Investment

Final report: Investment: The Pillars of Stronger Foundation Practice.

And you can view the report's launch webinar, with speakers Danielle Walker Palmour, Friends Provident Foundation, and Matthew Whittell, John Ellerman Foundation.

The final report is available to view and download.

The group's full terms of reference is available to view and download. 

The members of the group were: Danielle Walker-Palmour, Friends Provident Foundation (group chair); Janie Oliver, Access Foundation; Joanna Heywood, Big Society Capital; Diana Sutton, Bell Foundation; Sian Ferguson, Ashden Trust, Mark Leonard Trust and JJ Charitable Trusts; Mark Bromley, The Hinrichsen Foundation; Matthew Cox, Esmée Fairbairn Foundation; Christine Oliver, Polden-Puckham Charitable Foundation; Helen Carter, Francis C. Scott Trusts; Jackie Turpin, Joseph Rowntree Charitable Trust; Jen Hooke, ThirtyPercy.

Meeting #1 (February 2019) - Introduction

The working group looking first met in February, chaired by Danielle Walker Palmour of Friends Provident Foundation. A round of introductions revealed a variety of approaches to investment, with the age of the foundation and its founding values being central to how foundations view and use their endowments.

Members discussed whether ‘intentional investing’ was the most appropriate title for the working group. ‘Mission-aligned investing’ was suggested as an alternative, but it was felt that this unhelpfully implied that investing should be seen as separate from (although linked to) mission. Another suggestion was ‘good investing’, or to hold off naming the group until further deliberations. 

Some clear themes emerged that the group might address in future meetings. These included using foundation investments to challenge the status quo, the importance of a foundation’s time horizon and its consequences, and the public benefit requirement as a guiding principle.

These themes manifested in the questions that arose for the group to consider, ranging from constructing ethical portfolios to asking why more foundations are not currently viewing their investments through the lens of intentionality.

ACF will now work with the group’s chair Danielle to form a work plan for the next six meetings, inviting external expertise and critique to provoke, challenge and inform the group.

Meeting #2 (April 2019) - Mission-led investing vs maximising returns: seeing both sides

Larry Kramer, President of the US-based Hewlett Foundation, joined the group’s second meeting via a pre-recorded video interview. Following on from an article in which he ‘made the case against impact investing’, Larry gave a nuanced perspective on how foundations can achieve impact; in his view, strategic grant-making can have greater impact than making low return investments that may over time risk eroding the value of the endowment. Larry also touched on the different tactics foundations can deploy in tackling issues such as climate change, and the merits of the perpetuity model.

The group then dissected what they’d heard and how it might have challenged some of their own views on this issue. Reflections included: does foundation divestment make any difference to fossil fuel companies, or in reality do other investors step in with less benign intentions? Is the perceived need for specialist expertise among staff and trustees putting some foundations off using their investments in different ways, or is this an excuse? How do foundations change their investment approach given the constraints of their size and existing portfolios?

The group then broke into smaller groups to build on some of the key ideas from Larry’s interview. Is intentionality enough? Is shareholder activism an effective tactic? Is it true that philanthropic divesting has little or no impact on the companies? The discussion covered themes including the power of collective action, the range of tools that can influence corporate behaviour, and the lack of transparency around investments.

Meeting #3 (June 2019) – The intentional investing landscape: how has it changed over the last four years?

Two speakers joined us for this session; Kate Rogers, Co-head of Charities at Cazenove Capital, and Richard Jenkins, the authors of ACF’s report Intentional Investing in 2015. The group considered the questions: what has changed in the four years since the Intentional Investing report came out? Have the investment options outlined in that report changed (exclude, select, influence, deliver, or financial return only)? What additional opportunities have arisen over the last four years?

The speakers made many observations of the intentional investing landscape based on their experience and expertise. These included that the law is permissive to foundations investing intentionally and there are more options and research available. They increasingly see foundations wanting to make more use of their as yet underutilised endowments, as well as an increase in foundations looking to influence investment behaviours. They posed that there should be a baseline of ethical investment that all foundations should be achieving as society is demanding this. They also discussed the importance of board diversity in bringing fresh approaches to impact investing and ESG issues.

The group wanted to consider some practical approaches to moving the sector along the spectrum of capital, as outlined by Bridges Impact + and the Impact Management Project. The group asked ‘in 12 years’ time, will the decisions we’re taking now seem woefully lacking?’, a question which framed the discussion around these two questions:

• What are the fundamental questions that we might want to ask (of regulators and the sector) to change opinion and practice?

• How would you go about driving change in the sector in relation to investment practice?

Some of the group’s reflections included:

• Foundations are in a powerful position and should be clear with investment managers what they want.

