By Joshua Levin
As a nonprofit employee or executive, imagine finding out your organization holds investments that work against the impact you're trying so hard to achieve.
Many NGOs are discovering that this may not be far from the truth. Standard investment portfolios finance the business activities of fossil fuel companies, weapons manufacturers, private prisons, deforestation – this list goes on. Alternatively, what if you could align your institution’s investments with your mission, and even your campaigns, smartly wielding investment as a force to further your cause and your financial goals?
This is not a fantasy, but a revolution in socially responsible investing that’s already here. By looking at a few of the challenges and successes experienced by nonprofits walking this journey, we can learn lessons on how to expand our impact through finance.
First, a clear example of the challenge: I recently spoke with the board member of a foundation – in this case, who wishes to remain anonymous - that focuses on prisoner, worker and immigrant rights. The foundation donated around $50,000 to an immigrant rights organization, only to discover that its endowment simultaneously holds nearly $75,000 worth of shares in the parent company of the detention center against which it's advocating! Similarly, a roughly $25,000 grant to support labor organizing at a local factory was outweighed by an equity stake nearly four times greater in the factory’s holding company. These discoveries were upsetting to say the least and raised questions around the efficacy of grant-making done in isolation from the endowment.
Yet even obtaining this information took months of wrangling from the foundation's money manager, who subsequently insisted that making changes would be difficult and hurt financial returns. These claims ring false. The real issue is that most asset managers make their fees by putting everyone into the same portfolios regardless of their clients' true objectives; they simply don’t want to spend time customizing for "small" pots of money.
Unfortunately, these advisers are behind the times. Over 2,000 research studies, spanning 40 years of data, show that more sustainable companies tend to meet or outperform their peers. Simply put, as society makes progress on the causes we are fighting for – e.g. abandoning coal-fired energy or private prisons – the bad actors tend to lose. Why should you lose along with them?
Friends of the Earth (FOE) took a different approach. A leading environmental organization founded in 1969, FOE is deeply familiar with the power of finance to shape industry behavior. Says Michelle Chan, VP of programs: “We have been doing sustainable finance work for a long time. It really started in the 1980s, when we focused on World Bank reform. Then we engaged Export Credit Agencies. In the ‘90s, we began to work more with Wall Street Banks and the socially responsible investment (SRI) community.”
In recent years, FOE started to build up its financial reserves, and the organization wanted to put these to work in a way that enhanced it programs. FOE was fortunate to be starting from a blank slate. It crafted a request for proposal (RFP) with an extensive set of exclusions – from industrial agriculture to military contractors to mining – and ultimately sourced a provider that would fulfill all of its provisions. “The whole process took about six months,” Chan says.
“It was worth it,” adds Jeff Conant, FOE’s senior international forests program manager. “In the end I think we did a pretty good job as an organization, building a portfolio we can be proud of.”
A remaining challenge for FOE is ensuring ongoing alignment. As Chan states: “One of the ‘lazy’ assumptions of the model is that our screens are being followed. Yet with any kind of policy that you give to a money manager, unless you’re doing pure sector exclusions, there is still a judgment call. So some bad performers can get through.” The onus remains on the organization to keep its financial managers accountable.
In another example, the Heron Foundation made waves in 2012 when it decided to go “all in” on impact and socially responsible investing. Heron looked to its US$300 million endowment as an engine to help drive its strategy of economic development and poverty alleviation. Says Kate Starr, then CIO who managed much of the transition: “Once we understood the full meaning of fiduciary duty as applied to nonprofit organizations, moving to 100 percent brought us much closer to delivering on our mission.”
This sounds lofty, but the key was just to get started. “There were some easy moves we could take in the short run, like running screens on our large-cap equity exposure,” Starr says, “even as we looked for opportunities to make longer term, less liquid investments.”
Starr says the biggest challenge for Heron was getting transparency into everything the foundation owned: “Stocks, bonds, loans to nonprofit organizations, cash deposits – over 7,000 separate securities! It highlighted for us how difficult it is to find the right combination of social and financial information to assess how well the portfolio lives up to a foundation’s goals.”
Fortunately, since Heron’s transition, a growing suite of free tools has emerged to help simplify the process. OpenInvest offers the Portfolio Lens tool, which gives quick transparency into some of the most common portfolios. For a deep dive into specific issues across thousands of funds, FOE and AsYouSow offer the DeforestationFreeFunds tool, and AsYouSow offers its FossilFreeFunds with recently added carbon footprinting.
Finding a solution for a retirement plan can be a bit more complicated. 403(b)/401(k) plans often come with a set menu of investment options for employees. At WWF, where I spent the last six years, as well as at many NGOs, there are some “green” funds on this list. Yet they often include high management fees and spotty performance. Even worse, as profiled in this recent Bloomberg article and other media, it can be disappointing to look under the hood at the funds’ holdings.
At FOE, the approach for employee accounts is to exclude all funds with large oil holdings, and to default employer contributions into those that are tobacco-free. “We wanted to default employees into age-targeted full SRI funds, but amazingly, these don’t exist.” Nonetheless, retirement plan choices are available that offer some alignment with employee and organizational values. And the more employers request them, the more options will emerge.
Individual NGO employees also invest outside their employer. As mission-driven people, there’s no reason they shouldn’t practice sustainable investing. Indeed, this is often the easiest place to start, and SRI makes an impact. To implement, the company I co-founded, OpenInvest, makes socially responsible investing easy and affordable for both individuals and organizations. There are also green ETFs that can provide SRI portfolios at low cost.
Simply put, there are no longer any technological, cost, or performance barriers to adopting socially responsible investing. NGO leaders should chart the path -- at the institutional level, in their employee retirement accounts, and as ethical individuals.
Just as we increasingly demand that corporations account for and mitigate Scope 3 (value chain) impacts, we too should expect more of our service providers – especially financial service providers that also define the incentives that shape industry. In so doing, we discover a powerful new tool for magnifying our impact that has been on our shelf all along.
Image credit: Pixabay
Joshua Levin is a Co-Founder and Chief Strategy Officer at OpenInvest, a YCombinator-backed investment adviser dedicated to using technology to mainstream sustainable investing. He previously spent six years at WWF, where he managed the Commodities Finance Program, and has otherwise worked with the Rainforest Alliance, Root Capital, Conservation International in various capacities. He lives with his wife and two sons in Berkeley, CA.