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Responsible investors combine their financial objectives with environmental, social, and governance-related risks and impacts. This type of investing goes far beyond simple exclusionary screening or even the much-touted “ESG integration” (environmental, social, and governance integration) that considers only risks and opportunities within the investment itself. Responsible investing gets at the heart of how the philanthropic community can use its unique voice to further the systemic changes that are desperately needed in our economy, society, and environment.
Forward-thinking foundations have been investing this way for years, but this more cohesive approach has recently gained momentum in the mainstream. A growing number of philanthropic organizations see their investments as a means to expand their impact beyond grants. Over the past ten years, responsible investing has grown immensely — across all asset classes, styles, and geographies — and at a rate that has outstripped growth in most other investment strategies while showing little regard for downturns in the wider market. The amount of professional money managed using ESG criteria rose sharply, according to US SIF, and now represents 33% of the $51.4 trillion in total U.S. assets under professional management.
While the traditional stance has been to split financial management from grant-making or programming, a more updated view is that this separation is unwise. Indeed, it makes far more sense to use the total assets of an organization to pursue its mission — to mirror the social aims that are embodied in programmatic pursuits in investment activities. In other words, it makes little sense to pursue investment activities that do not support — or that may in fact threaten — the success of programmatic activities supported by such investments.
Philanthropic organizations are coming under fire because they fund solutions to problems that are caused by companies in which they are invested. That kind of unwanted attention and reputational risk is also fueling demand for more aligned ways of thinking about investments. What we’ve also seen is that donors tend to be inspired by this cohesive way of thinking and they like knowing that their contributions are making an active impact, rather than passively sitting in an account somewhere, growing for growth’s sake.
The definition of fiduciary responsibility has also evolved to integrate prudent investment practices with concerns about environmental stewardship, healthy and safe communities, and corporate accountability. Fiduciaries have a duty of obedience to the endowed institution’s mission, which requires use of investment practices that serve its charitable purposes, and applies to both program and investment activities.
In terms of enhancing returns, what we have also found in our investments is that careful consideration of environmental, social, and governance factors can help unearth information that the market is not yet considering. The old thinking — that by investing in a responsible way, returns are limited — has been put to bed by numerous academic studies over the years.
Read the full article about investing responsibly by Sonia Kowal at The Center for Effective Philanthropy.