Better Understanding Responsible Investing Practices

July 22, 2016 |
3 minute read
|

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.

Vikki Spruill

Author

Vikki Spruill

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.