• How do we educate ourselves and ask questions of our trustees, without letting knowledge reside with once investment expert? One way is to employ an adviser who is looking out for you.

• How can we be clear on what the impact of a particular product is?

• Foundations could disclose investments in annual reports so that the public can judge for themselves.

• If foundations won’t publish details of their investments, we could ask them to ‘explain or change’. We say in our accounts that we are achieving public benefits in relation to grants, but not investments. We could seek to clarify legally what ‘public benefit’ means in terms of trustees investment duties.

• The Living Wage movement is a good example of how standards can be created.

Stronger Foundations blog: Is intentional investing beyond returns becoming a moral, social and financial imperative?, by Max Rutherford, head of policy, ACF.

Meeting #4 (September 2019) – Investment: a total impact approach

For its fourth session, the topic of discussion was ‘social investment and the role of foundations in market development’, in which the group considered the role of foundations in developing a successful and sustainable portfolio.

The working group was joined by Chris Coghlan, Finance Director at Access - the Foundation for Social Investment, which works bridge the gap in the social investment market so that charities and social enterprises have better access to capital. Chris’ presentation specifically explored Access’ total impact approach, through which it takes into account the social and environmental impact of all its operations including investments.

The presentation led to an interesting discussion that unearthed areas of concern around social investment. The group saw charity bonds as a useful way to transition from commercial investing to social investment, but pointed out that charity bonds are at present only a tiny portion of the overall investment market.

Group members recognised that for many foundations Access’ level of investment transparency is difficult to achieve, as details of a portfolio are not always easy to access. With the aim of developing greater transparency, the working group stressed a need for common language. Clearly mapping out the range of individual investments strategies on to a standardised spectrum would enable comparison with peers.

Chris’ total impact approach resonated with the group. Members highlighted the need for factoring in impact when considering returns on investment, as this can too often be thought of solely in terms of financial profit. Negative and destructive impacts of investments must be considered alongside positive impacts to make investment truly intentional.

Blog: Total impact - aligning programmes and investment on purpose by Chris Coghlan, Access Foundation.

Meeting #5 (November 2019) - Aligning investment strategy with mission

At the working group’s fifth meeting, the topic was ‘Aligning investment strategy with mission’ and we were delighted to welcome Dave Gorman, Director for Social Responsibility and Sustainability at Edinburgh University, as our speaker.

Dave presented the journey that Edinburgh University had been on to align their own investment strategy with mission. Edinburgh University signed up to the Principles of Responsible Investing in 2013 and over time their investment strategy has moved to a position of positive investment in renewables and sustainable and social investments.

The group considered the similarities between the university and foundation sectors (e.g. mission and values focussed on delivering public benefit), as well as the differences (e.g. clear source of external pressure to change from the student body in the case of universities, but no clear source of external pressure for foundations). The group reflected that the foundation sector would need to create its own pressure to speed up change.

Following the presentation, the group considered a number of questions related to the topic:

1. In the context of increasing public scrutiny and pressure, how can we ensure that our investment policies stand up to public scrutiny?
2. What are the catalysts for change?
3. What does this mean for foundation practice?
4. Is intentionality enough?

The following points were made:

• The sense of urgency is lacking in our sector, so how can we create it?
• Would disclosing what our investments are create more urgency?
• We need a lightbulb moment. People often think that investment isn’t their area of expertise and there is a barrier, but it’s not that complex and perspectives shift once you start thinking about it.
• Capacity is a huge issue. Having staff in post to look at responsible investment specifically will help foundations to be more proactive.
• Working together would enable us to drive the market instead of the other way around.
• Getting good advice is important. Trustees need advice and they need to be responsible for their decisions.
• Training should be provided on the relevant investment world for trustees.
• The transparency agenda is powerful in relation to this. Transparency extends to who our fund managers are and enables others to see if our decisions have been good.
• Foundations will have to change the way they invest in the future. Are they ready for it? How do foundations future proof while being ethical?
• Using the right wording is important. Using the word ‘values’ can make people sit up and think.
• Investments are much bigger than grant budgets so the potential for doing harm is high and can outweigh positive impacts achieved through grants

Meeting #6 (January 2020) - Portfolio creation and investment manager selection

The working group met for its sixth meeting to consider the topic ‘Portfolio Creation and Investment Manager selection’. We were delighted to welcome Nicola Parker, an Independent Investment Adviser to the meeting to provide her perspective on this topic. Key points Nicola raised in her presentation included:

• that in her experience, trustee boards which have dived in to consider ESG investment in a comprehensive way, engaged with a range of material ESG issues and allowed time for a thorough process of consideration, have achieved more than those who have tentatively tinkered or treated it as a tick-box exercise

