By Ashok Kamal
Ashok Kamal’s research paper on capital markets and mission-related investing was written for Baruch’s MBA program. This paper won a 2009 Abraham J. Briloff Prize in Ethics, an award intended to stimulate scholarship in the field of ethics, with an emphasis on ethics in professional life.
Introduction: The Role of Philanthropic Foundations in Society
The philanthropic community in the United States is haunted by a dark shadow. While the 72,000 active foundations control an aggregate sum in excess of $600 billion, less than 1% of their assets are directed into investments that align with their philanthropic missions (Kramer, 2006, p. 43). This sobering juxtaposition not only represents an underutilization of resources, but also raises important questions about the manner in which the vast majority of foundation money is actually being spent. These issues arise just as philanthropy enters its golden age and arrives at a new ethical and strategic crossroads.
Philanthropy is already a growth industry, and experts anticipate an imminent cascade of billions of additional dollars into foundation coffers (Gertner, 2008, ¶ 1). The volume of wealth controlled by foundations makes them a significant investor in corporate America. In fact, as a collective, foundations hold more than 2% of the total market value of U.S. equities (Williams, 2003, p. 38).
The evolving nature of philanthropy in the 21st century is causing many pundits to re-examine its unique role in society. Bernholz (2004) asserts, “the framework that is fit to philanthropy must be modified somewhat from that of a purely commercial industry analysis” (p. 11). Gertner (2008) states, “the question that troubles many of the newest philanthropists, though, is whether their bequests will have a notable impact” (¶ 2). Porter and Kramer (1999) argue, “not enough foundations think strategically about how they can create the most value for society with the resources they have at their disposal” (p. 121). To optimize results, innovation is clearly in order.
By design, foundations are established to serve the public, compensating for market inefficiencies and governmental inadequacy. Traditionally, foundations have focused almost exclusively on grant giving as the means to support their missions, viewing their investment portfolios simply as a vehicle to support grants. Humphreys (2007) states, “most foundations tend to be invested for the long term. Foundations are distinguished from many other institutional investors, however, by their explicit philanthropic mission” (p. 2). After all, foundations invest on behalf of the public for its shared benefit, not private clients for personal financial gain. For this purpose only, foundations are afforded the privilege of tax exemption.
Although U.S. foundations are required by law to annually pay out at least 5% of their assets in order to maintain tax-exempt status, the average donate only 5.5%, allocating the remaining 94.5% of their funds in financial instruments intended solely to maximize net worth (Porter & Kramer, 1999, p. 122). Emerson, Freundlich, and Berenbach (2004) contend, “this is akin to an iceberg with the vast majority of its mass submerged below the water line and only an icy 5% ‘tip’ visible. The rest of the iceberg – the majority of a foundation’s corpus – is lurking below the waterline, undoing the value – and values – investors strive to create” (p. 8). In a real sense, the 5% of funds paid out each year is discounted by two additional costs that diminish social value: firstly, foundations deduct their own administrative expenses – accounting for several billion dollars annually, and secondly, grantees incur added overhead costs in order to satisfy the foundations’ increasingly stringent administrative demands (Porter & Kramer, 1999, p. 122). As a consequence, the strongest financial muscle of foundations lies in their investments, not grants. Jill Ratner, President of the Rose Foundation for Communities and the Environment, asserts, “if you have a large endowment, the power of that money to create change is probably more than the power of your grantmaking” (Jantzi, 2003, p. 13). However, examination of foundation investment portfolios has revealed a startling fact; many foundation investments actually contradict their charitable missions. The result is that both effectiveness and efficiency are undermined, devaluing net impact. Paul Hawken of the investment research firm Natural Capital Institute declares, “foundations donate to groups trying to heal the future, but with their investments, they steal from the future” (Piller et al., 2007, p. A1).
This literature review will explore the financial management responsibilities of charitable foundations by addressing the controversial topic of mission-related investing. I will begin by discussing traditional foundation investment philosophy, while pointing out conflicts that have surfaced between many foundation missions and investment portfolios. As a response to conventional practices, I will then provide an overview of the emergence of mission-related investing and its primary approaches to asset management. By reviewing evidence and examples both in support and against the mission-related investing paradigm, I will address the challenges and opportunities facing practitioners who wish to implement mission-related investing strategies in order to create social and financial value.
The Fundamentals of Mission-Related Investing
Origins and Genesis. The tension between mission and money plaguing many foundations has ignited a debate regarding investment responsibility in the foundation community. Emerson and Kramer (2007) relate, “the historical contradiction hidden in the philanthropic closet has been a quiet little secret for years. Most foundations create a firewall between the grant making and their investment management, usually overseen from a distance and entrusted to professional managers charged with maximizing financial returns, often at the expense of social or environmental values” (p. 40). Despite this dilemma, many leaders maintain that foundation portfolio managers, like their corporate counterparts, should concentrate solely on maximizing returns in order to increase grantmaking dollars. Monica Harrington, a senior policy officer at the Gates Foundation, revealingly stated, “investment managers have one goal: returns” (Piller, Sanders, & Dixon, 2007, p. A1).
