Alliance@PND

Through an agreement with UK-based Alliance magazine, PND is pleased to be able to offer a series of articles about global philanthropy.

Time to Change the Way We Invest

Time to Change the Way We Invest

A growing number of foundations are deploying a portion of their capital to mission-aligned investment strategies. This is an important trend. Still, only a small number of foundations seek positive environmental and social impact with their investments — and often with only a small share of their corpus. A recent U.S. study found that of the $908 billion of foundation assets under management, environmental or social criteria are applied to just 7.5 percent of the total. The study also identified only fifty-nine foundations that applied such criteria to more than 50 percent of their endowments. Most opted instead for a small carve-out for mission alignment — or failed to apply any criteria at all.

Why are more foundations not jumping on the mission-investing bandwagon and deploying a greater share of their assets to social and environmental causes? In today's complex global economic system, financial institutions and corporate actors directly shape environmental and social conditions. As investors, we seek to benefit from those systems, and we literally own a share of the companies we invest in. We, therefore, have some degree of accountability for their social and environmental impact.

Advocates for mission investing typically have framed their arguments as an opportunity. We can use our investments to seed innovation, scale solutions, and/or build economic opportunity for communities, with finance another tool in our toolbox. Yet few foundations today have a theory of change about how their investments should be used or how they might contribute to their broader objectives. Why?

Perhaps we're just not having the right debate. Instead of asking how we can we have positive impact with our investment practices and corporate holdings, maybe we should ask whether we are driving harm with those practices and holdings. Are we compromising our fundamental mission to serve the public good for which we receive our charitable tax status? Are our investments contributing to climate change, creating inequality, undermining women's rights, or supporting a system of financial secrecy that allows investors to escape paying taxes or hide corruption?

When framed this way, foundations should feel a greater urgency and sense of responsibility to scrutinize their investments and investment practices. Simple surveys of potential harm might expose whether those investments actually undercut the work of grantees seeking to address social and environmental ills. Mission alignment might be seen as a way to reduce inconsistencies in stated aims and actual practice — and minimize our vulnerability when such inconsistencies are publicly exposed. Many foundations have been the subject of exposés about their investments in shady companies and human rights-violating industries even as they fund organizations committed to fighting those practices. It's only after we've assessed the potential harm caused by our investments that we can begin to examine the opportunities for positive impact that exist alongside our traditional grantmaking.

Of course, the firewall between program and investment staff is a very real barrier to having this debate. Too often foundation investments are managed on a different side of the office (or in a different office altogether) by a specialized team with traditional financial skills that receives little input from program or issue experts. It is ultimately up to the foundation presidents and trustees to call the question. Are we contributing to the problems we ask our grantees to solve? And are we leaving money on the table that could help in achieving our goals?

If you own fossil fuels, you own climate change

Perhaps nowhere is this harm clearer than with the issue of climate change, whose impacts threaten the mission, programs, and grant recipients of every chartered foundation. The world faces a climate emergency and has little more than a decade left to dramatically reduce emissions of greehhose gases to keep the planet below catastrophic levels of warming. It is increasingly untenable for any investor — let alone those whose mission is to serve society — to own stocks in companies that are driving this crisis, refuse to develop business plans aligned with a 1.5 degree global warming cap, and continue to lobby governments to do nothing.

We need to transition to renewable energy quickly. This will require both capital and significant government intervention. It has been argued that every investor needs to put 5 percent of their portfolio into climate solutions if we are to get off fossil fuels in the required timeframe. Mission investors can play a particularly crucial role by also investing in communities likely to be left out of plans to move to large-scale renewable energy systems (e.g., those in rural areas).

By committing to divest from fossil fuels and invest in climate solutions, philanthropy can both reduce its climate and pollution impacts and help scale urgently needed solutions. Today, nearly two hundred foundations have made the pledge to "divest-invest," a remarkable level of consensus around an investment strategy, and yet utterly inadequate when one considers the thousands of foundations in existence and the dire threat posed by climate change.

Hedging inequality?

Climate, pollution, and fossil fuels are not the only harm that lurks in nearly every foundation portfolio. Most foundations are invested in funds that hold companies whose complicated global registration is designed to escape taxes, starving governments of revenues that could fund social programs, help alleviate poverty, and reduce inequality. Many foundations are invested in hedge funds that are registered offshore so as to escape scrutiny of their often-risky and (sometimes) illegal holdings. Apart from questions of transparency, such investments are seen as "giving life to an institutional arrangement which is basically nefarious and bad for our global society," says noted economist and Nobel laureate Joseph Stiglitz. Indeed, the publication of the Paradise Papers proved embarrassing for a number of large foundations that were investing in hedge funds in the Cayman Islands with significant holdings in some of the dirtiest fossil fuel companies. (The possibility of corruption and the desire for greater transparency has led our foundation to divest from all hedge funds.)

