Better Understanding Responsible Investing Practices
How can you do the most good, with limited resources, when facing enormous problems? That question lies at or near the heart of every decision at a foundation. This is true of the grant dollars which support community institutions and provide for social services, and it is true of the endowed dollars which are invested to in order to fund future grantmaking – providing for generations to come and needs unforeseen.
By carefully stewarding money held in the public’s trust, a foundation’s board can ensure that an initial philanthropic gift can grow over time, multiplying – many times over – and providing a strong financial base to advance the foundation’s mission. And many today are asking if those investments can be invested in other ways, beyond traditional grantmaking, to deliver benefits to the communities and complement the efforts central to the foundation’s mission.
THINKING ABOUT RESPONSIBLE INVESTING
At the Council on Foundations, we set out with our partners at the Commonfund Institute to get a better understanding of how foundations are thinking about the use of their capital.
- To what extent are foundations deploying new investment practices that align with their charitable missions?
- What motivates them to act and what might stand in their way?
- What do these practices tell us about the overall field of philanthropy?
With these questions in mind, we jointly conducted a survey of nearly 200 private and community foundations – the largest such study to date. We asked how these foundations invest their endowed assets.
Specifically, we looked at whether they have adopted or are considering adopting one of four “responsible investing” practices:
- negative screening of harmful assets;
- positive screening of enterprises rated well on environmental, social, and governance factors;
- direct impact investing in alignment with mission; or
- divestment from fossil fuels.
The headline number? Over a third said yes.
Take a second for that to sink in, and you’ll realize this is a big deal. If more than a third of foundations are involved in any conversation, it’s safe to say we’re past the point of trending topics and looking at potentially transformational developments.
For some, the questions rose from the calamitous realities of the Great Recession, like high unemployment, homelessness, and debt. Many foundations recognize the scale of today’s challenges, so they’re looking to unlock new resources to make a meaningful impact. Others are looking to powerful social movements, like the campaigns for divestment from Apartheid South Africa and fossil fuels, for instruction on the conscientious use of capital. The conversations on HOW to use financial resources has been robust with no less of an authority than the Vatican weighing in on the moral impetuses to action.
This survey is so important because it tells us about the motivations and challenges faced by foundations entering the discussion for the first time.
WE’RE STILL LEARNING WHAT THE TREND TOWARD RESPONSIBLE INVESTING MEANS
Above all else, foundation staff and trustees are still learning about these strategies, their potential, and how to implement them. Foundations have a legal duty to wisely steward their assets. The survey showed that 48% of those surveyed couldn’t say if these new strategies of mission driven investment were consistent with that fiduciary duty.
Fortunately, as this survey was being conducted, the Treasury Department released guidance – long sought by the Council and our partners – confirming that investing with an eye to charitable purposes is indeed an appropriate way to manage an endowment. It will be exciting to see if that newfound clarity does indeed spur more action.
However the biggest question remains – what happens to financial returns?
An endowment that grows over time may sustain a community for generations. Strong investment returns today fund tomorrow’s programs, and a healthy balance sheet gives foundation’s the capacity to step up in the face of crisis when government and business are strained. Foundations are currently facing a marketplace defined by uncertainty, volatility, and waning returns, so those responsible for the responsible use of foundation resources may rightfully wonder if its right to pursue mission aligned investments. Or they might wonder if they can afford not to.
Some trailblazers have put up the hypothesis that investing in values-aligned companies can actually net you above market returns. The theory has worked for many, but it’s probably too soon for definitive statements. Certainly a place-based foundation that invests in Main Street sees returns beyond the bottom line, but we must determine how to properly account for that impact.
Fortunately those pioneers and all those foundations at the forefront are building out the evidence to understand what is truly possible. The research, case studies, finance studies, and models of today will provide the insights for tomorrow. Donors and stakeholders are increasingly aware of these options and increasingly seeking them out. And when the board of a foundation takes up the issue, they’ll benefit from knowing how their peers have succeeded – and sometimes failed – in the past.
At the Council, we’ll continue to engage our members as they enter the conversation, and we’ll continue to work for a supportive regulatory environment. And if together we are all successful, we’ll continue to push philanthropy to be the most effective, the most responsive, and the most impactful it can be.
The full Council on Foundations-Commonfund Study of Responsible Investing is available at no cost to all at http://www.cof.org/content/council-foundations-commonfund-study-responsible-investing-foundations-survey-2016.