On the other hand, critics of this philosophy argue that foundations have an intrinsic responsibility to consider the total consequences of their investment activities and must allocate their assets accordingly. Sharon B. King, President of the F.B. Heron Foundation, proclaims, “harnessing the power of the capital markets for positive social and environmental impact is essential. It is appropriate that tax-advantaged institutions, such as foundations and endowments, begin to invest for mission in a thoughtful and rigorous way” (“Cambridge Associates,” 2008, ¶ 7). F.B. Heron’s board made the conscious decision “that the foundation should be more than a private investment company that uses its excess cash flow for charitable purposes” (Holmström, 2007, p. 21). This nascent school of thought aims to reduce the dissonance between programmatic and financial activities by employing management vehicles such as stock screens and promoting shareholder engagement. Termed mission-related investing (MRI), and also known as aligned investing, mission-based investing (MBI), and values-based investing, the objective is to generate a more holistic return on investment – one that enhances, rather than detracts from, the advancement of a foundation’s mission. Olsen and Tasch (2003) explain:
Mission-related investing is the practice of aligning foundation assets investment with philanthropic mission. It enhances the philanthropic pursuit by considering whether and how the externalities generated by the foundation’s asset investments strategy may counter the foundation’s mission, and by judiciously harnessing the power of investment assets to drive positive social and environmental benefits. (p. 5)
MRI is a derivative of socially responsible investing (SRI), which is America’s fastest growing field of professionally managed assets. Overall, SRI assets increased 18% to $2.71 trillion between 2005-2007, while the broader universe of professionally managed assets increased less than 3% to $25.1 trillion (Social Investment Forum, 2008, p. ii). However, the origins of MRI date back to well before the late 20th century. Jantzi (2003) recounts that the first incarnation of MRI “can be traced back to Victorian England, primarily to the early Quaker company pension funds that restricted investments in armament manufacturers – an investment policy that was aligned with the mission and teachings of the church” (p. 4).
MRI stands on three foundational pillars: screening, shareholder advocacy, and proactive mission investing such as mission-related venture capital or community investing (Cooch & Kramer, 2007, p. 3). While several tools for MRI exist, this paper will focus on two of the most prominent: employing investment screens and shareholder activism. These distinct approaches may be implemented independently or simultaneously as complements. Taken together, the strategies have empowered the foundation community to exercise greater discretion over its investments and created a forum to exert its influence. With practical tools for MRI becoming widely accessible, Markham (2004) argues, “screening portfolios and, just as important, taking an active role in corporate governance should be a part of every organization’s policy and practice” (p. B24). Humphreys (2007) concurs, stating, “with a growing diversity of investment instruments and services, it has now become easier than ever for foundations to embrace SRI strategies” (p. 3).
Investment Screening. Investment screens are based upon one of two paradigms. Negative screens are intended to eliminate support of companies that engage in undesirable corporate activity. Depending on the preferences of the institution doing the screening, companies are “screened out” according to the nature of their business activity. Historically, the majority of screens have been premised on business involving tobacco, alcohol, gambling, military, weapons, environmental degradation, adverse community relations, poor employee relations, unfair treatment of women and ethnic groups, and substandard product quality and attitude toward consumers (Kinder, Lydenberg, & Domini, 1994, p. xvii). As of 2006, 14 of the 50 wealthiest private foundations acknowledged using at least one negative screen in their investing practices (most commonly tobacco), including the David and Lucile Packard Foundation, Carnegie Corporation of New York, and Robert Wood Johnson Foundation, but only one – the Gordon and Betty Moore Foundation – reported actively screening its investments to explicitly exclude companies in conflict with its mission. Nine others would not comment on such practices (Lipman, 2006, p. 12). Negative screening may also occur based on a company’s governance practices, such as its propensity to commit legal violations including breaches of workplace safety standards and environmental regulations. While this method assists asset managers in making investments that coincide with a foundation’s values, it simultaneously reduces portfolio exposure to risk associated with penalties levied against its holdings. Therefore, such screens can actually promote greater financial returns by avoiding companies that lose money due to punitive legal judgments.
On the other hand, positive screens are designed to identify and support companies whose actions align with the values of an investor. While negative screens seek to divest from and evade objectionable stocks, positive screens deliberately direct investment to businesses that coincide with a foundation’s mission. For example, the $1.8 billion Doris Duke Charitable Foundation, which is dedicated to environmental causes, recently decided to invest only in timber businesses where forests are sustainedly managed (Piller, 2007, p. C1). The results can be mutually rewarding to investors, society, and companies alike; Humphreys (2007) points out, “socially responsible businesses can develop competitive advantages in their markets by engaging their stakeholders, creating useful products, effectively managing their supply chains, limiting their exposure to social and environmental risks, and finding and retaining the best talent through supportive, diverse workplaces and responsive employee-benefit programs” (p. 3). In an effort to broaden opportunities for foundations interested in investing in underserved communities, the F.B. Heron Foundation partnered with Innovest Strategic Value Advisors to launch the Community Investment Index, which positively screens companies in each industry of the S&P 900, based on community engagement factors such as corporate strategy, workforce development, and corporate philanthropy. After the inaugural beta tests in 2006, the index yielded competitive results, returning 15% compared to 15.3% for the S&P 900, and 13.2% for the Domini 400, the premier large-capitalization SRI benchmark (Southern New Hampshire University, 2007, p. 12).
Screening, of either type, is a subjective process. There is no absolute rule governing what a given foundation deems to be favorable and what is off-limits – the judgment is strictly based on its unique perspective and values. Therefore, some critics perceive screening to be a fundamentally flawed strategy based on incomplete information. Nocera (2007) states, “rare is the company, after all, that is either good or bad. To put it another way, socially responsible investing creates the illusion that the world is black and white, when its real color is gray” (p. C1). Entine (2007), of the American Enterprise Institute, is even more blunt in his rebuke of SRI: “the dark secret of ‘social investing’ is that it is neither art nor science: it’s image and impulse” (p. A11). In light of these concerns, proponents of MRI have enacted careful methodologies to effectively fulfill their institutional objectives. The process could best be described as both art and science.
