Each month, the Noyes Foundation receives about a half dozen calls from small and family foundations, less often from larger foundations, inquiring about our mission-related investment activities. Many of the callers are younger family members or staff who are motivated by a strong sense of values in their grantmaking, and desire a more focused approach to their investment portfolios.

The three questions most frequently asked are:

1. Is mission-related investing legal?

Under the law, fiduciary responsibility includes three duties as part of a trustee’s standard of care. The first, the duty of care, specifies that trustees are to act as a prudent person would in like circumstances.² The second, the duty of loyalty, is to avoid conflicts of interest. The third, the duty of obedience, mandates that trustees act in a manner that ensures that the organization operates in keeping with the rules and laws governing its formulation, and in accordance with its bylaws and mission.

One of the mantras of endowment management is that financial rate of return is the sine qua non of fiduciary responsibility under the prudent person or business care rule. Any other considerations—such as the social and environmental consequences of an investment—have traditionally been considered extraneous. But as William B. McKeown, recently of Patterson, Belknap and Webb, has observed, board members of charities "may have a duty to consider the effect on program of their investment decisions [and] to consider whether their investment decisions will further those charitable purposes, or at least not run counter to them."³ In other words, obedience to mission calls for a linkage between finance and mission.⁴

Although this view of fiduciary responsibility is growing, it is still far from the mainstream. Noyes has found its logic compelling, believing that institutional integrity has an important place in investment decisions. Unfortunately, there is not yet a large body of law on the subject.

In a path-breaking review of judicial decisions and state statutes, Lewis Solomon, Theodore Rinehart Professor of Business Law at the George Washington University Law School, and Karen Coe, conclude that:

Directors and trustees of nonprofit entities, including foundations, may undertake social investing without violating their fiduciary duties. They may consider social and environmental factors when making investment decisions, whether the prudent investor rule or the business binds them care rule. Under the prudent investor rule, a fiduciary may consider the social implications of her investments only if they do not take precedence over financial considerations. Under the business care rule, a fiduciary may consider social and financial factors equally when making investment decisions.⁵

2. Can the foundation make a competitive rate of financial return?

A second mantra of endowment management is that any reduction in the universe from which a money manager may select stocks or bonds for a portfolio produces "opportunity costs" that will inevitably lower the possible return. For years, consultants and money managers have argued against using social screens, suggesting that they create unintended portfolio risk and/or performance degradation.

Over the past decade, a growing number of research studies have shown that screened portfolios do not necessarily result in lower returns. A 1997 study by John B. Guerard found there to be "no statistically significant difference between the average returns of a socially screened and an unscreened universe during the 1987-1996 period."⁶ Manager selection and stock picking are the key determinants of performance. Other studies reach similar conclusions.⁷

The Domini 400 Social Index, a broad-based index of 400 socially screened corporations, and the Citizens Index, a market-weighted portfolio of 300 screened companies, have significantly outperformed the S & P 500. Since 1995, screened mutual funds have performed at least on a par with unscreened funds, overcoming slightly below average performance in the period 1971 to 1995. And for the period since 1995, Morningstar rankings also show high performance for socially screened funds.

Domestic equities

A growing body of research shows significant correlation between specific corporate activities and greater shareholder value. For example, a live simulation run by Innovest Strategic Advisers in concert with a leading Wall Street investment bank using a newly developed set of environmental screens showed "out-performance" in the range of 100-170 basis points per year for a highly diversified, S&P 500 portfolio. For high environmental risk sectors of the economy, such as chemicals and petroleum, the premium is as high as 500 basis points. Furthermore, there is reason to believe that the outperformance premium may be even greater in the future as environmental regulations tighten, globalize, and impact corporate balance sheets with even greater force. More than 50 other studies show strong correlations, ranging from 50 to 450 basis points, between improving a corporation’s environmental management system and improved shareholder value. As a result, an environmentally screened portfolio might, under certain circumstances, outperform a more traditional portfolio.

