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July 5, 2007 4:04 am

Socially responsible investment: Practising what they preach

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Accusations earlier this year that the world’s wealthiest foundation was pursuing investment strategies contrary to its mission goals put the spotlight on a long-standing conundrum for trustees.

The Bill and Melinda Gates Foundation was accused of investing its $32bn of endowments in companies whose activities helped cause the poverty and disease that the foundation was created to help eradicate.

As its chief executive, Patty Stonesifer, subsequently remarked, not without irony: “We have become the reference point for all the interesting questions in philanthropy.”

The core issue for foundations and charities is whether they should be using their endowments to reinforce their good works.

Penny Shepherd, chief executive of the UK Social Investment Forum, to which many British socially responsible investment funds belong, says: “There is an ongoing debate within the charity and foundations arena about investment strategies.

“Simplistically, there are two schools of thought. One school believes there should be a separation between investing and grant-making.” For this school, maximising income is the priority, so as to maximise grant-making.

“The other school – which we would support – believes you should also use your investment power to achieve your objectives.”

The argument is far from clear-cut. By one estimate, 95 per cent of charitable or foundation resources are typically invested, to generate the five per cent paid out in grants to pursue their charter objectives.

In a world of changing criteria for what constitutes Socially Responsible Investment (SRI), more and more trustees are wondering whether their investment strategies can change the world as much, or more, than their good deeds.

A study by the European Foundation Centre found 62,000 foundations in the 15 states of the pre-enlargement European Union alone. Its survey of 27,000 of them reported combined assets of €174bn, an average of over €6m per foundation. Meanwhile, it estimated, US foundations held $477bn of assets, and gave away $32.4bn in 2004.

Clearly, trustees have the investment wherewithal to exert enormous influence over corporate policies. Yet many do not. Research by Germany’s Bellagio Forum for Sustainable Development found that more than 43 per cent of foundations surveyed believed using sustainable development or social criteria in managing their assets reduces returns. Only 16 per cent said using SRI criteria increased returns while 15 per cent said it made no difference. That helps explain why only 39 per cent of foundations in the survey coordinated their mission and programmes with their asset management practices, while 61 per cent said there should be no links.

This view is losing ground, however. For example Calvert, a fund manager with $15bn under management that ranks among the leaders in SRI thinking, “believes fervently in the proposition that fiduciary responsibility can be compatible with social and environmental responsibility”.

In a joint toolkit for foundation and charity trustees published last September, Bellagio and the Paris-based European Social Investment Forum (Eurosif) argued that SRI investment funds often outperform funds that do not use SRI criteria.

“In 2004, according to Standard & Poor’s, the best-performing SRI fund was the £583m F&C Stewardship Growth fund, which returned 21.8 per cent, compared with the mean UK Equity fund, which returned 12.2 per cent.”

The idea of the toolkit is to persuade endowment trustees to rethink, and entrust their foundations’ money to external fund managers who will back only investments that reinforce the foundation’s charitable aims.

But this is far more complex than it sounds.

SRI had its genesis at the end of the 19th century, when some investors, usually with religious convictions, spurned companies that profited from alcohol, gambling and tobacco.

So-called sin-screen, or exclusion, criteria remain a part of many SRI funds’ strategies. During the 1970s, the US civil rights movement, the environmental movement and the anti-Vietnam war lobby gave a new fillip to SRI thinking.

But since the early 1990s, a fresh paradigm shift, driven by non-governmental organisations, has added a slew of new concerns, including the impact of globalisation, sweatshop labour, human rights, conflict zones, and tensions between the security forces and indigenous peoples.

SRI fund managers have gone on the offensive, researching and ranking potential investments according to the sustainability of their businesses.

Meanwhile, SRI has moved into the mainstream, with hundreds, or even thousands of investment managers around the world adopting some sort of SRI criteria.

A study last year by Eurosif identified no fewer than 10 distinct investment strategies adopted by European Socially Responsible Investors.

Four core SRI strategies were recognised covering €105bn of investments at December 2005: ethical exclusions, best-in-class, pioneer screening, and other varied positive screens.

Negative criteria survive – for instance tobacco screening.

But so-called Integration screening has become a leading strategy alongside Engagement investing, in which investors quiz companies and press them to pursue sustainable strategies.

Pension funds, particularly those of public-service employees, have become leading advocates of Engagement strategies. The good news, for foundation and charity trustees, is that when awarding investment mandates, they now have a huge choice of accomplished funds, with diverse strategies, to choose from.

Bennett Freeman, senior vice- president of social research and policy at Calvert, says: “Calvert and other SRIs have moved fundamentally towards positive criteria even as we retain negative exclusions. We are more focused on what we are for, than what we are against.”

Though professional SRI fund managers retain some issues on their books – “we are never going to back-off from tobacco,” says Mr Freeman – funds are emerging that match new concerns, and take a more relaxed view of alcohol, or even gambling.

“The focus of sustainability in the 21st century is climate change, global poverty, human rights, labour rights, and so on – it is about sustainability writ large,” says Mr Freeman.

Today, many in the SRI industry would argue that the concept of fiduciary duty, under which trustees have to deliver the objectives of their foundations, has undergone a change.

Trustees of charitable foundations devoted to making the world a better place may rather be failing to maximise their leverage if they do not pursue SRI strategies. Now that is a thought for Mr and Mrs Gates to chew over.

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