Christina Adams, Vice President of Finance for the Fetzer Institute, a Michigan-based research foundation, states, “it’s not easy to come up with screens – we arrived at them by doing a survey that asked the staff, partners, and trustees what screens they thought would reflect the institute’s mission” (Baue & Thomsen, 2003, ¶ 8). In describing the screening process undertaken by the Jessie Smith Noyes Foundation in the early 1990s, then-President Stephen Viederman (2002) recounts that after an initial board impasse attempting to achieve consensus on appropriate screens, “further discussion led to a set of positive and negative screens around the environment and women’s issues, reflecting the foundation’s programs and mission” (¶ 7). Although time-consuming and energy intensive, the efforts by Fetzer and Noyes not only add a moral dimension to their investments, but also allow their stakeholders to take ownership of the institutions’ leadership. This approach stands in contrast to the passive attitude of most foundations, where asset management is seen as a peripheral function to be outsourced to external money managers who have little connection to the institution’s purpose.
The popularity of screening continues to grow at a robust pace; there are now more than 200 different socially screened mutual funds and pooled investment products, representing a diverse array of investment styles, asset classes, and social priorities. Humphreys (2007) reports, “assets in socially screened mutual funds have increased from $12 billion in 1995 to $179 billion in 2005, making them the fastest growing segment of SRI in the U.S.” (p. 9). Experts believe the progression of screening is ongoing, as 65% of investment managers responding to Mercer Investment Consulting’s 2005 Fearless Forecast survey believe that screening will become a mainstream practice within a decade (Humphreys, 2007, p. 8). Evidence also suggests that screening may be positively affecting the behavior of some corporations who covet upgrades to their social ratings. Viederman (2002) states, “Innovest Strategic Value Advisors provides information to the financial world on the environmental performance and management capacities of corporations, and has recently been approached by CEOs of a number of Fortune 100 companies asking what they needed to do to obtain higher Innovest ratings. Some of the other organizations that provide rating of companies, including KLD, report similar approaches” (¶ 9).
The Social Investment Forum Foundation provides guides to foundations dedicated to specific causes who want to implement tailor-made screening practices. For example, health foundations may negatively screen their portfolios for companies that profit from fast-food or tobacco industries, environmental grantmakers can target companies with “eco-efficient” operations, human rights funders may employ investment criteria related to international fair labor conditions, and community foundations that support economic development can invest in companies with strong community relations departments or lending institutions that provide capital to financially underserved populations (Humphreys, 2007, p. 4). Nevertheless, applying screens may be perceived as too challenging for some institutions. The Vermont Community Foundation investment committee explored screening strategies, but eventually decided that there was a dearth of screens that satisfied all of its stakeholders; as a result, it launched a separate “socially responsible investment pool” and focused on other MRI practices (Kasper, Bernholz, & Fulton, 2007, p. 5).
Shareholder Activism. As an alternative to screening, advocates of shareholder activism endeavor to use their investment positions to positively influence the behavior of mainstream companies. Some foundations vote their proxies, a document serving as a ballot that also discloses important information about corporate issues and governance. The right to vote is afforded to all shareholders who want to influence management and the corporate decision-making process during annual meetings. Humphreys (2007) asserts, “the proxy is a material asset, which can serve as a key tool for actively promoting sound corporate governance, holding companies accountable for their impacts, and promoting long-term shareowner value” (p. 12). For example, the $6.1 billion MacArthur Foundation instituted a policy for voting shareholder proxies “to reduce or eliminate a substantial social injury caused by a company’s actions” (Piller, 2007, p. C1).
Foundations that seek to be even more aggressive can file their own shareholder resolutions to address issues of particular concern. Like screening, this approach transfers responsibility away from disconnected financial managers and empowers the foundation to exercise its will according to its philanthropic purpose. Lipman (2006) states, “in the vast majority of cases, private money managers cast the proxies in support of whatever position a company’s management supports – and that almost always is the opposite of what a shareholder resolution seeks” (p. 7). Investors who continuously own shares worth at least $2,000 in any U.S.-listed publicly traded company for one full year can file shareholder resolutions to be voted on at the company’s annual meeting (Humphreys, 2007, p. 13). Proposals are categorized either as governance, focusing on traditional management issues such as selection of directors, or as social, calling for reports or policy changes on social or environmental issues (As You Sow and Rockefeller Philanthropy Advisors, 2007, p. 1). Proactive dialogue with management may also be less formal. Foundation officers, trustees, and staff can write letters to company executives and board members to introduce topics related to social and environmental issues that fall within the purview of the foundation’s mission.
Although every branch of shareholder activism requires extensive involvement and acute knowledge of a company’s operations, it has proven to be effective in furthering the demand for increased corporate responsibility. In particular, the Nathan Cummings Foundation, whose founder created the food conglomerate Sara Lee, has exemplified the power of shareholder engagement to promote its interests of advancing human health and environmental justice. With an endowment valued at more than $500 million, the Cummings Foundation participated in thirteen shareholder resolutions in 2006, including attempts to persuade Bed, Bath & Beyond and Home Depot to improve energy efficiency in their stores and to require greater disclosure of greenhouse gas emissions by Ultra Petroleum and Valero Energy (Beatty, 2007, p. W2). Although such activism may not garner a majority of shareholder votes, the minimum underlying goal is to raise public awareness and initiate conversation by getting the foundation’s ideas on the company’s agenda.
