of the difference between ESG and SRI.

    Nearly half of participants – 48 percent – couldn’t say whether any of these strategies were consistent with a board’s fiduciary duty. Importantly, this concern is being addressed. The state Uniform Prudent Management of Institutional Funds Acts (UPMIFA) have long allowed nonprofit boards to include charitable impact as one factor in making prudent investment decisions. Andguidance from the Treasury Department and IRS was released shortly after this survey concluded echoing that on the federal level.

    However, despite these statistics, there are indications from the survey that, once exposed to the concepts, foundation leaders understand their promise. One community foundation respondent admitted flatly that they had no knowledge of the terms covered in the report, but said “these investing practices … will be discussed at our next investment committee meeting.” And a number of family foundations cited interest from next gen trustees in exploring these strategies. It seems that foundations get the potential impact of putting endowed dollars to work today and tomorrow

  2. Returns will still be a concern.
    The single biggest impediment to adoption of these strategies is still a concern that returns will be sacrificed. This is understandable when you consider that the focus of the study was on the endowed funds of foundations. Most foundations count on a return in excess of their payout requirement and administrative expenses in order to ensure they can continue to support their communities and grantees year over year.

    What will be interesting to explore, however, is whether this focus shifts at all as markets cool and 7 percent annual returns look less realistic. Faced with the prospect of declining purchasing power of their grant dollars, interest could grow for investments that pay financial and social dividends.

    There will also need to be more research into the true impact of mission-alignment on returns. Funds divested from oil outpaced the market as crude prices fell in recent years. And with the decision to divest from the private prison industry in June of last year, Columbia University and others avoided the dramatic fall in prices those shares experienced when the Department of Justice announced it would move to end contracts with such firms. Though the decision was not taken for financial reasons, the school likely avoided millions of dollars in losses. Are these examples one-offs? Or are social movements growing in pace and scale to the point that they need to factor in investment decisions?

  3. A chance to push boundaries?
    Foundations seem to be interested in how responsible investing can help push the boundaries of their work. The most often sited impact area that foundations would consider investing in was economic development – something that many foundations would like to pursue but which can prove difficult to pursue under the standard rubric of charitable purposes. Other key impact areas related to research and development in areas like renewable energy – things that feel more like commercial activity but still have social outcomes.

Whether it’s the place-based foundation looking to invest in “main street not wall street” or the national funder that’s divested from carbon and looking to what’s next, responsible investing tools and products could provide new avenues to accomplish these goals.

So as grantmakers and seekers consider the size and scope of the problems they hope to tackle, they’d do well to remember that the tool box is still growing.

Comments

Great to see COF move the needle forward! As you know, it's incredibly hard to advance this idea, but the good news is that there's now a vast, credible, and robust infrastructure across all asset classes, for aligning core values with investment policy and practice. Add to that wider acceptance and agreement as to the value-add of incorporating multi-capital (e.g., financial, human, social, environmental, built environment, civic moral) risk and opportunity in investment decision making. That's been my life's mission, in pursuit of democracy's promise. From my doctoral days at Harvard, with Paul Ylvisaker as my adviser, to today, I've worked to raise educate, empower, and engage fiduciaries and their stakeholders — including the public, which knows very little about what's possible — to this form of accountable capitalism, which could go a long way toward remedying the ills that currently plague us. Via Ylvisaker, almost 30 years ago, then-COF president James P. Joseph retained me to conduct an analysis of ethics and values in philanthropic decision making, including asset management. The result, a product of in-depth interviews and a survey: "Moral Values, Philanthropy, and Public Life: Recasting the Connections," published in 1989. Indeed, in 1986 I presented a paper, "Mixing Asset Management and Social Policies: Socially Sensitive Investing in the 1980s" at the annual COF conference, one of many such engagements through the next ten years or until President Clinton appointed Jim Joseph as ambassador to South Africa. In 1992, whilst still at the Council, Joseph retained me to examine grantmakers' response and opportunity to heal racial and economic divisions, through both grantmaking and asset management. That report, "Undimmed by Human Tears: American Cities, Philanthropy, and the Civic Ideal," was animated by the 1992 Rodney King shooting in Los Angeles. The findings, based in a series of in-depth interviews with leading grantmakers and urban policy experts, remain especially relevant today. On the community foundation side, in the late 1990s I helped The Boston Foundation become the nation's first community foundation to adopt responsible investing criteria affecting its endowment; the story was told in a 2005 article in the Stanford Social Innovation Review: https://ssir.org/articles/entry/the_other_95_percent All of this is to say that those few of us who have worked on this for a long time — Lou Knowles was the Council's point person on this, back in the day, as Director of Special Programs (1984-94) — take special pleasure in seeing the issue take hold, finally. Yet, there are some classic barriers and stumbling blocks that remain. The key one: creating demand. Unlike universities or pension funds, there's no "demand" yet, other than via the funds themselves. Financial advisers certainly are eager to see it, but they've failed to create demand, too (even though many are dearly beloved colleagues). I'm currently working to change that, and introduce more civic voice and agency in the process. I'm developing a pilot here in Boston that would involve all tax-exempt institutional investors (there are 29 classifications of tax-exemption) in a "Civic Fiduciary Council" and the general public (who underwrite these entities) in a "Civic Stewardship League" that helps to promote responsible investing, under the rubric "civic fiduciary". The proposition is quite simple: that, as a taxpayer-supported entity, these organizations have agreed to advance the public interest, a grand bargain that applies to asset management as well as operational decision making. The impacts can be felt both laterally (multi-capital, multi-asset, including pooled funds) as well as vertically (local, state, regional, national, global). I welcome further opportunities to communicate with the Council, on this or any other aspect of responsible investment. It's only fitting and proper that this kind of historical "due diligence" be conducted. I the meantime, keep up the good work!

