Social investing: on the screen but not in the portfolio?
Is socially responsible investing (SRI) “on the radar” for Canadian charitable foundations? How do foundation investors think about the question of returns and the role of socially responsible or impact investments in their portfolios? I spoke at a recent conference in Toronto on this subject and the answer is both good news and not-so-good news.
The good news is that there are more active foundations all the time with more assets to invest potentially in social causes and purposes. The asset base of registered charitable foundations in Canada totaled close to $46 billion in 2012 and is growing.
While data is hard to come by, a recent study by the Centre for Impact Investing at MaRS suggested that close to $290 million might be invested today by foundations in mission-related investments.
The not-so-good news is that when it comes to mission or social investing, foundations continue to be less active than one would have expected. What are the possible reasons for this? I noted five in my brief talk:
Reason #1: Investment committees and grant committees don’t talk.
Many if not most foundations leave investing to their investment managers and do not consider mission in their investing decisions.
Reason #2: Foundations think they can’t do it for legal reasons.
They are restricted by federal law barring investing in limited partnerships. Or they are cautioned by provincial law that they have a fiduciary duty to act as prudent and responsible investors. This leads to …
Reason #3: Foundations think they can’t do it for investment policy reasons.
They believe that socially responsible investing will lead to lower rates of return than conventional forms of investing. The assumption is that it is not acting prudently to invest in a socially responsible fund. And foundation investment committees are nothing if not prudent.
Reason #4: Foundations are generally small and risk-averse.
They think that they can’t do SRI because they don’t have enough assets to make a difference. They invest in pooled funds and leave it to the fund managers to make their choices. They don’t have enough staff expertise and they are reluctant to make the effort to select their own strategies.
Reason #5: The market isn’t sophisticated enough yet.
Staff and board members of many foundations are focused on their charitable giving work. They don’t consider other possibilities for the use of all of their assets. Examples and models are missing and there simply isn’t much product yet.
Will social investing get on to the screen or into the portfolios in a significant way by 2020? I think the answer is yes. Either because they want to diversify their investment strategies or because they want to apply more of their assets in pursuit of their mission, there is new interest in increasing the pool of social finance available to charities, and a willingness to consider loan guarantees, equity investments and support for investment intermediaries such as community economic development funds. It’s not the will that has been lacking, it seems, but the way.
To give us some ideas of what is happening in this field, take a look at a recent article, Adopting Impact Investing Strategies: Lessons Learned from Pioneering Leaders by Ann Jackson and Dennis Ho. Ann and Denis provide a good four step road map to social investing, illustrating each step along the way with comments from four funds that are leading the way in the field: the J.W. McConnell Family Foundation, the Edmonton Community Foundation, the Hamilton Community Foundation and the Toronto Atmospheric Fund.