In a heralded case demonstrating the potential efficacy of shareholder activism, the Noyes Foundation leveraged the support of one of its resolutions to successfully convince Intel to revise its environmental health and safety policies (Emerson, 2003, p. 44). In another successful case, the Needmor Fund, a family foundation dedicated to empowering disadvantaged populations, joined a shareholder coalition to push Taco Bell’s parent company, Yum! Brands, to improve working conditions for farm workers. After four years of engagement, Yum! agreed to a historic settlement that increased wages and applied a General Supplier Code of Conduct for growers across Florida (Humphreys, 2007, p. 13). One of Needmor’s grantees, the Coalition of Immokalee Workers, had already been working on behalf of this largely immigrant workforce – showcasing the ultimate synergy that can be realized between a foundation’s grantmaking and investing strategy.
Skeptics question whether the administrative costs of shareholder activism are prohibitive or impractical to foundations with budgetary or staffing constraints. Dowie (1998) reveals that one consequence is that “some foundation boards refrain from voting altogether as a matter of policy” (¶ 12). Lipman (2006) relates, “a big reason foundations hesitate to get involved in proxy votes is that they say it would drain too much of their staff’s time. For example, Hewlett’s [the William and Flora Hewlett Foundation] President, Paul Brest, says the foundation does not oversee its own proxy voting because doing so would require hiring more staff members” (p. 7). Other foundation executives disagree. The Noyes Foundation reviewed 117 company proxy statements in 2005 without needing to expand its staff (Lipman, 2006, p. 7). Lance Lindblom, President and CEO of the Nathan Cummings Foundation, clarifies, “it is not expensive to vote proxies. Voting proxies is a 30 second action over a computer. Investors can also contract with proxy services to handle this for them with a set of guidelines and that is not expensive” (“As SRI Matures,” 2007, p. 1). Apparently, the Hewlett Foundation has even altered its previous position, reflecting the contagious alacrity of MRI’s progression; Piller (2007) reports that the $8.5 billion foundation “recently decided to vote shareholder proxies to reflect its charitable aims” (p. C1). Some groups, such as the As You Sow Foundation and Rockefeller Philanthropy Advisors, also provide free, annual proxy-season previews to educate foundations and expedite tasks.
Shareholder resolutions may be more expensive to operationalize than other MRI strategies, but coalitions and networks such as the Interfaith Center on Corporate Responsibility (ICCR) provide useful resources that facilitate action and drive down cost (Humphreys, 2007, p. 8). In 2007, ICCR accounted for two-thirds of the more than 350 proposals filed in the first quarter (As You Sow and Rockefeller Philanthropy Advisors, 2007, p. 2). The practice of shareholder activism has become so prevalent that 89% of respondents to the Mercer Investment Consulting survey predicted that strategies such as shareholder advocacy and proxy voting will become mainstream within the next decade (Humphreys, 2007, pp. 8-9). The range of foundations already involved with shareholder activism is astonishing, including juggernauts such as the Ford Foundation, stalwarts such as the Educational Foundation of America, and smaller institutions such as the Colin Higgins Foundation (As You Sow and Rockefeller Philanthropy Advisors, 2007, p. 14).
The Evolution of Mission-Related Investing
Despite the recent momentum in support of MRI, only a minority of philanthropic institutions presently consider the social costs of their investments; the Council on Foundations reports that 82% of foundations “do not take social, environmental, or other nonfinancial factors into account when managing their greatest economic tool for fulfilling their organizational mission – their financial assets” (Emerson, 2003, p. 41). The illustrations of divergence between mission and investing practices are alarming. For instance, a foundation purporting to fight global warming might also invest heavily in Big Oil, a lucrative sector yet a notorious source of greenhouse gases. More specifically, the Charles Stewart Mott Foundation, dedicated to an equitable and sustainable society, owns $7 million in Chevron stock. At the same time, the Mott Foundation supports Amazon Watch, an environmental group that has spent years trying to force Chevron to disclose its expenditures defending a $5 billion lawsuit in Ecuador that accuses the company of neglecting to clean up pollution (Lipman, 2006, p. 9). One of the nation’s largest philanthropies, the W.K. Kellogg Foundation, which aims to create conditions that propel vulnerable children to achieve success, makes a large number of grants to health organizations while simultaneously owning stock in tobacco companies known for harming health in marginalized communities (Lipman, 2006, p. 9). Dowie (1998) relates, “environmental grantmakers like the Pew Charitable Trusts with large holdings in oil, chemical, timber, and mining companies represent an especially striking paradox. Other instances are less obvious – such as when a foundation committed to racial justice holds shares in companies with wretched equal-opportunity records” (¶ 4). Moreover, the conflict between mission and investing is not exclusive to liberal, politically leftist institutions. Dowie (1998) highlights the case of the Lynde and Harry Bradley Foundation, a $500 million institution known for supporting right-wing causes, “yet its endowment contains millions of dollars worth of stock in entertainment behemoths like Disney, Time Warner, Viacom, News Corporation, and Harrahs, whose business lines and products routinely outrage Bradley’s conservative grantees” (¶ 6).
A recent high-profile exposé on the Bill & Melinda Gates Foundation magnified the scope and salience of this controversy. Piller (2007) asserts, “the Gates Foundation reaps vast profits every year from companies whose actions contradict its mission of improving society in the United States and around the world, particularly the lot of people afflicted by poverty and disease” (p. A1). Among other dubious investments, the investigative report disclosed that the Gates Foundation had significant holdings in companies with infamous track records of predatory lending, medical malpractice, and child labor violations (Piller, 2007, p. A1). As the world’s largest foundation, with an endowment of $35 billion, the practices employed by Gates have significant implications upon the foundation community and society at large. Its investment decisions have unparalleled influence on others and leave behind a massive residual footprint. Yet the Gates Foundation reflects the modus operandi of most foundations, being unique primarily in the scale of its investment activity; it is estimated that $8.7 billion of its assets are held in companies that counter the foundation’s charitable goals or socially concerned philosophy (Piller et al., 2007, p. A1).
