Except for those that are whimsical, choices are made for a reason, in fact many reasons – some consciously and others unconsciously. So we are experts when it comes to choices – the best ones are informed, the good ones are better than the bad and often our choices are rewarding.
Ironically, when it comes to managing or investing our money, we tend to leave the choices to others. We generally take a hands-off approach to our investments, leaving the decisions to fund managers and corporate boards of directors.
I submit to you that there is a disconnect here. Not only do I want to choose paper or plastic, I want my money managers to think more broadly about the bottom line. I want the companies I invest in to integrate a set of social and environmental values in their business decisions.
The Jessie Smith Noyes Foundation is sixty years old. Our mission is to promote a sustainable and just social and natural system by supporting grassroots organizations and movements committed to this goal. Our funding priorities focus on environmental justice, communities threatened by toxics, a sustainable agricultural and food system, reproductive rights, and an environmentally sustainable New York City.
In the early 1990’s, we decided to broaden our choices to harmonize our investments with our mission. When it comes to foundations, the IRS requirement is that we payout at least five percent of our assets each year. For us the question became what to do with the other 95 percent. Should we use the bulk of our resources to further our mission? Should we ensure that there is no dissonance between our grantmaking on the one hand and our investments on the other? Should we look for ways to advance positive social and environmental practices and businesses through our investments?
Our choice was to “Just Do It.” We adopted an investment policy stating that “we recognize our fiduciary responsibility does not end with maximizing return and minimizing risk. We believe that in light of the social, environmental and economic challenges of our time, fiduciary responsibility in the coming decades will dictate the integration of prudent financial management practices with principles of environmental stewardship, concern for community, and corporate accountability to shareholders and stakeholders alike.”
There are three legs to our investment stool: screening, proxy voting and shareholder dialogues.
A recent L.A. Times series reported on the perceived contradictions between the good works the foundation is doing and the negative impacts of the companies in which it invests. Patty Stonesifer, CEO of the Gates Foundation, responded that “it is naïve to suggest that an individual stockholder can stop that suffering. Changes in our investment practices would have little or no impact on these issues. While shareholder activism has worthwhile goals, we believe a much more direct way to help people is by making grants and working with other donors to improve health, reduce poverty and strengthen education.”
This sounds a bit like what someone said to us back when we first starting discussing our investments. He said that “the problem with tainted money is that there taint enough of it.” He went on to argue, somewhat implied in Ms. Stonesifer’s remarks, that a foundation primary investment goal should be to make as much money as possible from its investments so that it can make more grants.
Well we do want to make as much money as possible, but we want to do it in a way that reflects our values and is consistent with our mission. And we are not alone.
According to the Social Investment Forum, in 2005 nearly one out of ten dollars under investment in the United States – more than $2 trillion – was actively involved in socially responsible investing. Each year more socially responsible funds are established, giving investors greater choice.
Proxy voting is gaining traction among foundations and other institutional investors, including huge public pension funds. Shareholder resolutions are growing and shareholders seem to be paying more attention. Boston Common Asset Management reported that in 2006, 325 proposals were filed on social issues, with about 25 percent addressing environmental concerns. They say that a record number of social issues received over 15 percent support from shareholders.
As an individual investor in mutual funds, you have rights too. For the past couple of years, mutual funds have been required to publicly disclose how they voted on proxy issues. Votes are now listed on the funds’ websites. Contact your fund managers and ask that they vote a certain way. Use this information to make your investment choices.
A new study by the Social Investment Research Analysts Network (SIRAN) found that in 2006, 79 companies in the S&P 100 Index included special sections on their websites, providing information about their social and environmental polices and performances. This is an increase of 20 companies or 34% over 2005. The study also found that over the past year, 12 of the largest U.S. companies issued corporate social responsibility reports for the first time.
