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Socially Responsible Investing: A Foundation’s Duty?

By Tom Watson on February 7, 2007No Comment


Socially Responsible Investing: A Foundation’s Duty?
By Bodi Luse, 2/7/2007


A series of investigative articles in the LA Times on January 7 and 11 took the Bill & Melinda Gates Foundation to task for investing in companies whose business practices directly oppose the work the world’s largest foundation is trying to do through its grantmaking. Poignant examples cited in the articles included a young child, vaccinated for polio and measles through a Gates-funded program, whose lungs are being destroyed by the Nigeria oil fires, and an elderly Seattle couple who lost their house after being victimized by a predatory lender in which the Gates Foundation is invested.

This begs the question: do foundations and other nonprofits have a responsibility to align their investments with their mission? Some legal and ethical experts think that it may be part of a nonprofit board member’s fiduciary responsibility to consider the effects their investment decisions may have on the organization’s mission. The website of the Foundation Partnership for Corporate Responsibility, an association of foundations working to link their grant making values with their investments, quotes “On Being True to Your Mission: Social Investment for Endowments,” a 1997 article by lawyer William McKeown in the Journal of Investing:

In order to fulfill their responsibility to see that the [nonprofit] corporation meets its charitable purposes, [board members] may have a duty to consider whether their investment decisions will further those charitable purposes, or at least not run counter to them.

And more recently, a study for the United Nations Environmental Program by Freshfields Bruckhaus Deringer, the world’s third-largest law firm, came to the same conclusion.

Socially responsible investing represents a surprisingly large part of the investment universe. In 2005, according to the Social Investment Forum, nearly one out of ten dollars under investment in the United States—more than $2 trillion—was actively involved in socially responsible investing. Two common forms of socially responsible investing are investment screening of portfolio holdings to avoid corporations that have poor records on social and environmental issues, and on corporate governance, and shareholder activism that may include voting proxies on individual company’s proxy statement or engaging corporations in dialogues on issues of concern, and filing and co-filing shareholder resolutions.

After the LA Times articles, Gates Foundation Chief Operating Officer Cheryl Scott posted a rationale of its investment policies on its website. According to Ms. Scott, the Foundation chooses to take a passive role towards its investments and focus its energies on developing expertise in its grantmaking focus areas rather than on ranking and screening companies based on social factors like environmental practices or lending policies.

Other foundations, however, are already making the connection between money and values, specifically by taking part in shareholder activism. Among those joining in sponsorship of shareholder resolutions on environmental issues and corporate governance are the Nathan Cummings Foundation, the Needmor Fund, and the Tides Foundation. Others, such as the Ford Foundation, the Rockefeller Brothers Fund, and The Boston Foundation, have developed active proxy voting policies.

An inspiring case study of socially responsible investment comes from the Interfaith Center for Corporate Responsibility (ICCR), an international coalition of 275 faith-based institutional investors including denominations, pension funds, healthcare corporations, foundations and dioceses with combined portfolios worth over $100 million. ICCR members are dedicated to merging their social and religious values with their investment decisions, while at the same time investing for long-term financial performance. The ICCR recently published an evaluation of the practices of HIV/AIDS-TB-Malaria pharmaceutical manufacturers, and was able to say that in 2006 five out of the 15 companies evaluated made substantial policy shifts, often after consultation with shareholders, communities impacted by the diseases, and non-governmental organizations—lowering the cost of drugs, partnering with manufacturers of generics, and declining to enforce patents, among other actions.

Each year, the amount of money invested by foundations is enormous. After all, foundations must disburse only 5% of their endowment every year, while 95% is invested. For the Gates Foundation, whose endowment stands at $35 billion at even before the Warren Buffett gift,  that comes out to $1.75 billion disbursed annually versus $33.25 in investment. These amounts represent real potential for power in encouraging corporate good citizenship; what are the opportunity costs of declining to exercise that? As a steward of the public good, the Gates Foundation has an opportunity for moral leadership that should be too good to pass up.

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