At best, such contradictions reduce a foundation’s impact toward the advancement of its mission. At worst, these discrepancies may offset the beneficial effect of grants – and in the most extreme examples, can even result in a foundation doing more harm than good. An anonymous senior foundation official (2007) points out, “investments that exacerbate social ills – whether hunger, sickness or environmental damage – all carry hard-dollar costs that can be estimated. The chief investment officers do not have to bear these costs, true. But someone does. So the foundation boards and investments officers are free-riding on others’ burdens” (Bernholz, 2007a, ¶ 4).
With such great wealth under foundation control, it behooves leadership to realize the great service potential that exists in strategic asset management. Foundations have the capacity to exponentially expand their positive impact by leveraging their immense capital power. Domini (2001) asserts, “by giving away 5% and investing 5%, foundations can effectively double their annual budget for good works” (p. 123). Spearheaded by a handful of maverick foundations that embraced a shift to their investment approach, more and more institutions are being compelled to re-examine the societal implications of their asset portfolios. Increases in industry scrutiny, greater management understanding, and enhanced public pressure to invest more responsibly have fueled the growth of MRI.
For more than a decade, the Noyes Foundation, whose goal is to promote a sustainable society, has taken a strong stance in favor of aligning its $60 million in assets with its mission. Viederman (1995) explains:
By investing with the sole aim of economic self-interest, we would endorse the market orthodoxies in which all growth is good and any contradictions are explained away as side effects and externalities. By profiting from passively holding stock of a company whose environmental impact is being challenged by one of our grantees, we would put our self-interest before the interests of our grantees. (p. 5)
With a keener appreciation for the relationship between mission and investing, the number of foundations engaging in MRI has been growing substantially. The MRI universe now includes every type of foundation – private independent, private family, operating, corporate, and community – with private independent foundations leading the growth (Cooch & Kramer, 2007, p. 14). Over the past ten years, the figure of foundations participating in MRI has doubled while the sum of new foundation dollars invested in mission-related investments has tripled (Emerson & Kramer, 2007, p. 40). Mission investments’ annual growth rate averaged 16.2% between 2002 and 2007, compared to just 2.9% during the preceding thirty-two years (Cooch & Kramer, 2007, p. 2). The Annie E. Casey Foundation, for instance, has allocated $100 million, or 3% of its total assets, to MRI (“Cambridge Associates,” 2008, ¶ 6). The F.B. Heron Foundation has 26% of its assets in mission investing, which it wants to increase to 50% by year-end 2010, and the $730 million Meyer Memorial Trust community foundation has $40 million in investments aligned with its mission, with plans to increase that figure substantially (Anonymous, 2008, ¶ 5-7). The Blue Moon Fund, which seeks environmental sustainability and social equity, is in the process of moving 25% of its endowment into mission-related investments (Stannard-Stockton, 2007, ¶ 12).
Additionally, the visibility and credibility of the MRI movement has been expanding, in large part due to the elite stature of some of its most recent converts. Piller (2007) asserts, “in a sharp break from past practice, major charitable foundations are initiating or strengthening efforts to harmonize the social and environmental effect of their endowment investments with their philanthropic goals” (p. C1). Today, foremost institutions such as the Ford Foundation – the nation’s second-largest private philanthropy, the MacArthur Foundation, and the Rockefeller Foundation, are factoring social and environmental impact when planning and executing their investment strategies (Piller et al., 2007, p. A1). Ford’s Chief Investment Officer, Linda Strumpf, comments, “the board has for many years felt that if we were going to be long-term investors, then we must be responsible for the long-term effects of our investments on our mission” (Lipman, 2006, p. 7). Adds Donna Dean, Chief Investment Officer of the $3.5 billion Rockefeller Foundation, “increasingly, we look for investments that provide a social benefit as well as the financial return we expect” (Piller, 2007, p. C1).
A consortium of major foundations recently launched the “2% for Mission” campaign, an effort to galvanize MRI within the philanthropic community. The objective of the campaign is to urge foundations to increase MRI to 2% of all U.S. foundation assets over the next five years, which would result in roughly $10 billion committed to investments yielding a social outcome consistent with each foundation’s mission (“New Guidebook,” 2007, ¶ 2). Such strategies may lead to more targeted attacks against the enduring social problems that foundations are designed to tackle. Bernholz (2004) points out that “the kinds of benefits described as public – child welfare, arts promotion, education – are enormous pursuits requiring the resources of many, not just the resources of a few. To the degree that individuals, organizations, and foundations committed to a certain set of environmental goals can aggregate their financial and intellectual resources, they will advance their opportunity for success” (p. 143).
Many foundations memorialize their commitment to MRI with written investment policies. For example, the Rockefeller Foundation (2008) publicizes its Social Investing Guidelines, describing its specific experience with MRI (¶ 4). The Lydia B. Stokes Foundation (2008), with its mission to empower people to help themselves, uses its investment policy statement to delineate its philosophy and corresponding mission-related investments, including strategic guidelines and performance measurement and reporting procedures (¶ 1). As a sign of the changing tides of MRI, even the Gates Foundation (2008) now posts a description of its investment philosophy, which highlights its social values and approach to managing the endowment (¶ 5). As a general framework, a comprehensive investment policy for MRI will encompass a statement of fiduciary responsibility, investment philosophy, investment goals and guidelines, asset allocation strategies, and evaluation mechanisms (Foundation Partnership, 2008).