There are many other examples of companies that have been convinced to improve their environmental, social and governance (ESG) practices. On other hand, there are some companies who have no interest in, and even an antagonistic attitude toward, ESG concerns. Exxon Mobil is a case in point. For years it has opposed environmental and alternative energy initiatives and questioned global warming. So how did they do in 2006? They made $39.5 billion. But even at Exxon Mobil things are changing. Rex Tillerson, the new CEO, recently said about global warming, “It is clear that something is going on. It’s not useful to debate it any longer.”
I look at this as an opportunity. And that is why the Gates Foundation should not be a passive investor. And that is why institutional investors should embrace their responsibilities as shareholders. And that is why you as an individual investor should not give up your choices.
A couple of weeks ago, Jon Entine of the American Enterprise Institute wrote an op ed in the Wall Street Journal criticized socially responsible investing. He wrote, “Selling a bad company would have no more impact than scooping a thimble full of water out of the deep end of the pool; it goes back in the shallow end when the person on the other side of that transaction buy it.” He may be right if avoidance of a stock was the only strategy employed.
But what if those of us with thimbles joined those with cups and those with pails and those with buckets to control enough water that we could press for changes like protecting the aquifer from which the water comes or finding alternatives to the chlorine chemicals now used, or paying decent wages to the pool boy. Our coalition of shareholders would have sufficient water power to convert to water pressure.
The money is ours or is entrusted to us. Let’s be active and exercise our choices.
Thank you very much for the opportunity to discuss prospects to advance socially responsible and mission related investing. Today I am going to focus my remarks on the market rate investment side of the ledger. I want to recognize the great work of our sister foundations, which have led the way in supporting their missions by using their assets for program related investments and other below market rate strategies.
Fifteen years ago when the Noyes Foundation’s Board of Directors discussed how to use the full complement of our resources to advance our mission, we talked it over with a group of stakeholders to get their feedback. Most thought an entry into socially responsible investing was the right thing to do. One respondent, a grant seeker, had a rather contrary perspective. After listening to the merits of aligning our program and investment goals, he said, “You know the problem with tainted money is there’s taint enough of it.”
His view, subscribed to by many charged with investing institutional dollars, is that the singular investment goal should be to maximize financial returns. After all, if an institution makes as much money as it can, there will be more resources available to pursue its mission. For these proponents, a wall should be constructed between investments and mission to allow for each to reach their highest potential. In the foundation world that wall is pretty high, less than 15 percent of surveyed members of the Council on Foundations report using social investment screens to guide their corporate investments.
Another view, one that we subscribe to, is that all parts of the organization should work in harmony to support the mission. Under this theory it is incoherent to do good works through our programmatic efforts and counter those acts by our investment decisions. The wall should come down and investment decisions guided by a philosophy that takes into consideration fiduciary, social and environmental bottom lines.
So is responsible investing and community development plausible? If on your computer you hit shift – F7, it gives you other words for plausible. Possible? For sure it is possible. Reasonable? I think it is reasonable. Conceivable? Certainly it is conceivable. Likely? Well, if we do not get organized and lead this effort, it is not likely to happen very soon.
What are the challenges?
For one, there are the “prudent investor” and business care standards. An 1830 Massachusetts court ruling spoke of exercising sound discretion and observing “how men of prudence, discretion and intelligence manage their own affairs.” It goes on to say that an investor should consider the “probable income” from such investments and the “probable safety of the capital to be invested.” Lewis Solomon, Professor of Business Law at George Washington University and Karen Coe offer an expanded view. Their conclusions are that a prudent investor may consider social implications only if they do not take precedence over financial considerations. According to Solomon and Coe, under the business care rule, institutional investors may equally consider social and financial factors. Others take an even broader view, arguing that investors may have a responsibility to weigh the effect that certain investments may have on charitable purposes and the pursuit of mission.
Another key challenge is the widely held belief that socially responsible or mission related investing has a negative impact on financial performance. There have been papers written and studies conducted that show that socially responsible investing does not hurt returns. And some have argued that companies that pay attention to issues of the workplace, the environment and the community tend to be better companies to invest in from a financial perspective. In January, Mercer Investment Consulting reported on a survey of 183 U.S. institutional investors which found that 75 percent “believe that environmental, social and corporate governance (ESG) factors can be material to investment performance.”
