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July 22, 2003
Foundation Begins to Reconcile Investments with Programs
    by William Baue and Mark Thomsen

The Fetzer Institute uses screens and community investment to align a small portion of its assets with its social and environmental goals.

"Don't let your left hand know what your right hand is doing."

Taken out of context, this old saying could describe the attitude of many institutional investors, who completely divorce investment decisions from the institution's mission and programs. Typically, institutional investors seek to maximize investment returns to provide the most support possible for the institution. However, what if the activities of companies held in the portfolio counteract the activities of the institution?

The quote in fact originates in the Bible, and instructs alms-givers not to draw attention to their generosity. Nowadays, however, many grant-giving foundations are reexamining the actions of one hand, namely investments, and experimenting with reconciling them with the actions of the other hand, namely programs. Such is the case at the Fetzer Institute, a Kalamazoo, Michigan-based foundation with about $280 million in total assets. The Fetzer Institute supports research, education, and service programs that integrate spiritual considerations into the secular and even scientific realms.

About five years ago, Fetzer's trustees began to discuss dismantling the wall between investments and programs by adopting socially responsible investment (SRI) strategies. SRI takes into account social, environmental, and ethical considerations alongside financial considerations.

"Some trustees felt that [SRI] wouldn't make a difference, but some felt we had to be holistic in our mission on both the grant-making and on the investment side," said Christina Adams, assistant treasurer and vice president for finance at Fetzer. "These trustees were very passionate and convinced the other trustees to give it a try--there was a huge discussion that lasted for probably two years before we did anything."

After deciding to apply SRI on what is now a $7.2 million subset of its $70 million large-cap passive portfolio, the trustees had to tackle the question of which screens to use and how. The large-cap passive portfolio tracks a Northern Trust index.

"We didn't want to do negative screening, but instead to reward companies for being environmentally correct because that would eventually translate into better performance," said Ms. Adams. "It's not an easy process to come up with the 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."

The mission-related screens decided upon ended up including two negative screens that exclude tobacco and weapons. "Any defense contract and you're out," Ms. Adams said.

However, the screening focuses on positive issues, namely community development and the environment. Fetzer trustees decided to invest $1 million through the Calvert Foundation to support community development.

As for the environmental screens, Fetzer uses data supplied by the Investor Responsibility Research Center. IRRC is a non-partisan research provider that releases quarterly scores rating companies on four environmental issues: Superfund sites, toxic emissions fines, oils, and chemical spills. Fetzer chose not to value the Superfund sites, instead using the other three ratings for 33 percent of the overall environmental scores. Companies that score in the bottom 25 percent of their industries are excluded, and the remaining 75 percent of companies in the industry are overweighted.

"Most mainstream investment professionals believe as soon as you start excluding companies from your investable universe, you're going to increase volatility and decrease performance," said Ms. Adams. "We haven't seen that."

Fetzer's SRI portfolio was down 20.6 percent for 2002, while the Northern Trust index it tracks was down 21.6 percent.

"Performance has been very comparable to the other part of our passive portfolio over time," said Ms. Adams.

As for shareowner action, Ms. Adams actively votes proxies based on the screens' written guidelines.

"We're not looking into shareholder activism because we don't have the staff for it and we would have to be much more active in identifying issues," Ms. Adams said. "The market situation is dampening moves to expand, so we haven't accelerated that at all--people just want to get past this rough spot."


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