Similarly, research shows that "companies making a public commitment to follow ethical business practices are more profitable than companies which do not make ethics a key component of their overall management."⁸

International equities

Currently, only a few screened international equity investment vehicles are available to investors. Limited data indicates outperformance by screened international managers; although a brief history and lack of appropriate benchmarks make it difficult to draw any firm conclusions.⁹ Still, interest in this asset category is growing.

Fixed income

No publicly available performance history currently exists for screened fixed income portfolios. Noyes has screened its fixed income instruments for more than a decade. Our experience with screened fixed income portfolios has met or exceeded our fixed income benchmark, the Lehman index. Research has shown that "should socially responsible investors choose to broaden their investment set to encompass bonds, there should be no penalty for following their social values after adjusting for credit risk."¹⁰

Venture capital

Mission-related venture capital, or social venture capital, is an investment instrument of relatively recent origin. As with traditional venture capital investing, data on financial performance over time are difficult to amass. While there may not be any socially responsible "home runs" as yet, what has been called "patient capital" is helping to create new firms, with new corporate cultures that are financially solid while creating social returns value through their work.

Investment cost of Mission-Related Investing

Rates of return on investments reflect investment costs. Most managers of separately managed institutional accounts report they do not charge extra fees for managing screened portfolios. Weisenberger reports the expense ratio for non-socially screened funds is 1.40 percent compared with 1.62 percent for screened portfolios. Morningstar compared large cap growth funds and found that the average expense ratio for socially screened funds is slightly lower, 1.44 percent versus 1.47 for non-screened funds.

Conclusion

Noyes has concluded that the financial risk in mission-related investing is no different from the risk inherent in investing in any asset class. Given the large universe of publicly traded stocks and bonds, a skilled money manager who applies mission-related screens is as likely to achieve his benchmark goals over time as a manager who has no screens. As one John Knox of Trainer, Wortham and Company, the foundation’s fixed income manager for many years, has observed, "If there is something in the portfolio that you don’t like, let me know. There are many options so I can respond to differing needs, taking into account your level of risk, need for diversification, and other factors."

3. How does mission-related investing contribute to the foundation’s long-term goals?

Of the three questions most frequently asked, this is the most important and most difficult to answer, since each mission-related "leg" must be evaluated separately.

A discussion of screening by a foundation board begins with awareness of the fact that investments have non-financial, social and environmental consequences, in addition to financial returns. It acknowledges that inevitably there are varying degrees of dissonance between the foundation’s values, its grantmaking, and its investments. Ultimately, it raises the question of institutional integrity, "the dissonance between creed and deed," that institutions need to address.¹¹ Noyes has found that the very process deepens and strengthens the board’s understanding of our mission and our values, which is of great value whether or not we have changed the world through the investment process.

There is no single path to reducing dissonance. Negative screens can be used to weed out the worst offenders. Positive screens can identify "best-in-class" companies, which are potentially part of the solution to a problem. Many foundations screen only a portion of their portfolio in order to become comfortable with the process over time.

Instead of using exclusionary screens, a foundation may decide it would be more effective to engage the "offending" company through proxy voting, letter writing, attending meetings with management, or filing shareholder resolutions on issues of concern. Noyes, for example, occasionally buys stock in companies for the purpose of shareholder activity to support its grantees.

It is important to note that effectiveness is not necessarily a function of the size of a foundation’s holdings in a particular company. Noyes had just 100 shares when it filed its resolution with Intel, described below. A foundation’s assets, combined with those of other social investors, can provide a powerful voice for corporate change.

Mission-related venture capital consists of investments in young, privately held companies whose products, services, processes and corporate cultures are in varying degrees aligned with the foundation’s mission. Because Noyes is committed to developing a sustainable and environmentally sound agriculture and food system in the U.S., one that is socially just and economically viable, it decided to participate in a venture capital opportunity with Stonyfield Farm, a profitable yogurt manufacturer in New Hampshire having sustainable agriculture integral to its mission. Stonyfield sources organic milk from family farms, uses containers with a minimum of plastic so as to reduce chemical inputs and damage to the environment, and gives 10 percent of its profits "to the planet." Noyes believes that its investment in Stonyfield will further its own mission-related goals while providing healthy returns on its investment. Other mission-related venture capital opportunities include a new technique for detecting leaks in underground storage tanks, environmentally sound aquaculture, apparel from organic and recycled cotton, and bio-degradable cleaners.¹² Each provides a market-based solution to environmental problems.