I think an equally important challenge before us is how to change the institutional investment culture. Whether a foundation, university endowment or pension fund, it takes willingness and leadership from the top of the organization to initiate these changes. At the same time I believe there is an opportunity to advocate and organize from the bottom up. In practice, what is needed is a grassroots and grass tops strategy for change.
I am hopeful and believe that we are witnessing a deeper interest by the public in including social criteria in their investment decisions. The 2006 Fearless Forecast by Mercer Investment Consulting showed that among 157 investment management firms from around the world, the “proportion of managers expecting increased client demand for the integration of environmental, social and corporate governance analysis into mainstream investment processes is 13 percent in the coming year, rising to 38 percent over the next three years.”
Let me tell you about the Jessie Smith Noyes Foundation. It was founded in 1947 by Charles Noyes, in honor of his late wife Jessie Smith. Mr. Noyes made his fortune in New York City’s commercial real estate market. For the first forty years, the Foundation provided scholarships and fellowships to individuals who shared Mr. Noyes’ commitment to fairness, integrity and hard work. In the late 1980s, the funding strategy was changed away from scholarships and fellowships to program grants to organizations working on agricultural, environmental and reproductive health and rights issues.
Today our mission is to promote a sustainable and just social and natural system by supporting grassroots organizations and movements committed to this goal. Our funding priorities are shaped by a view of the Earth as one community, an interconnected web of life in which human society is an integral part. We continue to fund the same issue work but we are now more interested in learning about ways to connect social movements.
On the investment side, we believe that:
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our fiduciary responsibility does not end with maximizing return and minimizing risk,
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economic growth can come at considerable cost to communities and the environment,
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investors should consider these social issues in the pursuit of financial objectives, and
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it is essential to reduce the dissonance between philanthropic mission and endowment management.
We also believe in making money. The Foundation is viewed as a perpetual institution. Therefore, investments with the potential to generate substantial and long–term returns that offset inflation are important to pursue. We utilize all the tools available to us as investors to obtain a competitive rate of return measured against industry-wide benchmarks.
Our investment philosophy did not just happen. In the early 1990s we began discussing ways in which to use the Foundation’s assets to further our mission and to reduce the dissonance between our grantmaking values and our asset management. The three strategies identified were
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negative and positive screening of stocks and bonds,
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shareholder advocacy and
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mission related venture capital.
In 1993, we set up a limited liability venture capital company, Blue Dot Fund, with an initial allocation of $6 million. There were no ground rules other than a general mandate to invest in deals that were consistent with the Foundation’s values and mission. Over a ten year period, the fund invested $12.4 million in early and later stage investments and in mission-related venture funds. We have been winding down the Blue Dot Fund and the lessons learned from our experiences as a venture capitalist can be a topic at a future conference.
Through Blue Dot we invested directly in emerging companies: Stoneyfield Farms, producer of organic yogurt and milk products which contracted for raw materials with family farmers in the Northeast; Highland Energy Services, operator of programs to reduce energy use in commercial buildings; Just Desserts, San Francisco baker that created quality jobs in an urban enterprise zone; and Lyme Timber, investor in sustainable timber land management.
In addition to our own fund, we invested in other venture funds. We were among the initial investors in Coastal Ventures Limited Partnership, which focuses primarily on Maine and Northern New England. Coastal Ventures makes equity investments in growing companies which can generate above-average equity returns over five to seven-years and also meet social goals. These include the creation of high-quality jobs and ownership opportunities for low-income individuals, the production of socially beneficial and environmentally sound products and services, and the implementation of progressive management practices. The quarterly reports that investors receive not only measure the financial and management performance but also the number of jobs created.
Two more venture funds in which the Foundation is invested in are:
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Commons Capital, which invests in "double bottom-line" early-stage companies whose products, services or corporate cultures promote a sustainable economy by delivering market solutions to major social and environmental challenges. Investments are made in companies working on clean energy, environment, education and healthcare. Commons Capital also looks for companies owned or managed by women and minorities, and companies that enhance community development and international sustainability.
