NSFM Participant Opinion: Foundation and endowment investing for the public benefit

Stephen Viederman writes: Harmonizing foundation and endowment missions—their spending—with the investment of their assets, would best serve “the public benefit.”  The Charity’s Commission of England and Wales has identified "the public benefit" as a concise definition of the purpose of these institutions.  However, foundations and endowments often separate their mission spending from investment of their assets.  This produces a false dichotomy that results in these institutions more often than not operating with one arm tied behind their backs.

Sadly, in the US, England and Wales, serving "the public benefit” in practice seems to refer only to providing grants and other charitable giving, which is required to meet legal requirements.   To consistently serve "the public benefit," the goal of a foundation’s financial investments should be, at a minimum, to do the least possible harm to its mission goals and the public, while providing financial resources for mission giving activities.

Harmonization of giving and investing is part of being a prudent fiduciary.  The original meaning of “prudent,” as in prudent person, is to be farseeing.  When the Jessie Smith Noyes Foundation adopted a farseeing approach to mission and investments through a process of harmonization in the early 1990s, I believe it was the first time that we understood the full meaning of our fiduciary duty.

Recent publications I have seen on climate change and philanthropy reflect this inconsistency. Each thoughtfully lays out a variety of opportunities for grants that would help US and English foundations and charities respond to climate change, regardless of their mission.   Missing from the publications is even a hint that investment of foundations’ endowments—presently estimated at over US$500 billion—could add value in dealing with climate change.

Acting more like investment bankers than philanthropists, foundations regularly direct most of their resources—their financial assets—away from their philanthropic missions. This is not due to lack of opportunities.  For example, there are a large number of mission connected investment vehicles available that deal with climate, water and related issues in virtually all asset classes.

Professor Michael Jensen and his colleagues at the Harvard Business School approach this harmonization issue as a matter of organizational integrity, which they define “as that group’s or organization’s word being whole and complete.” The concept incorporates morality, ethics, and legality.  Organizational integrity is “a factor of production as important as knowledge and technology.” Their model “reveals a causal link between integrity and increased performance, in whatever way one chooses to define performance (for example, quality of life, or value-creation for all entities).”

The World Economic Forum also highlights the importance of investment practices in its 2011 report, Accelerating the Transition towards Sustainable Investing: Strategic Options for Investors, Corporations and other Key Shareholders. It stresses that the financial markets have great transformational power to accelerate the transition to more sustainable business practices and value creation.

While foundations and endowments pursue their philanthropic missions through difference processes when making grants, providing services and investing their assets, they could be more effective by harmonizing those processes.  All should be guided by the same fundamental purpose, serving the public benefit.

It all seems so obvious.  But, as someone once said, "The difficult takes a while to change, the obvious a bit longer."

In my next blog I will examine the Bermuda Triangle of foundation investing and other barriers that will require work to change.

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Steve Viederman is affiliated with The Christopher Reynolds Foundation in New York and is co-chair of the Get Off Your Assets Committee of the International Human Rights Funders Group. He is also a member of the advisory board of Inflection Point Capital Management and a contributing editor of the Journal of Sustainable Finance and Investment.

This article is part of the NSFM opinion series, in which participants propose specific steps towards real and sustainable market reform. Contributors write in a personal capacity. NSFM participants are invited to comment on blogs articles and contribute to the series. Please contact Ebba Schmidt or Frank Jan de Graaf for further information.

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Article References

Design to Win: Philanthropy’s role in the fight against global warming (2007). California Environmental Associates. http://www.climateactionproject.com/docs/Design_to_Win_8_01_07.pdf.

Institute for Responsible Investing (2009) Harvard University. Handbook on Climate-Related Investing across Asset Classes. Available at http://hausercenter.org/iri/wp-content/uploads/2010/05/Handbook_ClimateRelatedInvesting.pdf.

Institute for Responsible Investing (2007). Handbook on Responsible Investment Across Asset Classes. Available at http://hausercenter.org/iri/wp-content/uploads/2010/05/IRI_Responsible_Investment_Handbook_2008_2nd_Ed.pdf.

Institute for Responsible Investing (2009) Harvard University. Handbook on Climate-Related Investing across Asset Classes. Available at http://hausercenter.org/iri/wp-content/uploads/2010/05/Handbook_ClimateRelatedInvesting.pdf.

Jensen, Michael C, et al (2010). Integrity: A positive model that incorporates the normative phenomena of Morality, Ethics, and Legality—Abridged. Harvard Business School NOM Working Paper No. 10-061. Download from http://ssrn.com/abstract=920625.

Lindblom, Lance and Teague, Peter (2011), More Donors Need to Support Innovative Climate Solutions, Chronicle of Philanthropy, February 20.

Viederman, Stephen (2008), How Grantmakers Can Curb Global Warming, Chronicle of Philanthropy, May 8.

World Economic Forum (2011). Accelerating the Transition towards Sustainable Investing: Strategic Options for Investors, Corporations and other Key Shareholders. Download from

http://www3.weforum.org/docs/WEF_IV_AcceleratingSustainableInvesting_Report_2011.pdf