Investing With A Mission

Over the past decade, the profile, size, and scope of the nonprofit sector in the U.S. has skyrocketed to a degree not seen since the birth of the modern foundation in the time of John D. Rockefeller, Andrew Carnegie, and Andrew Mellon. In 2006, the 68,000 private foundations in the U.S. made grants totaling $32 billion. That’s a tiny fraction of their endowed assets. The Foundation Center, a research firm and clearinghouse on philanthropy, lists 50 private foundations with more than a billion dollars in assets. Many new giants have emerged on the stage, notably the $30 billion Bill and Melinda Gates Foundation (soon to double its assets with a huge donation from Warren Buffet.)
The sheer size and prominence of these endowments and other nonprofit entities has raised new questions about how best to deploy private wealth to serve the public good. Over the past decade, a small but committed number of private, nonprofit institutions have pioneered new approaches to leverage the power of all their assets in support of their mission, rather than just their operational and grant-making budget. The issue burst into public prominence early in 2007 when the Los Angeles Times ran two investigative pieces alleging contradictions between the Gates Foundation’s investments and its mission. As one example, the Foundation has given grants to fight diseases like asthma in the Niger Delta that may be linked to pollution from oil companies operating in the area that the foundation holds in its endowment. Those articles spurred the Gates Foundation to clarify its investment criteria, though not to make major changes in its investment strategies at this time. But the articles also sparked a much broader debate among the foundation world and in the press that has led to yet more interest in Mission Related Investing (MRI).
Trillium Asset Management Corporation has helped several foundations among our clients implement pieces of an MRI strategy and we have relationships with some of the foundations that are pioneers in the field, including the F.B. Heron Foundation, the Nathan Cummings Foundation, and the Jessie Smith Noyes Foundation. To help support and disseminate information about the wave of innovation underway, we will soon release Mission-Related Investing for Non-Profit Organizations: Practical Tools for Mission/Investment Integration.1 The rest of this article provides a sneak preview of a few of the issues covered in more depth in that report.
Why Pursue Mission Related Investing?
A nonprofit’s mission is its heart, its core, its reason for being. In business terms, the mission defines the organization’s “value proposition,” or the value that it seeks to create. A nonprofit’s value is at best indirectly related to financial return. It lies instead in the creation of environmental and social value. This raises the question: how can a nonprofit organization achieve the greatest environmental, social and financial value from its philanthropic resources? As the trustees of the F.B. Heron Foundation asked themselves a decade ago (and answered affirmatively): “Should a private foundation be more than a private investment company that uses some of its excess cash flow for charitable purposes?”
For a small but growing number of foundations and other nonprofits, Mission Related Investing provides the answer to these important questions. MRI strategies allow foundations and non-profits to leverage more of their assets in support of their mission, not just the portion they grant or spend to fulfill their mission. Think of it this way: a grant is an investment with a -100% direct financial return (total financial loss) in order to generate a high return in the form of positive social or environmental change. MRI can also create social returns, but with much higher (and often market-competitive) financial returns. Over time, MRI exposure can dwarf the grant-making budget, thus multiplying the organization’s positive impact on its mission.
Ethical and fiduciary responsibilities also offer compelling arguments in favor of Mission Related Investing. As all assets donated are generally tax-deductible, along with most of the earnings on those assets, there is a duty to manage all the funds in such a way as to provide the greatest benefit to society – the ultimate beneficiary of the trust. MRI provides the means to do this. Evolving understanding of the fiduciary responsibility of foundation and nonprofit trustees also support Mission Related Investing. In the 1800s, common stock, real estate, gold, venture capital, hedging, futures, and options were considered too speculative to be held by trusts. In 1830, the Massachusetts Supreme Judicial Court coined the term “prudent man” when they ruled that trustees must invest the assets in their care in the manner in which a prudent man would invest his own assets. Key to this decision was freeing the definition of fiduciary responsibility to evolve with the times – as new investment practices evolved, so too did the prudent man’s behavior. Consequently, trusts are now allowed to hold assets such as common stock, which were once considered too speculative. The guiding definition of prudence is subjective and based upon the goals of the individual investor – the “prudent man” (and as a majority women-owned firm, we’re happy to say that plenty of prudent women are now fiduciaries as well).
A momentous shift in the understanding of fiduciary duty is now underway as increasing numbers of investors recognize that sustainability issues, such as social and environmental concerns, impact long term shareholder value and thus should be considered in investment decisions. Indeed, in a report commissioned by the United Nation’s Environment Program, the world’s third largest law firm Freshfields Bruckhaus Deringer recognized this shift and declared that “integrating environmental, social, and governance (ESG) considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.” Indeed, Paul Watchman, a Freshfields partner and senior author of the study2 noted, “Institutional investors have more freedom to integrate ESG issues into their decision-making than they think. Whilst normally we find ourselves encouraging our clients to be more cautious, in this case we can instead say ‘be more imaginative’.”
Mission Related Investing Tools
There are several other reasons to pursue Mission Related Investing identified in our report, but we wanted to leave room for at least a short discussion of the tools and strategies available to pursue MRI. Many of these tools are similar to those in socially responsible investing and will be familiar to most readers of Investing for a Better World: negative screens to exclude companies that conflict with an organization’s mission, positive screens to seek out investments in companies that support their mission, engagement tools to influence the performance of companies in the portfolio, and high impact investing in community investments, social ventures, and other program-related investments. (Given their direct and tangible social benefits, it is not surprising that community investments and program related investments are the fastest growing asset class in MRI.) What distinguishes Mission Related Investing from Socially Responsible Investing is the effort to tailor these strategies to the organization’s specific mission. So for instance, a foundation focused on alleviating poverty has chosen to apply negative and positive screens to invest a portion of its endowment in companies that play a key role in reducing poverty, rather than a more general social responsibility screen.
These tools are described in much greater detail in our upcoming report, which also includes real world examples of how foundations and nonprofits are putting these tools into practice.
To receive a printed copy of the report, e-mail a request to Lisa MacKinnon at lmackinnon@trilliuminvest.com. To download a PDF version now, click here.