Shareholder activity has clearly demonstrated it can add value to grantmaking. Noyes’ intervention on behalf of its grantee, the SouthWest Organizing Project (SWOP) in Albuquerque, New Mexico, resulted in Intel’s coming to the table for discussion even though it had previously refused to meet with SWOP. Intel agreed to change its Environmental, Health and Safety Policy and agreed to share information with communities. Of further value, SWOP earned respect within the state for its role in the process.¹³

Many foundations neither vote their proxies themselves nor direct their managers in the voting of proxies and, consequently, abrogate the opportunity to let management know their concerns related to their programs. It is interesting to note that Taft-Hartley pension plans are required by law to vote their proxies in a manner to benefit their pensioners and to report their votes. Proxies in this case are seen as assets, in addition to the underlying value of the stocks.¹⁴

Issues most often encountered by foundations in planning and implementing MRI

Based upon Noyes’ discussions with foundations, four issues need to be addressed in order to move a foundation’s investment policies and programs toward mission-related investing.

First, the board must identify the areas of dissonance between its investments and grantmaking values. Second, the board should evaluate its discomfort level with this dissonance. Assuming some discomfort, the conversation can then be directed to explore ways to minimize the dissonance given the foundation’s circumstances and its resolve.

The issues identified here need not be constraints or barriers to change. Rather they are described in order that the readers can learn from the experience of others so that desired outcomes might be easier to attain.

1. The culture of finance
Business schools do not teach how to incorporate social, political, cultural, and environmental criteria into the investment decision-making process. Driven by short-term incentives, few investors see reasons to consider the long-term effects on society of harmful products and business practices. As Dee Hock, founder, president and CEO emeritus of Visa observed:

Institutions that operate so as to capitalize all gain in the interests of the few, while socializing all loss to the detriment of the many, are ethically, socially and operationally unsound. Yet that is precisely what far too many corporations demand and far too many societies tolerate. It must change.

Some years ago London financial analysts were surveyed about the way they brought environmental considerations into their analysis. Despite evidence that good corporate environmental performance can increase shareholder value, most viewed the environment as an ethical and moral issue and, therefore, not relevant to their financial analysis. This survey underscores the market’s inattention to so-called "externalities." Another recent study found "an overall insignificant capital market response "to a sample of 98 negative environmental events in which electric power companies or oil firms were involved (as reported in the Wall Street Journal between 1970 and 1992)."¹⁶

These examples underline the sensitivity needed in raising the issue of mission-related investment with a finance committee. This is especially true in circumstances when the finance committee members are advisors but not board members because as a rule, they are not familiar with the foundation’s programs and values.

2. Board politics
Board politics is a subject not often addressed in the philanthropic literature. However, anyone who has worked in and around philanthropy is no stranger to the subject. Whether the issue intensifies when ‘family’ is added to the mix is an empirical question, though many would suggest that it does.

Experience suggests that a committed board member -- willing to champion the issue of mission-related investment and to work until there is resolution -- is essential. This member must have the respect of other board members, be well informed about the issues, and be willing to use his or her political capital within the institution to make things happen. The problem in the absence of such a board member can be seen in the case of one sizable family foundation, whose executive director had a strong commitment to aligning grantmaking and investment strategies, only to be told by the chair, a financial professional, that the matter was not to be raised at a board meeting.

3. Underlying financial and economic assumptions and culture
The MIT economist Paul Krugman observed that "simplistic ideas of economics often become badges of identity for groups of like-minded people, who repeat certain phrases to each other, and eventually mistake repetition for truth."¹⁷ The same may be said for finance, especially around the topic of socially responsive or mission-related investing, leading to a conclusion that it cannot be done.

Economics, which defines the rules of the game, also sets constraints on the discussion. Consider, for example, the convention that the environment is an "externality"; that the "commons", our shared heritage of air, land and water, is not ‘valued’; that equity as an issue of justice is not found in the index of economic texts; and that the future is to be discounted. This world-view further constrains the discussion of mission investing.