The recent boom in MRI has created a veritable cottage industry of money management professionals who consult with foundations to develop MRI strategies. Blue Haven Capital, for example, has four boilerplate MRI portfolios (Education, Human Services, Environment, Health) and can customize an investment basket for individual clients that aligns with specific philanthropic missions. Moreover, the company employs sophisticated research and analytic techniques to accurately categorize investment opportunities; Blue Haven Capital has systematically reclassified 98% of the investable U.S. market into mission-related categories using data from firms such as Goldman Sachs, Charles Schwab, Standard & Poor’s, and Morningstar (Blue Haven Capital, 2008). In another mark of MRI’s market viability, Cambridge Associates, a leading global provider of independent investment advice and research to institutional investors and private clients, recently announced the launch of its Mission Investing Group to take advantage of the rapidly growing demand for MRI. The Group will develop a detailed understanding of key players in the MRI field, construct a manager database, define best practices for implementing MRI programs, provide annual performance reports for each type of MRI strategy, and create a MRI resource guide (“Cambridge Associates,” 2008, ¶ 1-4).
A plethora of new resources has also become available to foundations interested in implementing MRI strategies. For example, a new handbook from the Social Investment Forum Foundation, entitled “The Mission and the Marketplace: How Responsible Investing Can Strengthen the Fiduciary Oversight of Foundation Endowments and Enhance Philanthropic Missions,” includes a step-by-step section on “Getting Started with Mission-Related Investing” that walks foundations through the process of commencing a MRI program. Tim Smith, Social Investment Forum Chair and Senior Vice-President of Walden Asset Management, explains, “in today’s era of ‘engaged’ philanthropy, with ‘venture philanthropists’ seeking more entrepreneurial, market-based solutions to social and environmental problems, responsible investing strategies have become increasingly embraced by many foundations seeking to leverage the full range of assets at their disposal” (“New Guidebook,” 2007, ¶ 5). The growing chorus of MRI supporters contends that MRI is not only a good practice for foundations, but it is the right thing to do as well. A recent report in the Financial Times concludes, “trustees of charitable foundations devoted to making the world a better place may rather be failing to maximize their leverage if they do not pursue SRI strategies” (“Practicing What They Preach,” 2007, p. 6).
Challenges to Mission-Related Investing
Legal Concerns. Given the traditional profit-maximization policy of most foundation investment managers, the legality of MRI has been scrutinized by legal scholars and philanthropy leaders. Foundations abide by two primary fiduciary guideposts set forth by the law: the first is the prudent-investor rule, which directs a fiduciary to manage a trust as a prudent investor would with his or her own assets. When applied to private trusts the federal law is supplemented by an American Law Institute statement that prompts trustees to “invest and manage the funds of the trust as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the trust” (Dowie, 1998, ¶ 8). The other major fiduciary consideration is the business-judgment rule, under which “the governing board of a charitable corporation is free to use its own business judgment as to the use of charitable assets, as long as the board acts in what it believes to be the charity’s best interests” (McKeown, 1997, p. 75). Lewis Solomon and Karen Coe confirm that “fiduciaries of not-for-profit organizations in the U.S. are permitted to consider social and environmental factors when making investments decisions” (Jantzi, 2003, p. 21).
The evidence suggests that MRI is not only a perfectly legal strategy, but also may be the most responsible performance of fiduciary duty that can be employed by foundation trustees. Attorney W.B. McKeown (1997) concludes, “in order to fulfill their responsibility to see that the corporation meets its charitable purposes, they [board members] may have a duty to consider whether their investment decisions will further those charitable purposes, or at least not run counter to them” (p. 77). Luse (2007) adds, “more recently, a study for the United Nations Environmental Program by Freshfields Bruckhaus Deringer, the world’s third-largest law firm, came to the same conclusion” (¶ 4). Jantzi (2003) asserts, “in addition to being a prudent analytical approach to investing, for institutional investors the MBI process can strengthen the institution’s fiduciary responsibility by aligning mission with asset management” (p. 3). In fact, the social value of an investment can even justify a below-market financial return, simply on the grounds of mission alignment. Kinder, Lydenberg and Domini (1992) contend, “the board of an organization devoted to furthering racial justice could justify, on the basis of its purposes, choosing to invest in a company with an outstanding equal employment opportunity policy, even if its dividend rate were less than that of another company without such a policy and record” (p. 276-277).
William M. Dietel (2007), Chairman of the Board of the F.B. Heron Foundation in New York, states, “I believe that effective stewardship entails the deployment of the foundation’s assets to their highest and best use. Too many foundation boards, however, limit their view of fiduciary oversight. They accept a narrow interpretation that assumes the best thing a board can do is to maximize the financial value of the endowment” (p. 1). As with any fiduciary responsibility, the decision-making process may be more critical than the outcome. To ensure mission congruence and appropriate governance, John Ganzi recommends three steps to follow for foundations interested in making mission-related investments: document how it relates to the mission, document due diligence supporting the investment decision, and undertake continuous monitoring to ensure that the investment complies with mission-related objectives (Olsen & Tasch, 2003, p. 16).