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Solstice Capital II is a $60 million socially responsible venture capital fund that invests 50% or more of its assets “pro-actively” in high growth companies promising significant, positive social or environmental impact in the field of energy/environment, healthcare/medical, and education/training.
Venture capital investments are not the only vehicle we have used to support our mission and to focus on community development needs. We have made some use of program related investments (PRIs) and recoverable grants. We have also made grants to organizations developing for-profit subsidiaries, including one selling sustainably harvested timber in a small community outside of Santa Fe, New Mexico and another operating a materials recovery facility in a South Providence, Rhode Island neighborhood.
Additionally, the Foundation’s social screens promote principles of sustainable communities. We ask our investment managers to look for companies with demonstrated leadership on charitable giving, innovative approaches to community development, environmental friendly building designs. We also seek to invest in companies that purchase goods and services from minority and women owned businesses and actively promote contract opportunities for minority and women owned suppliers and service providers.
Lastly, as an active shareholder we engaged in dialogues with and send letters of concern regarding various issues to decision makers in corporations in which we own stock. We have voted our proxies in support of resolutions calling for an end to predatory lending and for the inclusion of community factors in corporate planning.
Our experience is that options are available for institutional investors to engage in mission-consistent and/or community investing. Again it is about changing the way in which investors think about their responsibilities.
So what about the broader picture for community investing?
The Social Investment Forum’s 2005 Report on Socially Responsible Investing Trends in the United States, shows that socially responsible investment assets in the United States are at $2.3 trillion, a 258 percent increase since 1995. Of the $2.3 trillion, $19.6 billion or one percent is in community investing assets, defined as “capital from investors and lenders that is directed to communities that are underserved by traditional financial services.” The $19.6 billion in 2005 is up from $13.7 billion in 2003 and from $4 billion in 1995.”
The 2005 Report identifies four primary community investment options:
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Community Development Banks – 54 banks with assets totaling $10.1 billion.
- Community Development Credit Unions – 275 credit unions with assets totaling $5.1 billion
- Community Development Loan Funds – 180 funds with assets totaling $3.4 billion
- Community Development Venture Capital Funds – with $870 million of capital under management
There are new and exciting investment products coming onto the market. I suggest that you visit the web site of the Community Investing Center or that of the Community Development Venture Capital Alliance.
And then there is the putting your money where your mouth is. In 1999, the Public Welfare Foundation purchased the True Reformer Building in Washington, DC’s Shaw neighborhood. In 2001, they moved their offices there from the famous Watergate Hotel. The True Reformer building was the first in the nation to be designed, financed, built and owned by the African American community after Reconstruction. The foundation’s building is integrated into the community, with its resources available to community-based and civic groups. Now the Foundation has teamed up with the Manna Community Development Corporation to build 12 affordable homes on land that the Foundation owns.
Another great story is the Jacobs Family Foundation in San Diego, which invested $5 million in the Diamond neighborhood and worked with residents to create the community-owned Market Creek Plaza. The Plaza is a 75,000-sq. ft., three-story building housing a cultural training kitchen, a state-of-the-art meeting and conference center, accessible community and office space, a showplace for public art and a neighborhood gathering place. With creativity, respect for cultural diversity, and passion for their community, resident teams transformed the site of an old dilapidated aerospace factory into a vibrant community hub with 11 national and local business (some owned or managed by local residents) and more than 170 new jobs.
So the opportunities are available. The question is do we have the will?
In September of 2005, the National Committee for Responsive Philanthropy (NCRP) issued “A Call for Mission-Based Investing by America’s Private Foundations.” The Call states that “nonprofit endowment assets, including foundations, universities and hospitals, easily top $1.3 trillion, though some estimates including institutional investors such as pension funds, put the tax exempt endowment total at some $7.3 trillion.”
NCRP feels the foundation community should do more: “The overall picture is one of foundations with large amounts of capital failing to make it reasonably accessible to the nonprofit sector whether in grants or loans or other kinds of investments…How can foundations reposition themselves to become the doorway to a functional nonprofit capital market, both providing capital from the billions currently capitalizing for-profit corporations and leveraging government and private capital?” Their proposal is for foundations to “devote a similar proportion of their endowments … for mission-related investments. Taking the most recent number on foundation grantmaking, that would be $30 billion in investments matching $30 billion in grants. Anything less…shortchanges the nonprofit sector and diminishes the potential of institutional philanthropy.”
NCRP offers two rather interesting suggestions that are worthy of our consideration. The first deals with foundation program staff, who NCRP believes do not understand much about nonprofit financing. NCRP suggest a massive undertaking “to identify and train the thousands of staff people working for major foundations and turn them into financiers.” Second and more boldly, NCRP proposes the creation of a financial intermediary, with significant financial resources, that can “function between the nonprofit and foundation spheres as a vehicle for legitimizing foundation endowment investment.” They suggest modeling the intermediary on the success made by the Local Initiative Support Corporation (LISC) and Enterprise Foundation.
The past January, Mark Kramer and Sarah Cooch of the Foundation Strategy Group issued a report for the Shell Foundation entitled, “Investing for Impact – Managing and Measuring Proactive Social Investments.” I think it is a valuable read on how to measure social and financial impacts. They wrote, “ Proactive social investment is an activity that holds immense promise for foundations and other organizations dedicated to social progress, yet the field remains largely undeveloped…The hundreds of billions of dollars in foundation assets currently held in conventional investments are certainly one resource that must be tapped.”
To advance the field of social investment Kramer and Coe suggest collecting better information about financial performance of PRIs, cataloguing social investment options to help investors better understand the field, clarifying fiduciary duty with regard to risk and return, creating intermediaries or pooled funds to reduce staff time and costs, developing a standard approach to measuring and comparing returns on social investments, and establishing better communication among those who are active social investors.
The last idea I want to raise with regard to moving this agenda is pressure from the bottom up. Everyone is a consumer and/or a constituent. We buy products of companies, we engage providers for services and we pay tuition for our education. We should utilize that connection as an opportunity to make change. A few years ago the Noyes Foundation funded an organization – the STARC Alliance – Students Transforming and Resisting Corporations. Among the many things that STARC did, was a Community Investing Campaign on college campuses. As reported to us in a 2004 final grant report: Vassar College – two percent of its endowment was to be invested in a socially responsible fund; Williams College – a social choice fund was started; Portland State University – a community investment fund was set up as part of its endowment; and Mount Holyoke – students were working on two percent of the endowment going to a screen fund and one percent into community investing.
I read with interest the web site information about The Campaign for MSU, “a comprehensive capital campaign designed to better prepare Michigan State University for meeting the needs of the next 150 years.” The goal is to “maintain excellent investment returns while minimizing the associated market risk.” It spoke about the investment managers focusing on “investment fundamentals and risk controls to keep the record of investment performance outstanding.” It also touted how the returns have been ranked near the top in the nation.
A survey by the National Association of College and University Business Officers showed that the average return on endowments in 2005 was 9.3 percent. That was a drop from 15.1 percent in 2004 but still significant. The study also showed a growing trend toward alternative investments, such as hedge funds, private equity, venture capital, natural resources and real estate. Such holdings went from 12.8 percent in 2004 to 15.1 percent last year. This is a good sign because it is in the alternative asset class that you will find more opportunities for mission related investing.
The challenge before us is to change the culture of investing, making social and community investing criteria against which we measure institutional investment success. We know the assets are there to be invested. We know the products are there to be utilized. We know there are good models to follow. And we know the successes that have been achieved. Now we need to know if we have the will to make it happen.
I suggest to you that the trends are moving in the right direction, more investors are aware of mission investing and more communities are looking to scale up and partner with investors to pursue unique development opportunities. It is now our responsibility to tip the scales in our favor, using sound information, rational persuasion and good old fashioned organizing to get it done.
I thank you again for the opportunity to share my views and look forward to your questions.
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