Foundations can be smarter investors

Stephen Viederman
Stephen Viederman

Stephen Viederman

Foundations are like old-fashioned slot machines: They have one arm and are known for their occasional payout.

The 2007 report, Design to Win: Philanthropy’s Role in the Fight Against Global Warming, for example, called for $600 million in additional grant money, beyond what foundations were currently giving.

Never mentioned was the then $600 billion in assets that could be added to the “fight against global warming.”

Foundations can exercise their ownership of companies by voting their proxies.

They can invest in communities to help mitigate and adapt to climate change.

And they can invest in a variety of climate-related financial instruments that can obtain market rate returns.

Finance seems to be the disowned stepchild of philanthropy.

Highly acclaimed books on philanthropy, such as Joel Fleischman’s The Foundations, examine boards and grants and strategies, but not finance.

And the reviews of these books rarely call attention to this omission.

Think of how much more bang for the buck foundations would achieve if they used both of their arms — the 5 percent making up the grants, and the investable capital that makes possible the grants — the “other” 95 percent.

By not using both arms, by failing to use all of their resources in support of their missions, foundations are failing to meet their fiduciary duty.

There is no doubt this is legal, and it may be obligatory to fulfill foundation’s fiduciary duty.

Way back in 1997, William McKeown, then a lawyer at a leading New York firm, concluded that, “to fulfill their responsibility to see that the corporation [non-profits and foundations] meets it charitable purposes, they may have a duty to consider whether their investment decisions will further those charitable purposes, or at least not run counter to them.”

In the same year, Lewis Solomon, Theodore Rinehart professor of business law at George Washington University Law School, demonstrated that “whether bound by the common law prudent investor rule or the business care rule, fiduciaries of nonprofit entities are permitted to consider social and environmental factors when making investment decisions.”

In the late 1990s, “consideration” of social and environmental factors was a maturing art.

Today, the full integration of financial and environmental, social and governance factors is becoming mainstream.

“Sustainable investing” reflects our understanding that issues such as climate risk, labor and environmental supply chains, and human rights are tangible and financial, not intangible and extra-financial as they had previously been described.

The firms associated with this trend are Goldman Sachs, Deutsche Bank, Dow Jones Sustainability Indexes, HSBC and many others.

In addition to competitive returns, harmonizing mission and finance add value to the impact of the foundation’s mission.

If you are concerned about legality, call your lawyer and ask him how to do it, not if youcan.

The process is fun, a word not often used in the same sentence with finance.

Everyone — board, staff, and even, occasionally, grantees — becomes engaged in the all aspects of the foundation’s mission, and that is truly an essential aspect of meeting fiduciary duty.

Stephen Viederman, former president of the Jessie Smith Noyes Foundation, serves on the finance committees of the Christopher Reynolds Foundation and the Needmor Fund, and consults with foundations on meeting their fiduciary duty.

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