It's no surprise that many publicly-traded companies and private equity firms have faced scandals over violations of human rights in their supply chains, extreme gender pay inequity, various labor violations, and/or corrupt dealings with dictators. Some of these violations could never be predicted in advance, but companies that adhere to Environmental, Social and Governance (ESG) standards are far less likely to run foul of international human rights standards, gender-based abuses, corruption, and industries that pollute and exploit communities and ecosystems.

What about the money?

Today, over $12 trillion in assets under management are ESG-integrated; this is no longer a cottage industry. Moreover, a growing body of academic research and a slew of recent studies by independent nonprofits show that you do not have to sacrifice returns to invest sustainably and responsibly. ESG-screened indexes have been outperforming their benchmarks for twenty-eight years on a risk-adjusted basis.

The Wallace Global Fund began its journey with mission investing in 2009 and has been fully ESG-integrated across the whole investment portfolio since 2012. Our portfolio is fossil fuel free and is more than 15 percent invested in climate solutions, with rigorous gender and human rights screens and a carve-out for highly transformative impact investments designed to advance women's empowerment and community development at a fair rate of return. The portfolio has outperformed its financial benchmarks by a substantial margin each year since 2012, including a 21.6 percent return in 2017. Given the threats to democracy and climate worldwide, the board decided to put those returns back into grantmaking in 2018, doubling our program budget. Ethically, we did not feel we could grow our endowment with so much at stake and so many good organizations needing to build their capacity to respond to the crisis we face.

To be clear, we are committed to environmental and social impact alongside healthy financial returns. We recognize that the values of short-termism and shareholder primacy inherent in the modern financial system are creating economic instability, but we are getting excellent returns and creating impact, which should be of interest to foundations that are wedded to market rates of return.

At the same time, by eliminating the wall between investments and grantmaking, we have unleased new levels of creativity within our foundation. Our board, investment committee, and staff meet frequently to discuss goals and how we can use grants and investments to realize them. As a result, we have helped seed new initiatives that align investment capital with field-building and advocacy initiatives and have supported social movements that are calling for new economic models based on environmental sustainability and human rights — and have been able do so without being hypocritical or inconsistent.

Our investments are not perfect, and we consistently strive to improve on them. It's what we do every day with our grantmaking, so why not do the same with our assets? No doubt there are some hidden problems in our portfolio that we may have missed — we still operate wihin an imperfect system — but by trying to avoid harm and improve our impact, we are better serving the public good.

Six simple steps to a better portfolio

Many foundation presidents and their trustees avoid developing a theory of change about their investments because the process is difficult and requires all parties concerned to examine deeply held values and longstanding practices. Based on our experience, we believe there are six simple steps foundations can take to create a better, more sustainable and responsible investment portfolio:

Have the debate. Convene a discussion among the board and senior staff. Pose the questions: Are our investments harming the public good? Do they undercut the work of our grantees? Are we leaving money on the table that could help the grantees and communities we work with, as well as society at large? Be prepared: the discussion is likely to unfold in unpredictable ways.

Know what you own. Survey your investments, and ask your staff and board to look at what you hold. Then do an initial scan of the environmental and human rights records of the companies in which you are invested. 

Apply your organizational values. One of the best exercises you can engage in is to develop a statement of principles as they apply to your investments. It will prove to be both illuminating and inspiring.

Redefine return expectations. Establish a standard of return that incorporates social and environmental impact into your financial expectations. Identify what level of financial AND environmental and social risk you are willing to tolerate. When your investment advisers howl, remind them that they work for you. If they can't or won't or do what you expect, there are plenty out there who will. 

Put some resources into it. You probably spend a fair amount of money on managing your grants. There's no reason why you shouldn't also put resources into assessing and changing the social impact created by your investments. Do the research and bring in experts to guide you.

Don't let perfection be the enemy of "get going now." Even modest steps will improve your impact and infuse your foundation with new energy and a sense of purpose.

In the final analysis, the existential threats facing the planet and societies around the globe require us to deploy every tool in the toolbox in service to our missions. We can strive to improve our impact, or we can settle for complacency and culpability. The choice is really quite simple.

Ellen Dorsey is executive director of the Wallace Global Fund.