How European foundations use investments “for the greater good”
December 21, 2012
Over the past decade, a diverse range of European foundations have successfully adopted sustainable and responsible investment (SRI) approaches in managing their capital endowments. Recently, foundations have also expanded their philanthropic toolset by devoting a portion of their assets to impact investments, which prioritize social returns above financial returns. While their approaches differ, these foundations all believe that their investments can enhance the pursuit of their mission. The report “360-Degrees for Mission”, commissioned by the Swedish Foundation for Strategic Environmental Research, Mistra, provides detailed case studies on the experiences of the Church of Sweden, Deutsche Bundesstiftung Umwelt (DBU), Dreilinden, Fondation du Luxembourg, Fondazione Cariplo, Fonds 1818, Friends Provident Foundation, and Mistra itself.
The report aims to offer guidance to other foundations that are considering SRI or impact investments and even describes practical steps to start implementing these approaches in the foundations’ management of capital endowments. The core of the report, eight individual
case studies, shows diverse examples of sustainable investment. The different foundations represent a wide range of sizes, institutional heritages and geographic locations. Also, representatives of the different foundations are interviewed, so that personal reflections are combined with detailed information on the development of their investment strategies.
SRI is financially viable
While each of the foundations emphasizes different aspects of their stories, some common themes were apparent. Every foundation found that SRI investing gave them at least market rate returns. Furthermore, six of the eight foundations had applied SRI across 100% of their investments (apart from impact investments). While the argument that SRI destroys returns is losing ground, a significant barrier still exists in the lack of internal resources and the perceived low efficiency of SRI (small contribution to mission compared to the time/cost invested relative to the grant-side). Here umbrella foundations such as Fondation de Luxembourg and joint fiduciary management platforms such as the one created by Fondazione Cariplo can play an important role in lowering costs and resource needs.
The Church of Sweden, Fondation de Luxembourg, DBU and Mistra all cited reputation risk as a strong reason to adopt an SRI policy. These foundations all have a public profile and rely on the goodwill of the general population, if not on its continued financial support. There have been many news stories of foundations that seem to undo their own philanthropy with their investments. A prominent example came in 2007 when the Los Angeles Times ran a story on the Gates Foundation, which was working to improve living conditions in the Niger Delta even as it was invested in oil companies whose operations created public health problems in that region. If foundation investments face public scrutiny, either via the press or disclosure requirements, SRI will gain traction.
Learn by doing
The case studies in the report show that foundations can and should take a step-by-step approach to introducing SRI, rather than trying to design their system 100% in the first attempt. A modest initial approach lowers internal barriers, whilst it pays to be patient and allow a sufficient monitoring period before making major course corrections. Simply using negative screening to avoid objectionable companies will not “change the world” according to Mistra. Investors such as the Church of Sweden and Mistra create a positive incentive for businesses to behave responsibly by actively seeking to invest in companies that contribute to sustainable development. Negative screening can still form a component of an SRI strategy, but it is important to combine it with best-in-class, ESG integration or impact investing approaches.
Most foundations approach ESG from an investment management point of view and are not using the active ownership approach. Active ownership includes voting equity shares and engaging with companies on critical issues. Exceptions to this are Mistra, Fonds 1818 and the Church of Sweden, which do have active ownership policies. Some foundations feel they are too small to make a difference through active ownership. Here, a way to pool foundations’ ownership activities and lower transaction costs could magnify the influence of active foundations. Such pooling options are already offered by equity ownership service providers, and investor initiatives such as national SIFs and the PRI. Foundations could efficiently access these resources as a group after coming together to share know-how and develop joint positions on ownership issues.
Teaming up on impact investing
While it is relatively easy to implement SRI, impact investing is much more challenging. New products need to be developed and seeded, and investments require private-equity type due-diligence work. This requires time and expertise. Here it is crucial that foundations collaborate and share resources to lower transaction costs. A European platform for this would be helpful.
with attribution (and link, if online) to www.tias.edu.
To be cited as: “How European foundations use investments ‘for the greater good’”, David Imbert, Ivo Knoepfel, www.tias.edu, December 21, 2012.
Report: 360 Degrees for Mission
Ivo Knoepfel is founder and managing director of onValues, an independent investment consultancy.
David Imbert is a senior consultant at onValues