harmonizing giving and investing as a necessary step for Foundations to meeting the ‘public benefit’ test
by Stephen Viederman
I listened and lectured in Melbourne, Sydney and Brisbane in October 2005 and I admit I became an Australiaphile. While there I was struck by many similarities and differences between our philanthropies. One similarity of special interest to me was the limited interest in and even lesser practice of using assets as a way of adding value to giving as an instrument of change.
Each year the effort to “invest as if the future mattered” becomes easier as new and more sophisticated investment vehicles in all asset classes enter the market. In addition, the concept of ownership and stewardship has grown urging shareowners to engage with the companies they own by voting proxies and in other ways.
The public benefit is how the Charity’s Commission of England and Wales describes the charitable purpose of foundations. This is as clear and concise a definition as I have seen.
Unfortunately, however, this only seems to apply to giving, not to the use of the assets that make the giving possible. In Australia, I suspect, as is the case here in the US, the chasm between mission and giving, on the one hand, and investment, on the other, is still more the rule than the exception. I firmly believe that harmonizing giving and investing is a necessary step toward meeting the ‘public benefit’ purpose.
Three recent publications from the US and UK on climate change and philanthropy reflect the chasm. Each thoughtfully lays out a variety of opportunities for grants to respond to climate change that could be helpful for US and English foundations and charities with varied missions.
What these publications do not do is even hint that investment of foundations’ endowments— in the US presently estimated at over US$500 billion — could have value in dealing with climate change. Acting more like investment bankers than philanthropists, every day foundations direct most of their financial assets away from their philanthropic missions, despite the availability of appropriate, mission related investment vehicles dealing with climate, water and other issues in virtually all asset classes.
Language often presents a problem. I speak now of ‘investing as if the future mattered’ which does not easily roll off the tongue. Let me explain. As an investment committee member I would look at conventional financial analysis as well as past societal and environmental indicators. What is different evolves from an additional set of unconventional questions about future societal and environmental issues. Looking at the food industry, for example, I would raise questions about the policies, procedures and practices that are in place regarding obesity, water, climate, labor, land, food security and scarcity. These are real issues as well as surrogates for governance. Asking the questions and getting the answers can avoid predictable and often preventable surprises.
This perspective moves the discussion from too narrow a focus on ‘mission’ to a broader discussion of public benefit. An arts and culture funder, for example, could do a loan guarantee for an arts or culture organization if it focuses specifically on its mission.
But if the focus shifts to investing as part of purpose, for the public benefit, the arts funder, and all funders, would consider other issues and other investment vehicles that are of public importance. Among these might be water availability and utilization and climate change, labor and human rights, including the relationship between aboriginal communities and corporations, land use and agriculture, diversity, and many more.
The Bermuda Triangle of foundation investing seems to swallow up discussions of assets as an instrument of change. On one side of the triangle is the board and investment committee; the second is the investment office; and the third is the consultant. Their views on finance, formed in the same business schools and work places, see the world all too often as an externality, and intangible. The issues noted above are not factored into their investment decisions, which are made for short-term returns as if the future did not matter.
There are hurdles to overcome. Foundations boards and investment committees often don’t leave enough time for discussion of broader and new issues for the longer term. There is also an underlying myth that investing in this new way results in underperformance. The boards and finance committee members, often personally very involved with social issues after work and on weekends, do not see these same issues as matters of concern for investment by the foundation and in their day jobs.
I do not underestimate the difficulty of getting started but I know it can be done. The Jessie Smith Noyes Foundation (www.noyes.org, see especially the investment policy), The Needmor Fund (www.needmorfund.org), and The Christopher Reynolds Foundation (www.creynolds.org) have done it with more than 80 percent of their investments looking toward the future, and other foundations are on the path.
For a foundation to get started it ideally requires:
- a champion for this new way of looking at investment – depending upon the culture of the group, a board member or the chairperson is usually the initiator;
- time allotted to discuss the implications for the foundation – it is helpful if there is a model among the foundation’s peers that can serve as an example;
- an emphasis on process – many foundations begin with a small portion of their assets to find comfort levels, others begin with corporate engagement and specifically proxy voting, expressing their sense of ownership
- a knowledgeable finance professional present at the discussion not to sell products but to answer questions that arise – questions about performance, asset allocation, the investable universe, corporate engagement and other matters.
- once agreement is reached, the investment policy needs to be revised to reflect the links between investment and purpose throughout the document such as environmental, societal and governance issues that are of particular importance, or guidelines for managers to vote proxies;
- finally it is time to make changes as necessary in investment management – the goal should be an investment strategy and practice that is future-oriented, risk–adjusted and opportunity-directed adding value to the foundation’s public benefit.
Investing as if the future matters is worth doing. I have found that at Noyes and the other foundations I have been involved with it was the first time that the board really paid attention to the finance committee reports which were easily understood because they were in English rather than financese. As the board explored the links between giving and investing finance became fun, two words not usually used in the same sentence. Paying attention is one of the first duties of fiduciary responsibility.
St. Augustine observed that one of Hope’s beautiful daughters was Courage. I hope that we all have the courage to move ahead with our investments to serve the public benefit as if the future mattered.
About the author:
As President of the Jessie Smith Noyes Foundation I have been involved from the early 1990s in what we called mission-related investing. I worked with the board to reduce the dissonance between our grantmaking—economic and environmental justice, reproductive rights and sustainable agriculture—and our investments. After retiring in 2000 I continued efforts as a member of the board and finance committee of the Needmor Fund, and now with the Christopher Reynolds Foundation. In addition to writing, lecturing, consulting, listening and grandparenting, I am on the Advisory Committee of Inflection Point Capital Markets, a contributing editor to the Journal of Sustainable Finance and Investment and co-chair of the Get Off Your Assets Committee of the International Human Rights Funders Group. Comments and questions are very welcome at firstname.lastname@example.org.
Australian starting points: