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Aligning Assets with Mission: Responsible Investing for Charities

Resource Center - Foundation

by Brittany Stares

There are two unhealthy paradoxes within the charitable sector. The first is that, on a daily basis, nonprofit professionals work hard to advance the mission of their organization—yet the assets of the organization may be invested in such a way that is unsupportive of, or even at odds with, this mission. The second is that charities often rely on endowed assets to ensure mission delivery over the long-run—but conventional investing can expose these assets to systemic risks, jeopardizing or destabilizing returns.

ESG Factors Impact Risk and Returns

Enter responsible investing, a term that has gained mainstream status in the financial world but remains largely elusive within the charitable sector. Responsible investing refers to a general approach to investing that considers environmental, social and governance (ESG) factors in the selection and management of investments. This departs from traditional investing, where these factors are viewed as non-material.

The rationale for integrating ESG factors into investment decision-making is rooted in an evolving understanding of risk: ESG factors are increasingly seen as critical in assessing the risk of investments (think, for instance, of the financial impact of a company oil spill or factory accident). More recently, ESG factors have been linked to value generation, with a growing body of evidence showing that investors who consider ESG issues have higher returns than those who do not.

For charities, responsible investing can be a way to protect endowed capital and ensure sufficient returns for stable programming or grant-making, as well as an opportunity to better align organizational assets with mission.

In practice, responsible investing encompasses a range of strategies. These include negative screens (excluding specific companies or sectors from the portfolio); positive and “best in class” screens (investing in companies based on positive ESG performance); proxy voting and shareholder engagement; and impact investing. The recent rise of responsible investing means that organizations and their investment managers have a plethora of resources for understanding and tailoring these tactics to their needs.

Where Mission and Investing Meet

On the whole, the charitable sector has been slow to embrace responsible investing. An early exception to this trend is the Community Foundation of Ottawa (CFO), a public foundation that serves an array of charitable purposes in the Ottawa area.

In 2009, the CFO began developing its responsible investing policy, which now ties its investment portfolio to two core beliefs. The first is that responsible corporate behaviour with respect to ESG issues generally has a positive influence on long-term financial performance. The second belief is that the organization expects its values of accountability, transparency, fairness and integrity—part of its mission to have an “enduring impact on communities”—to be reflected in the corporations in which it invests. Part of this strategy includes using a “best in class” approach to investments and leveraging share proxy votes to encourage companies to improve their corporate governance, environmental sustainability, and employee and human rights.

In 2012, the CFO went a step further to become a signatory to the United Nations-supported Principles for Responsible Investment (PRI), joining some of the world's largest asset owners in pledging to consider ESG issues in their investments, be active owners and encourage the broader uptake of responsible investing. To date, the CFO is the only community foundation in Canada to have signed the PRI, and one of only a handful of Canadian charities to do so.

Brian Toller, who led CFO’s move into responsible investing when he was its board chair, says that key for his organization in adopting a responsible investing policy was educating the board, identifying core investment beliefs, working with partners in the field like SHARE Canada, and having a gradual path to put the policy in place over time. Toller admits that his organization's leadership came with challenges, as few resources existed at the time on responsible investment for small funds. Now, he says, there are far more examples to follow: the CFO, for instance, has its responsible investing policy on its website for other organizations to learn from.

According to Toller, the impetus for a responsible investing policy has to come from the asset owner: the charity and its board, not investment managers. To facilitate this, the AFP Foundation for Philanthropy–Canada awarded its 2015 annual research prize to work focused on shifting the nonprofit sector towards responsible investing. The research, completed last fall, found no significant financial hurdles to charitable participation in responsible investing, and plenty of room for its uptake.

Education is critical in helping charities become aware of the opportunities in responsible investing. The first key step: understanding the two paradoxes charities are caught in, and what they can do about them.

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