However, there are answers, some of which we have summarized, to the questions of legality, financial return and effectiveness discussed above.

4. Time
Mission-related investing takes time. However, the time spent is justifiable if the process is defined as adding value to grants and program, rather than simply spending more time on finance.. At Noyes, much of our mission-related investing, especially the shareholder activity, is seen as a program activity, not a financial activity.

Time is required to decide which screens are most appropriate to a foundation’s mission, and what advocacy strategies will advance the foundation’s goals. If the portfolio is to be actively managed, it takes some time to review the portfolio constraints with the manager and to determine if the companies held still reflect the foundation’s goals. If the manager is professionally involved in social investing, this process is usually relatively easy. If he or she is not, more time may be needed to develop sensitivity to the social issues impacting the corporations.¹⁸

Finally, time is needed to develop and review proxy guidelines. If done internally, voting proxies may also require significant amounts of time. Monitoring how managers vote the foundation’s proxies will take additional time, although, once again, if the manager is professionally involved in social investment, less time will be needed to oversee proxy voting.¹⁹ Letter writing, engagement with management, and/or filing shareholder resolution will require substantial commitments of time and perhaps additional budget resources.

Conclusion
How prevalent is mission-based investing among family foundations? The Council on Foundation’s Management Survey suggests that fewer than 10 percent of foundations presently screen their portfolios.²⁰ Much of the screening may reflect a singular concern, such as tobacco, which is quite prevalent among health funders. An informal survey of environmental grantmakers done by Noyes and the Interfaith Center on Corporate Responsibility in 1995 suggests that perhaps as many as 25 percent of these foundations screen at least some portion of their portfolios.²¹

Data on proxy voting are not available. However, during the 1999 proxy season, ten foundations did co-file, while two foundations filed shareholder resolutions. They were all family foundations. It is clear that some progress has been made when these admittedly small numbers are measured against the fact that the first foundation-initiated shareholder resolution was filed in 1994 by Noyes. The number of foundations doing mission-related venture capital is also very small, and again these are family foundations.

Mission-related investing is not a "one size fits all" activity nor need it necessarily encompass all aspects of mission-related investing. Some foundations may choose to screen all or part of their investments while they develop a comfort level with the activity. Others may choose to direct their attention to voting proxies and engaging corporate management in a variety of ways. Still others may choose community investment or focus on mission-related venture capital with part of their assets. The best approaches are those that support the mission-goals of the foundation and the skill sets of the board members and staff.

It has been suggested that the obscure takes a while to see, and the obvious takes even longer. The philosopher Schopenhauer believed all truth passes through three stages: first it is ridiculed; second it is violently opposed; and third, it is accepted as being self-evident. For many foundations, mission-related investing appears to be somewhere between stages one and two. For the Noyes Foundation, where we have begun to see the fruits of our efforts, mission- related investing is becoming self-evident, i.e. part of who we are and what we do. The Foundation would be delighted to assist other foundations to share in the excitement of our journey.

