Mission Aligned Investing: More Complex Than It Seems

Even with the best intentions and emerging tools, the current investment framework makes it difficult to match investment portfolios to values.

Tufts University students rally calls for the administration to divest its fossil fuels holdings. Courtesy Boston Globe

In recent years, digital technology has given the public more access to information about the internal workings of public institutions such as universities and philanthropies. This has led to greater scrutiny of the investment portfolios of endowments and pension funds--and periodic cries of outrage at the discovery of investments that seem to run counter to mission statements and the public good. Recent examples include student protests over university investments in fossil fuel companies, and news stories about foundation investments in private prisons and payday lenders.

On the surface, investing with one's values may seem simple, but our experience at the F.B. Heron Foundation shows that even with the best of intentions and promising, emerging standards and tools, the current investment framework makes it challenging.

When we read news stories about our peers, such as recent articles about the Bill and Melinda Gates and MacArthur Foundations, and investments that seem misaligned with their missions, we know that that kind of article could also be written about us. Even a die-hard environmentalist is likely to be invested in fossil fuel companies if he or she has a 401(k), because it's surprisingly difficult to align traditional investments with values.

Back in 2011, Heron allocated 40 percent of our investments to align with our mission. But we are now fully converting our portfolio; our goal is to have 100 percent of our investments fully mission-aligned by 2017. "Helping people and communities help themselves out of poverty" is our public purpose, and we think all our investments should improve the likelihood that we reach that goal.

Last year, we examined every enterprise in our portfolio for social performance. This meant looking inside all our public and private equity and debt holdings to assess the companies inside. What we found was a mixed bag. For example, the two largest employers in our portfolio were Foxconn and Walmart. Though these companies employ poor people--and we generally like big employers since jobs are critical to helping people help themselves out of poverty--in our view, they scored poorly due to low wages, limited access to job benefits, and worrisome working conditions.

The problem is that divesting from such companies is often no small task. Here are some of the reasons why:

• Delegation of investment authority: Most institutions (and individuals) use fund managers because it is economically efficient to do so. These managers have specialized teams focused on maximizing financial returns regardless of social impact. Heron still has a portion of its assets invested passively via BlackRock, which has no customizable investment vehicle for an institution of our size. Thus, at the moment, we continue to be invested in companies that we would prefer not to be, including Foxconn and Walmart.

• Fund structure: Many institutional investors use investment vehicles that are time-bound and have liquidity constraints. For example, Heron remains invested in a private equity fund that was originally a social investment, but now underperforms both socially and financially by our measures. However, we are obligated to stay in this fund for the agreed-upon term. Some private equity funds also lack transparency around the companies they acquire, which can lead to unpleasant surprises.

• Lack of standardized data: Most companies do not report reliable, standardized data points that allow potential investors to assess their social performance in a meaningful way. And so currently, it is difficult to move large amounts of money to investments with confidence that their social performance has been accurately measured. It's also hard to compare companies' social performance across different industries. (One sector where we have found a lot of information on social performance is the financial services industry, due to the requirements of the Community Reinvestment Act.)

We're encouraged by the work our colleagues at the Sustainable Accounting Standards Board, which, after having released provisional sustainable accounting standards for 45 out of 80 industries, found that companies are already addressing nearly 70 percent of SASB disclosure topics in their 10-Ks. However, of these disclosures, 37 percent consist of boilerplate information, and only 10 percent use quantifiable metrics. (SASB 2014 Annual Report, p.12). We share SASB's view that this type of information is not useful to helping investors evaluate or companies manage social performance. We've therefore invested in SASB to improve the quality of sustainability disclosure available to stakeholders.

To begin moving out of our BlackRock passively managed funds, we developed a screen using available data--inadequate though it might be--to identify companies we would feel good about investing in. We are also working with asset managers who are willing to customize investment products to meet our needs. Along the way, we have gained a better understanding of which metrics are useful indicators of social performance, given our values. For example, we look explicitly at companies' employment practices and have made some headway in the use of peer-relative comparisons, measuring job volatility relative to revenues as an indicator of a company's management practices (higher job swings in a consistent revenue environment suggests management short-termism). If a company shows evidence of net extractive employment practices, we will divest. However, we continue to face challenges in filtering through the many, often-used metrics for social performance that we find misleading. For example, we've found that community philanthropy is not a useful predictor of a company's social and environmental performance, and in fact, it is more likely a bellwether for socially negative business practices.

As a result of our screen, we have decided to significantly divest from seven of the Global Systemically Important Banks. The data we found indicated that they weren't lending enough to small businesses, putting enough priority on quality consumer-level financial products, or adequately improving risk-management practices to meet our expectations.

It will take several years for us to optimize our portfolio for both social and financial return. At that point, we hope to have a strong system for monitoring the ups and downs of social performance on our investments just as transparently and effectively as we currently monitor financial returns.

By then, we also hope that such systems will have become mainstream, and we won't need to continue jury-rigging a special Heron-only approach. Then we can focus on continually improving information, asking tougher questions, and finding more aligned money managers.

We hope that Heron's decision to move early on this front (coupled with similar actions on the part of our institutional colleagues, such as the McKnight Foundation, the Wallace Global Fund, and CALPERS) will help untangle the web of relationships and assumptions that keep so many well-intentioned stockholders invested in ways that work in opposition to their social goals.

This article first appeared in Stanford Social Innovation Review on June 4, 2015

This page contains materials from The Huffington Post and/or other third party writers. PricewaterhouseCoopers LLP ("PwC") has not selected or reviewed such third party content and it does not necessarily reflect the views of PwC. PwC does not endorse and is not affiliated with any such third party. The materials are provided for general information purposes only, should not be used as a substitute for consultation with professional advisors, and PwC shall have no liability or responsibility in connection therewith.