October 21, 2010Unethical
Investing By Charities
By Ron Robins, Founder & Analyst - Investing for the
Soul
It is strange that many Western charities still invest
their funds in companies whose activities create the
very difficulties they are trying to alleviate. But such
problems can be minimized if charities create well
designed ethical investment policies.
In a 2009 UK survey, the Charity Project and the Charity
Finance Directors Group (CFDG) found that of its 164
member charities with investments over £1million, 60 per
cent had an ethical investment policy, while just 25 per
cent of smaller charities with investments under
£1million had one.
A prime example of the dilemma charities face without a
strong ethical investment policy was exposed in a Los
Angles Times January 2007 article. It detailed an absurd
situation that the Bill & Melinda Gates Foundation found
itself in. This foundation is probably the largest in
the world and was founded by Microsoft co-founder
multi-billionaire, Bill Gates, and his wife Belinda.
The Los Angeles Times stated that, “the [Bill & Melinda]
Gates Foundation has poured $218 million into polio and
measles immunization and research worldwide, including
in the Niger Delta. At the same time that the foundation
is funding inoculations to protect health, The Times
found, it has invested $423 million in Eni, Royal Dutch
Shell, Exxon Mobil Corp., Chevron Corp. and Total of
France — the companies responsible for most of the
flares blanketing the delta with pollution.”
Continuing, “oil workers… and soldiers protecting them
[in the Niger Delta] are a magnet for prostitution,
contributing to a surge in HIV and teenage pregnancy,
both targets in the Gates Foundation's efforts to ease
the ills of society, especially among the poor. Oil bore
holes fill with stagnant water, which is ideal for
mosquitoes that spread malaria, one of the diseases the
foundation is fighting.”
But why wouldn’t all charities have strong ethical
investing policies and thereby limit such potential
conflicts of interest? The answer usually is that there
is a ‘hands-off’ approach between charities and their
financial advisors. Charities often believe they know
little about investing (though that is untrue of larger
charities such as the Bill & Melinda Gates Foundation)
and primarily want the highest returns possible on their
investments. Charity funds’ managers also seek the
highest returns and so invest their funds in the ways
they believe make safe and good returns.
Charities wanting to invest ethically and screen for
environmental, social, and governance (ESG) issues, have
to engage their investment consultants in the
discussion, as it is unlikely that their investment
consultants will bring up the subject themselves.
This is clear from a 2009 US study, “Investment
Consultants and Responsible Investing,” where
researchers found that, “investment consultants are
still cautious about raising ESG issues with their
clients. Only 22 per cent said that they raise the issue
of ESG integration as standard procedure when meeting
with clients. The majority—71 per cent—said that they
discuss ESG integration only when clients ask about it.”
Though US-based, the results of this study are probably
reflective of the situation in most countries.
Charities have excellent opportunities to further their
missions with appropriate ethical investing policies. If
working to alleviate poverty, they may consider putting
some of their funds in the microfinance sector where
small loans are made to help individuals build emerging
businesses. If they are concerned with the environment,
they could put funds into the alternative energy sector
and avoid investing in companies with large greenhouse
gas emissions.
Also, as stockholders, charities can engage in
‘shareholder advocacy’ by lobbying particularly
companies in ways that advance their causes.
However, most investment consultants will still advise
charities to have a ‘balanced’ portfolio. This, as well
as good returns, can be achieved by employing a dual
investing mandate whereby investments are first checked
to see they aid, or at least do not hinder, the
charity’s mission, and then they should pass a general
ethical or ESG screen. (Ethical and ESG screened
portfolios can provide as good—and sometimes even
better—returns than conventional portfolios. See my
column,
Can Ethical Investing Produce Higher Returns?
Charity workers themselves see the importance of
investing ethically too. From the UK’s FT.Advisor in May
2010, “research from… The Pensions Trust [and] Queen
Mary, University of London, [found] 72 per cent of
charity workers think investing ethically is critically
important… On average, younger members and women
reported more interest in ethical investment, with 83
per cent of those under 35 showing a moderate to high
interest, compared with 61 per cent of those over 65.
Similarly, 76 per cent of women believe ethical
investment is important in comparison to 66 per cent of
men.”
Also, donors are unlikely to want their charitable
donations going to investments that may harm the
charity’s mission. Again, from the UK, the
charitysri.org website divulges that, “according to a
2008 GFK/NOP poll of 2,000 adults commissioned by the
EIRIS Foundation, 52 per cent of the general public
would be unwilling to give to a charity that is
investing in a way that is against its mission, and a
further 31 per cent would be less likely to give.” I
suspect that were such surveys conducted in other
countries, the results would be similar.
Whether or not involved in charities, most people
believe charities must invest ethically and in ways that
further the charities’ goals. By holding and making
investments that negate their goals, charities alienate
donors and decrease donations. Becoming ever more
conscious of such dilemmas, most charities will find
their best choice is to institute strong ethical
investment policies.
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