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January 27, 2014
Sustainable Investment Helps Support Missions of Foundations
    by Robert Kropp

Finding that relatively few foundations manage their assets according to sustainable investment strategies, the US SIF Foundation publishes a guide to help them do so.


Charitable foundations traditionally invest their assets in order to increase the amounts they can provide through philanthropy. It stands to reason then that by maximizing their returns of investment, foundations can use those profits to increase the benefits they provide to society.

But what constitutes a superior return on investment may not be so straightforward when one considers the long-term investment approach taken by foundations. In Unleashing the Potential of US Foundation Endowments: Using Responsible Investment to Strengthen Endowment Oversight and Enhance Impact, a report recently published by the US SIF Foundation, the Bill and Melinda Gates Foundation—by far the nation's largest private foundation, according to the report—provides a cautionary tale of what can happen when a foundation's investments fail to align with its mission.

“In 2007, the Bill & Melinda Gates Foundation came under fire in a Los Angeles Times exposé on the foundation’s $423 million worth of investments in oil companies,” the report states. “The article described how the daily gas flaring of Italian petroleum company Eni, one of the Gates Foundation’s investments, spewed soot and fumes into the village of Ebocha in Nigeria, bringing environmental and social destabilization to the local population.”

Almost half the foundation's assets “have been in companies that countered the foundation’s charitable goals or socially concerned philosophy,” the report quotes the article as stating.

“Today, relatively few foundations are taking advantage of mission, impact or other sustainable and responsible investing strategies,” the report finds. Nevertheless, the report identifies at least 100 foundations that employ some form of sustainable investment in their strategies, and the likelihood is that the number is considerably higher. In 2012, the US SIF Foundation identified about $60 billion in assets under management by foundations that utilize environmental, social, and corporate governance (ESG) criteria in their investment strategies. At least a dozen foundations have filed shareowner resolutions as well.

Foundations should consider sustainable investment strategies, the report advocates, “not only to advance their missions but to fulfill fiduciary duty.”

One longs for the ideal world in which the concept of fiduciary duty is emphatically decided by the 2005 Freshfields report and its Fiduciary II sequel, but alas we do not appear to be there quite yet. Thus the report from US SIF describes at length the reports' conclusions that incorporating ESG criteria into investment decision-making may well constitute fiduciary duty. Furthermore, the report goes on to quote from FSG Social Impact Advisors, which argues in 2008 that “there is considerable and growing evidence that taking social and environmental considerations into account may actually increase investment returns for the long-term investor. If so, then considering such factors would not conflict with profit maximization.”

“Foundations in the United States collectively control billions of dollars in assets,” the report concludes. However, “the investment strategies for most of these assets do not affirmatively contribute to their mission goals and broader concepts of investor responsibility.”

“Foundations have taken on the commendable task of addressing myriad societal and environmental challenges—poverty and unemployment, gender and racial inequities, excessive corporate influence on the political process, global warming and many others,” the report continues. “By employing responsible investing strategies, they can deploy more of their extensive resources in financial and human capital to further their missions and maximize their ability to achieve positive societal impact.”

“This guide provides compelling examples of foundations that have made the commitment to utilize their endowments for positive social and environmental impact,” US SIF Foundation CEO Lisa Woll said. “We hope that the information and tools provided in this report will motivate many more foundations to follow their example.”

 

 
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