Some advocates argue that foundations should be penalized for failing to integrate MRI into their investment approach. Jed Emerson, a scholar on philanthropy and visiting fellow at the University of Oxford, believes that Congress should consider removing the tax-exempt status of foundations that ignore the impacts of their investments on their missions (Lipman, 2006, p. 8). Emerson considers MRI a matter of legal accountability:
The most dangerous scandal that is about to break is the scandal of trustees who are forgoing the fulfillment of their fiduciary responsibility by turning over 95% of the assets that they supposedly are overseeing to outside actors who are managing those assets with no reference whatsoever to the social or environmental mission of their institution. If that’s not a violation of fiduciary responsibility, I don’t know what is. (Lipman, 2006, p.8)
A modified tax scheme would, for example, provide exemption only to mission-related investments, while taxing the remainder of a foundation’s endowment. Other experts warn, however, against the possibility of too much change, too quickly. Without a more standardized set of practices for MRI, Stannard-Stockton (2007) cautions, “if we require things from philanthropic entities before an infrastructure is in place, we will do nothing but water down the very concepts we hope to support. Imagine what would happen if a new law was announced that levied a special tax on non-organic food. . . . We would see a dramatic decline of what the word ‘organic’ even meant” (¶ 10). Nevertheless, government controls have always driven changes affecting the intersection between capital markets and the rest of society. Drawing upon the history of discount brokerages and pension plans, Bernholz (2007b) argues, “if we really want to catalyze a movement of investments and entities that promote and pursue sustainable values, products, and practices we need to do more than play as if there are free markets. . . . In other words, we’ve got to think about tax incentives, structural supports, and regulations” (¶ 9).
Economic Concerns. One of the primary hurdles to large-scale diffusion of MRI is the perception that social investments, by nature, yield substandard financial returns. Tim Smith believes “the so-called ‘conscience penalty,’ that a social investor will perform below their benchmark, is still among the biggest misconceptions” (“As SRI Matures,” 2007, p. 1). Jantzi (2003) explains a methodological flaw that has contributed to the “conscience penalty” myth:
Those studies that show a negative correlation between MBI and financial return have not been particularly well researched, according to MBI professionals. For example, a 1995 study by the Research Foundation of the Institute of Chartered Financial Analysts reached its “negative” conclusions regarding MBI by relying on studies from the 1980s before any data existed on the topic. (p. 12)
Humphreys (2007) asserts, “whether measured in terms of market penetration, performance, impact, or breadth of products and providers, the success of SRI as an investment discipline has increasingly been recognized by individual investors and institutions alike” (p. 3). And John B. Guerard Jr., former Senior Vice President and Director of Quantitative Research at Vantage Global Investors concludes, “there is no statistically significant difference between average returns of a socially screened and an unscreened universe” (Jantzi, 2003, p. 11).
With more than a decade-long track record to draw upon, SRI funds demonstrate a highly competitive social and financial performance. For example, the Dow Jones Sustainability Index (DJSI) has outperformed its unscreened benchmark, the MSCI World, by more than 3% since 1993; the Neuberger Berman Socially Responsible Fund has beaten its unscreened benchmark, the S&P 500 Index, over 1, 3, 5, and 10 years; and the Calvert Social Investment Fund Equity Portfolio has been awarded 5 Morningstars (Humphreys, 2007, p. 6-7). The Domini Social Index (DSI), launched by KLD Research and Analytics in 1990, has outperformed the S&P 500 on a total return basis and on a risk-adjusted basis since its inception (Jantzi, 2003, p. 40). One of the most talked about SRI funds to date, Goldman Sachs’ GS SUSTAIN, outperformed the MSCI World by 25% in 22 months, with 72% of its holdings beating their peers over the same period (Goldman Sachs, 2007, p. 1).
Savvy foundations have been reaping the rewards of SRI’s bounty. For instance, the F.B. Heron Foundation reports that its mission-related investments have matched and even outperformed many of its peers and traditional benchmarks of financial returns (Kramer, 2006, p. 44). Heron’s Vice President of Investments, Luther Ragin, Jr., states, “in the field of community development there are a variety of good investment opportunities across asset classes and return hurdles that not only align with our mission, but can increase the impact and reach of our work” (The F.B. Heron Foundation, 2004, p. 1). Molly Stranahan, a board member at the MRI-champion Needmor Fund, reveals that the foundation’s returns are usually as good or better than at least half of other foundations (Lipman, 2006, p. 14). Executed properly, MRI delivers the best of both worlds: competitive returns from conscionable sources.
Political Concerns. Another possible force working against MRI lies in the composition of many foundation boards. Patricia Wolf, Executive Director of the Interfaith Council on Corporate Responsibility, relates, “sitting on those boards are a lot of corporate executives.” Wolf continues, “some of those corporate people may be getting shareholder resolutions aimed at their companies” (Lipman, 2006, p. 8). Viederman (2002) suggests that many board members’ aversion to MRI may be more subconscious and less deliberate: “the culture and psychology of finance focuses on a single bottom line, which is what members of the committees have been trained to do. Furthermore, their institutional connection is secondary to their primary occupational role, and ‘being social’ may raise issues in that portion of their life” (¶ 18).
Some foundation officers are also hesitant to employ SRI practices, given that the source of their institution’s money may be derived from less than socially responsible business activity. The Hilton Foundation’s Chief Financial Officer, Patrick Modugno, states that because much of the Hilton fortune has been amassed from gambling casinos in Nevada hotels, it “would be quite hypocritical” for the foundation to target other companies who it perceives as socially irresponsible (Lipman, 2006, p. 10). Yet the founders of many celebrated modern foundations earned their wealth by engaging in industrial practices that produce negative social and environmental impacts, such as natural resource extraction, and the Rockefeller Foundation, for example, carries no stigma for embracing MRI. As Lenkowsky (2007) asserts, “what matters most is not where philanthropic dollars come from, but what is done with them” (p. 69).
