Cover Story

Socially responsible investing—where foundation endowments are in sync with their grantmaking mission—is still "out there," but maybe not as far as it once was. There's new research that says SRI doesn't necessarily penalize returns, and there's new thinking on whether SRI is worth it even if it does.

An outside observer of philanthropy might well anticipate that foundation investments and grantmaking correspond. That is, that both are tailored to promote the foundation’s mission. For example, that the Gotbucks Foundation does not hold stock in the Smokes-R-Us tobacco company, no matter how fat the dividends, at the same time it supports a smoking cessation programs.

And yet, any outside observer bearing such assumptions would be in for a surprise. Although the contradictions are seldom as blatant as that hypothetical example suggests, the idea of bringing investment strategy in sync with grantmaking strategy remains overwhelmingly suspect to organized philanthropy.

A few foundations, mainly small and liberal ones, do practice what’s known as socially responsible investing (SRI, in shorthand) of their portfolios, and some interesting trends have developed in that regard. But the heavy majority, including many that would be termed progressive in other ways, continue to carry out their fiduciary responsibility by hewing to the traditional notion of maximizing investment return and using that money only—the returns—to further the foundation mission.

Ideology has little, if any, bearing on choosing that course. A spot check of self-described progressive foundations indicates that many of them, especially the larger ones, staunchly stick with the traditional approach. So do their right-wing counterparts, who seem no more inclined to harness their investments to work toward their larger purposes programs, despite the stereotype of being single-minded and super-ideological. "I’m not aware of any conservative foundations doing ‘social investing,’" says Chris Olander of the New York City-based JM Fund, which counts itself among the conservative funders. "At JM, we invest strictly on the basis of performance from a fiduciary standpoint." Muses Olander, "What would be a ‘conservative’ social investment? Would we look corporations that refuse corporate welfare?"

The Reasoning

What’s holding them all back? For the most part, there’s a fear—or even, a conviction—that assets invested with other than a maximum return in mind will do relatively poorly. And that prospect violates one or both of these hallowed maxims: To make less than the achievable return robs the institution of grantmaking power; and, besides, making money and spending it are very different matters; they’re the input and output, the yin and yang, of philanthropy.

The idea of setting investments and grants on the same track has been around for years. (One writer traced it to seventeenth-century Quakers who refused to invest in weapons businesses.) In the last two decades, it has been embraced by such investing entities as union pension funds and churches. Indeed, those entities have become such active social investors that numerous specialized investment funds have sprung up to handle the demand. Some of the SRI giants—KLD, United States Trust Co. of Boston, Parnassus Investments—are well known among institutional investors.

Although the core of the debate—whether to put all of your money where your heart is—has been conducted in gentlemanly fashion, the underlying rhetoric has been heating up. SRI proponents sometimes charge their traditionally oriented counterparts with buying shares of "toxic stocks." Now, that doesn’t mean the certificates will poison you; it’s just a nifty pejorative for the offerings of tobacco and alcoholic-beverage companies, weapons manufacturers, environmental polluters and the like.

Within the foundation world, the few foundations that already employ SRI have been expanding the scope of their concerns. Other funders say they’ve begun to broach the topic at the board level. Worth noting:

• An institution of 26 years standing, the Interfaith Center on Corporate Responsibility, now receives 9 percent of its budget from foundations and lists eight of them among its supporters. One of them, New York City-based Jesse Smith Noyes Foundation, gave the center $50,000 between 1994 and 1996 and shows every intention of continuing the largesse.   
• In the last couple of years, a half-dozen regional associations of grantmakers (RAGs) have held meetings to discuss SRI theory and practice and to gauge sentiment for undertaking it.   
• Corporate management practices, not just products and marketing methods, are attracting increasing attention among those who believe in SRI. "Shareholder activism"—voting for or sponsoring resolutions and badgering top executives through letters and face-to-face meetings—is emerging as a way to expressing displeasure, particularly the popular portfolio "screens" that rule out or in certain kinds of stocks.   
• The use of "mission-related venture capital" now appears as tiny wedges on some funders’ asset allocation pie charts under the moniker of "alternative investments."

