By John Cochrane
There’s little doubt that impact investing has generated a lot of excitement, but has it translated into action? The Council on Foundations and Commonfund Institute conducted a recent survey to ask foundations about their understanding, implementation, and perceptions of four “responsible investing” strategies:
- Carbon divestment;
- Mission related investment in enterprises that align with charitable purpose (MRI);
- Positive screening of firms with good track records on environmental, social, and governance issues (ESG); and
- Negative screening of firms engaged in industries that might contravene charitable purpose (SRI).
Of nearly 200 respondents, about a third were using or considering one of these strategies when investing their endowed assets. Some of the trends echoed earlier research. Larger foundations were more likely to already be adopters, for instance. But when you move beyond those raw numbers, and look at some of the perceptions and motivations, you can draw out a few newer insights.
- There’s still a lot to learn.
Foundation respondents frequently cited a lack of understanding of the products and strategies on offer in the responsible investing field. Amidst the flurry of new terms and products available, it’s an understandable predicament. For almost as many of our respondents who said they were using or considering a responsible investing strategy, just as many – 31 percent – said their board had “no understanding” of the difference between ESG and SRI.
Nearly half of participants – 48 percent – couldn’t say whether any of these strategies were consistent with a board’s fiduciary duty. Importantly, this concern is being addressed. The state Uniform Prudent Management of Institutional Funds Acts (UPMIFA) have long allowed nonprofit boards to include charitable impact as one factor in making prudent investment decisions. And guidance from the Treasury Department and IRS was released shortly after this survey concluded echoing that on the federal level.
However, despite these statistics, there are indications from the survey that, once exposed to the concepts, foundation leaders understand their promise. One community foundation respondent admitted flatly that they had no knowledge of the terms covered in the report, but said “these investing practices … will be discussed at our next investment committee meeting.” And a number of family foundations cited interest from next gen trustees in exploring these strategies. It seems that foundations get the potential impact of putting endowed dollars to work today and tomorrow
- Returns will still be a concern.
The single biggest impediment to adoption of these strategies is still a concern that returns will be sacrificed. This is understandable when you consider that the focus of the study was on the endowed funds of foundations. Most foundations count on a return in excess of their payout requirement and administrative expenses in order to ensure they can continue to support their communities and grantees year over year.
What will be interesting to explore, however, is whether this focus shifts at all as markets cool and 7 percent annual returns look less realistic. Faced with the prospect of declining purchasing power of their grant dollars, interest could grow for investments that pay financial and social dividends.
There will also need to be more research into the true impact of mission-alignment on returns. Funds divested from oil outpaced the market as crude prices fell in recent years. And with the decision to divest from the private prison industry in June of last year, Columbia University and others avoided the dramatic fall in prices those shares experienced when the Department of Justice announced it would move to end contracts with such firms. Though the decision was not taken for financial reasons, the school likely avoided millions of dollars in losses. Are these examples one-offs? Or are social movements growing in pace and scale to the point that they need to factor in investment decisions?
- A chance to push boundaries?
Foundations seem to be interested in how responsible investing can help push the boundaries of their work. The most often sited impact area that foundations would consider investing in was economic development – something that many foundations would like to pursue but which can prove difficult to pursue under the standard rubric of charitable purposes. Other key impact areas related to research and development in areas like renewable energy – things that feel more like commercial activity but still have social outcomes.
Whether it’s the place-based foundation looking to invest in “main street not wall street” or the national funder that’s divested from carbon and looking to what’s next, responsible investing tools and products could provide new avenues to accomplish these goals.
So as grantmakers and seekers consider the size and scope of the problems they hope to tackle, they’d do well to remember that the tool box is still growing.
John Cochrane is Associate Director, Social Innovation, at the Council on Foundations. His work includes programming for philanthropists and stakeholders around impact investing and other emerging forms of financing to leverage private dollars for public good.