Great to see COF move the needle forward! As you know, it's incredibly hard to advance this idea, but the good news is that there's now a vast, credible, and robust infrastructure across all asset classes, for aligning core values with investment policy and practice. Add to that wider acceptance and agreement as to the value-add of incorporating multi-capital (e.g., financial, human, social, environmental, built environment, civic moral) risk and opportunity in investment decision making. That's been my life's mission, in pursuit of democracy's promise. From my doctoral days at Harvard, with Paul Ylvisaker as my adviser, to today, I've worked to raise educate, empower, and engage fiduciaries and their stakeholders — including the public, which knows very little about what's possible — to this form of accountable capitalism, which could go a long way toward remedying the ills that currently plague us. Via Ylvisaker, almost 30 years ago, then-COF president James A. Joseph retained me to conduct an analysis of ethics and values in philanthropic decision making, including asset management. The result, a product of in-depth interviews and a survey: "Moral Values, Philanthropy, and Public Life: Recasting the Connections," published in 1989. Indeed, in 1986 I presented a paper, "Mixing Asset Management and Social Policies: Socially Sensitive Investing in the 1980s" at the annual COF conference, one of many such engagements through the next ten years or until President Clinton appointed Jim Joseph as ambassador to South Africa. In 1992, whilst still at the Council, Joseph retained me to examine grantmakers' response and opportunity to heal racial and economic divisions, through both grantmaking and asset management. That report, "Undimmed by Human Tears: American Cities, Philanthropy, and the Civic Ideal," was animated by the 1992 Rodney King shooting in Los Angeles. The findings, based in a series of in-depth interviews with leading grantmakers and urban policy experts, remain especially relevant today. On the community foundation side, in the late 1990s I helped The Boston Foundation become the nation's first community foundation to adopt responsible investing criteria affecting its endowment; the story was told in a 2005 article in the Stanford Social Innovation Review: https://ssir.org/articles/entry/the_other_95_percent All of this is to say that those few of us who have worked on this for a long time — Lou Knowles was the Council's point person on this, back in the day, as Director of Special Programs (1984-94) — take special pleasure in seeing the issue take hold, finally. Yet, there are some classic barriers and stumbling blocks that remain. The key one: creating demand. Unlike universities or pension funds, there's no "demand" yet, other than via the funds themselves. Financial advisers certainly are eager to see it, but they've failed to create demand, too (even though many are dearly beloved colleagues). I'm currently working to change that, and introduce more civic voice and agency in the process. I'm developing a pilot here in Boston that would involve all tax-exempt institutional investors (there are 29 classifications of tax-exemption) in a "Civic Fiduciary Council" and the general public (who underwrite these entities) in a "Civic Stewardship League" that helps to promote responsible investing, under the rubric "civic fiduciary". The proposition is quite simple: that, as a taxpayer-supported entity, these organizations have agreed to advance the public interest, a grand bargain that applies to asset management as well as operational decision making. The impacts can be felt both laterally (multi-capital, multi-asset, including pooled funds) as well as vertically (local, state, regional, national, global). I welcome further opportunities to communicate with the Council, on this or any other aspect of responsible investment. It's only fitting and proper that this kind of historical "due diligence" be conducted. In the meantime, keep up the good work!

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