Stephen Vieferman, President
Miriam Ballert, Finance Chair

1. This is adapted from "Thinking About Mission-Related Investing," National Center for Family Philanthropy, "Investment Issues for Family Foundations: Managing and Monitoring Your Philanthropic Assets," National Center Journal, Vol. 2, Washington, D.C., NCFP, 1999.
2. It is important to observe that, in its original meaning, to be prudent is to be farseeing. This sense of the term is lost in the more modern usage, which implies looking backward.
3. W.B.McKeown, "On Being True to Your Mission: Social Investments for Endowments," Journal of Investing, Winter 1997, 6 (4), 71-78.
4. See the Restatement of the Law Third, Trusts, section 227, as quoted in Mark Dowie, Passive, Dissonant or Making a Difference: Which Way for Foundation Investing?, Financial Markets and Society, Philomont,Va.: Financial Markets Center, 1998.
5. Lewis D. Solomon and Karen C. Coe, "Social Investments By Nonprofit Corporations and Charitable Trusts: A Legal and Business Primer for Foundation Managers and Other Nonprofit Fiduciaries," UMKC Law Review, 66,2, Winter 1997,213-250; and same authors, "The Legal Aspects of Social Investing by Non-Profit Fiduciaries," Journal of Investing, Winter 1997, 6 (4), 112-119.
6. John B. Guerard, "Additional Evidence on the Cost of Being Socially Responsible in Investing," Journal of Investing, Winter 1997, 6(4), 31-36; see also Lloyd Kurtz, "No Effect, or No Net Effect? Studies on Socially Responsible Investing," Journal of Investing, Winter 1997, 6(4)37-49.
7. For a more complete discussion of financial performance of screened portfolios, see the Winter 1997 issue of The Journal of Investing, and The Investment Research Guide to Socially Responsible Investment (Ed. Brian R. Bruce for the Colloquium on Socially Responsible Investing, Plano,Tx., Investment Research Forums, 1998) ,which provide a compendium of some of the most relevant research.
8. Curtis Verschoor, "Internal Control: A Weapon in the War Against Fraud," Director’s Monthly (National Association of Corporate Directors, Washington, DC), February 1999, p.7.
9. Frank J. Travers, "Socially Responsible Investing on a Global Basis: Mixing Money and Morality Outside the U.S.," Journal of Investing, Winter 1997, 6 (4), 50-56.
10. Louis D’Antonio, Tommi Johnsen, R. Bruce Hutton, "Expanding Socially Screened Portfolios: An Attribution Analysis of Bond Performance," Journal of Investing, Winter 1997, 6(4),79-86
11. Climate Change Report reported that all of the large funders of global warming activities held stocks of the major producers of global warming chemicals, yet none had engaged these corporations in discussions of the issues, nor would any discuss this dissonance with the reporter (April 29, 1998, Vol. 1, No. 2, pp. 1-6).
12. See the Foundation’s annual report, available by mail or on our web site, www.noyes.org, for the up-to-date list of our alternative investments.
13. See Stephen Viederman, "Shareholder Activity and Community Organizing," 1997 Annual Report, Jessie Smith Noyes Foundation (available at www.noyes.org/97pres.html) and Stephen Viederman, "Adding Value to Your Grants," Foundation News and Commentary, January/February 1997, 68 ff., also available on our web site as a link to http://int1.cof.org/fnc/17viederman.html. The issues of concern to the SouthWest Organizing Project are reflected in its report, Intel Inside New Mexico, Albuquerque, New Mexico, SouthWest Organizing Project,1995.
14. The Foundation Partnership on Corporate Responsibility, a project of the Interfaith Center on Corporate Responsibility (which has 30 years of experience representing religious institutional investors in pursuit of their concerns about issues of global finance, militarism, health, corporate accountability, environment and equality) will assist foundations learning about the issues involved in voting their proxies. Contact: Tim Smith, FPCR, 475 Riverside Drive, New York, NY 10115, 212-870-2295; fax 212-870-2023, info@iccr.org.
15. Personal communication to Stephen Viederman, January 13, 1998.
16. Kari Jones and Paul Rubin, Department of Economics, Emory University, "Effects of Harmful Events on Reputations of Firms," April 1999 (www.service.emory.edu/~cozden/ruben 99 26 paper.pdf).
17. The Economist, August 31, 1996, page 19.
18. Noyes held Potash of Saskatchewan in its portfolio, providing a naturally available substance necessary for agriculture. When we read that the company had acquired a chemical nitrogen fertilizer plant our screened manager and we agreed to sell since this no longer supported a low-input agriculture. A portfolio manager, not sensitive to the issues, would have probably not noticed this, or would have reacted positively assuming that combining the sale of both potash and nitrogen fertilizer would be more efficient.
19. The time needed for these activities can be greatly reduced as the substantive background on the proxy issues can be obtained from the FPCR, note 14 above. The FPCR service is at this writing free to foundations. There are also other entities that can assist including the IRRC and Proxy Monitor, which charge for proxy voting information and services.
20. Data from the Management Survey must be interpreted with caution since it reflects only Council members who have responded. No effort is made to normalize the data to the foundation community as a whole.
21. Caution is also in order interpreting these data, which are unpublished. A brief report is available from the Noyes Foundation. 1995.