• that the investment policy will need to be regularly reviewed and discussed with investment managers to ensure they have understood the nuances and specific needs of the endowment

• trustees and staff can engage with their investment managers to a greater degree of depth than most do; ensuring that managers are continuing to identify ESG issues that reflect the foundation’s mission and values; gathering together different managers to compare approaches to particular issues to encourage learnings, for example gender equality or the climate crisis; and researching the approaches of different managers to encourage best practise

• to consider returns and risk in relation to both financial performance and ESG factors, such as the positive and negative impacts of a company on people and the planet, and to interrogate impact reporting where it feels like greenwash or does not reflect the factors that managers are considering when analysing the ESG impact of a company

• push back when managers that state that applying an ESG screen will negatively impact financial returns as the body of research does not support this

• to explore how investments can be aligned with mission and values within the investment structures the foundation is currently using and whether these need to be assessed.

Members of the working group then discussed key questions raised by the presentation including:

• grantees are frequently assessed on an annual or tri-annual basis while investment managers may be in place for a decade or more without re-assessment on issues beyond financial performance. This can lead to foundations not being in touch with thought leadership on ESG and investment

• that when a foundation’s investment policy focuses only on financial return and doesn’t align with its mission and values, this is a signal to investment managers that the foundation favours finance first investments which don’t take account of ESG considerations. Policies should ideally integrate ESG, risk and return factors as the three are interlinked and mutually dependent

• foundations should use the expertise of their trustees, grantees and staff to ask bigger picture questions of investment managers and so that their portfolio is an enabling tool for their broader purpose.

Meeting #7 (March 2020) - Investing through a diversity, equity and inclusion lens

The working group met for its seventh and final meeting to consider the topic ‘Investing through a Diversity, Equity and Inclusion lens’. For its final meeting, the group heard from Diana Massdijk, founder and CEO of Equileap. Diana spent most of her career in the NGO sector working on women’s rights. Key points from Diana’s presentation were:

Those managing investments can use a variety of ‘screens’ or ‘lenses’ to consider environmental, social and governance factors. This might include assessing and ranking companies based on whether they are carbon-intensive or if they have effective oversight to avoid human rights abuses in their supply chain. Assessment might include evidence in company annual reports and through engaging with the company directly. Assessment and ranking might be conducted internally or through using external agencies and research from activist organisations.

Despite many years of work on gender in the workplace, women have still not achieved parity on wages, executive and board representation and many still face harrassment. Much of the available data is focused on women at the most senior levels, particularly company boards. Equileap aims to accelerate gender equality at all levels by assessing and ranking thousands of companies globally across 19 criteria. Equileap has a database of companies with a market cap (the number of shares x the value of each share) of £2 billion+ covering 23 developed economies.

Equileap assesses companies based on a ‘scorecard’ covering gender balance and leadership, promotion and development; equal compensation and work-life balance; sexual harassment policy; corporate commitments to gender equality. Data is gathered from visits to over 3,500 companies and researching Corporate Social Responsibility reports and data published by the company. Equileap’s data and indices (ranking of companies) have been used to create financial products (for example funds focused on companies with strong performance across the 19 criteria) and to help investment managers consider gender when assessing ESG performance.

Women’s economic participation has clear benefits for them and their families. The inclusion of women in the workplace at equal participation levels would be worth £28 trillion to the global economy and research has shown that companies with more gender balance in leadership have better financial performance. Thus Equileap’s work has both social and financial benefit.

The working group then discussed how foundations and those managing their investments can use gender and other lenses to consider different aspects of a company’s performance. Screens exist to assess companies based on environmental and governance performance. The group was keen to explore whether similar rankings could help to shed light on other elements of diversity, equity and inclusion, for example how well a company engages with and serves those from marginalised communities, or with disabilities.

The group also discussed the importance of knowing what data is being used to assess and rank companies, a ranking is not worthwhile if the foundation doesn’t understand and agree with the criteria behind it.

Further reading

Below you will find a suggested reading list, which the working group identified and considered as part of its deliberations. If you would like to send suggestions to us, please do by emailing [email protected]

• Intentional Investing (2015) ACF
• 'How can foundations ensure they are in good shape to pursue a long-term mission?' (2018) A write up of a panel discussion involving ACF and several members in Charity Finance
• 'Hewlett Foundation's Leader Makes a Case Against Impact Investing' (2019) Larry Kramer in the Chronicle of Philanthropy
• Changing Attitudes to Ethical Investment? (2014) Charity Commission for England and Wales
• Charity Investments: Guidance and Good Practice (2018) Scottish Charity Regulator (section 5)
• Giving is not like investing (2019) Center for Effective Philanthropy