"The Positive Kicker"

At the John D. and Catherine T. MacArthur Foundation, thinking outside the box about investing is so institutionalized that a senior staff position was created to oversee it. Says the staffer, William McCalpin, director of investments related to programs: "We go out looking for investment opportunities that are consistent with our fiduciary responsibilities but that also interface with our grantmaking. The latter is what might be called the positive kicker, and it’s been a definite MacArthur commitment since 1991."

MacArthur eschews both screens and shareholder activism to concentrate on what McCalpin calls alternative investments—"unusual situations in which we can provide a portion of the capital needed and also further our grantmaking mission." Three current examples: "energy efficiency and renewable energy; a planned community on land we own in Florida; small-business economic-development loans that were originally capitalized by HUD." Such investments represent no predetermined portion of the foundation’s portfolio.

What they lack in numbers, the advocates of social investing make up in zeal. The Pied Piper of the movement is the president of Jesse Smith Noyes, Stephen Viederman, who sings the practice’s praises wherever possible (including FN&C, "Adding Value to Your Grants," January/February 1997). He takes care, however, not to exaggerate the foundation community’s acceptance of social investing: "There still hasn’t been a hell of a lot of debate, or even a lot of interest, among foundations. The reason for that in most cases is the composition of the foundation’s finance committee."

Viederman’s West Coast counterparts include the Tides Foundation’s Drummond Pike and philanthropist/consultant Tracy Gary. Pike says he has "never quite understood disassociating investments from grantmaking and terms the common arguments against social investing "dissembling." He adds, "Unfortunately, people don’t do the kind of research that would show them that it’s as viable as any other kind."

"We’ve taken some hits, even from so-called progressives, for investing socially," says Pike. In behalf of its donor-advised funds, Tides maintains short-term and long-term social accounts in professionally managed funds. The managers screen positively and negatively in the foundation’s behalf. Tides also engages in some shareholder activism, relying mostly on United States Trust Co. of Boston to coordinate the activities. "We average about a 13 percent return," Pike says. "Pretty good, yes, but of course everybody’s always trying to get 20."

Gary founded the San Francisco-based Resourceful Women and has now established a consulting firm. In both roles, she urges clients and friends to invest with a social purpose, and she sees no reason why foundations shouldn’t do the same. Says Gary, "It’s simply inexcusable for them not to do it. Most foundations give around 5 to 20 percent of income, not too many routinely give more than that. So the majority of their resources are invested. Why not use them for a good purpose?"

Gary becomes incensed at the claim that social investing means forgone income: "My aggregate return has averaged about 16 percent for a long time; last year it was 33 percent. Anyway, after these great years in the market, we should all be willing to give something back, to take 6 or 10 percent if that’s what it turns out to be."

Gary observes a difference in the way women and men view the subject. "Traditionally," she says, "women have been leaders—in religious institutions and elsewhere—in keeping our values, actions and assets in alignment with one another. Ninety percent of the women I’ve worked with want to do this kind of investing." Given the trend toward more women running foundations, it’s understandable why Gary forsees that socially responsible investing will continue to grow in acceptance. She predicts: "It will be a major trend in the twenty-first century. The practice is coming of age."

ROI: Where the Rubber Meets the Road

As indicated above, the central issue in social investing is the rate of return it will—or can be expected to—produce. Advocates point to studies showing market-level returns or better (See "Results and the Double Bottom Line"). The most convincing evidence is the performance of the Domini 400 Social Index (DSI), a group of stocks picked by SRI guru Amy Domini and her associates in May 1990. These "socially screened" corporate stocks tracked by Domini have performed as well or slightly better than the Standard & Poor’s 500 for seven years now. In 1996, the Domini 400 was up 23.70 percent compared to 23.07 percent for the S&P 500.

Two studies of the DSI done last year by Boston-based Northfield Consulting Services concluded that social screening neither helped nor hurt a portfolio’s performance. The overall finding: Even if they screen in or out based on social criteria, shrewd investors can find enough sound stocks to yield acceptable return.

In any case, favorable and neutral statistics on rate of return seem to have changed few minds. As The Boston Globe put it in a recent profile of the Domini 400 Social Index and its founder: "Amy Domini has a pretty persuasive argument to make. Her problem is: is anybody listening?"