Conclusion: Mission-Related Investing Going Forward
MRI is a unique process that must be tailored to fit its agents’ priorities. Humphreys (2007) states, “there is no ‘one best way’ to be a responsible investor. Each foundation has a unique set of values and very specific financial needs. Foundations must therefore determine which strategies most effectively complement their philanthropic goals” (p. 3). Foundation consultant Anne Morgan (2000) recommends developing a values statement, beyond the mission, which can help facilitate MRI: “your values statement describes issues that inform your work – how you interact with others, your closely held aspirations” (Council on Foundations, p. 1).
Additionally, the pace at which a foundation embarks upon a MRI strategy varies across the philanthropic spectrum. Olsen and Tasch (2003) state, “most foundations currently involved in MRI set a target percentage of assets and adopt an incremental approach to achieving this proportion over a number of years” (p. 13). Such an approach hedges against risk and provides ample room for adjustments based on strategic learning. All decisions can be made easier by engaging professional guidance, including MRI-wise consultants and financial firms. Philanthropic institutions commonly hire professional investment services, making added cost a matter of scant concern. In fact, despite employing external services to help develop and manage its MRI strategy, F.B. Heron’s investment management fees are below the mean of other private foundations, leading Luther Ragin, Jr. to conclude, “while each foundation will have to work at visualizing its own mission through an investment strategy, there is no need to reinvent the wheel” (Southern New Hampshire University, 2007, p. 14).
Ultimately, the distinction between money and mission is a false dichotomy. Kinder et al. (1994) proclaim, “conventional wisdom holds that you can’t mix money and ethics. Conventional wisdom is wrong. Socially responsible investors have proven it so” (p. 1). Regardless of a foundation’s mission, there is no shortage of investment opportunities that can advance its purpose while matching its tolerance for risk and need for returns. Humphreys (2007) relates, “when implemented in a disciplined manner, sensitive to a foundation’s appetite for risk and return, and focused on the long term, all strategies of responsible investing can help build true long-term wealth for the foundation and for society” (p. 18).
While MRI has only begun to receive significant attention, the concept of using money for a motive has been a long-standing hallmark of capitalist societies. Public campaigns that have improved corporate practices are well documented, ranging from pressure to stop sweatshop labor to preventing animal cruelty in the production of cosmetic and food products. The Boston Foundation was not only the first community foundation in the U.S. to vote its proxies, but also initiated its MRI efforts in the 1980s with the South African divestment campaign against apartheid (Godeke & Bauer, 2008, p. 59). A more contemporary manifestation involves actions by the Gates Foundation and its greatest benefactor, billionaire Warren E. Buffet. After a Spring 2007 report by the Los Angeles Times showed that the Gates Foundation held more than $20 million in investments in companies accused of supporting the controversial Sudanese government, which has been implicated in acts of genocide in Darfur, Gates divested itself completely from its Sudan-linked holdings, while Buffet’s company, Berkshire Hathaway Inc., sold its $3.3 billion worth of stock in PetroChina – an oil company with close ties to Sudan (Piller, 2007, p. C1). Clearly, the dollar has always been and continues to be a potent sociopolitical catalyst.
It is incumbent upon foundations to carefully consider the greater social and environmental impact of their wealth. While grants provide one avenue for achieving objectives, investment portfolios – which contain by far the greatest proportion of a foundation’s assets – represent a largely untapped and potentially invigorating source for advancing mission. Emerson (2003) declares, “foundation leadership must now work to ensure that all foundation resources and practices are in alignment with the goals and interests of the institution” (p. 47). Humphreys (2007) echoes, “with mission-related investing, foundation trustees and officers can begin to think more comprehensively about advancing their programmatic goals by leveraging the untapped potential of the full range of their philanthropic assets” (p. 3). Olsen and Tasch (2003) describe MRI’s broad benefits:
MRI offers foundations powerful new tools to achieve their missions. The strategy has potentially profound implications for environmental sustainability, international and community development, health equity, education, and many other missions. By applying a rigorous approach to the explorations of synergies between asset investment and grantmaking, foundation officers can and will unlock the potential of the massive capital resources they control. (p. 19)
Mission-related investing is redefining the concept of “return on investment” for the 21st century. Developments in social accounting, a practice designed to monetize social impact, have greatly enhanced the ability of foundations to measure and communicate the social value of both their grantmaking and investing activities. Methods such as the social return on investment model and expanded value-added statement organize qualitative and quantitative data into financial frameworks that account for societal benefits to a wide range of stakeholders (Richmond, Mook, & Quarter, 2003, pp. 311-317). Applied to MRI, social accounting can buttress foundations seeking to justify the value of investing according to their values. In other instances, though, Olsen and Tasch (2003) point out that “some investors do not see the need for explicit methodologies of social accounting for investments focused in sectors where social benefits are self-evident, such as renewable energy and community development. In these cases, social performance is presumed to be a corollary of business success” (p. 13).
Godeke and Bauer (2008) proclaim, “foundations must unleash more of their resources, not fewer, to achieve positive impacts that change communities and societies. To do that, means thinking beyond the 5% payout and considering all alternatives. Mission-related investing is an idea that adds value by creating value for all parties involved: communities, society, the marketplace, and the foundation” (p. 16). Viederman (2002) sheds light on the past and future of MRI:
It has been suggested that the obscure takes a while to see, the obvious even longer. Schopenhauer believed that all truth passes through three stages: first it is ridiculed; second it is violently opposed; and third, it is accepted as being self-evident. For most institutional investors, social investing is somewhere between stage one and two. All in all, there is reason for hope despite there being a long row to hoe. But the journey has begun. (¶ 24)
And it appears that the transformative nature of MRI is leading the philanthropic community toward greater destinations. As proven by an emerging group of foundations, mission and money need not be mutually exclusive pursuits; rather, they can be complementary means for bettering society.
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Published December 14, 2014
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