Last year the High Court confirmed that Ashden Trust could select investments in line with its mission; specifically, to align with the Paris Agreement on climate change. Following the case, the Charity Commission is updating its investment guidance. It will have to make clear, if it wasn’t already, that charities are not required invest solely on the basis of maximising financial returns.
So, how should foundations invest their endowments, if they are to be guided by their missions? This is a £70bn+ question.
Access – The Foundation for Social Investment invited Lucent to undertake a series of interviews with foundations and support bodies to find out more about their different approaches and whether Access might usefully do more to share their own learning. We are pleased to share some insights from this work here, as well as a separate blog with a list of responsible investment initiatives/networks/training.
Total impact vs carve-outs
Access has always had a total impact approach to managing its own endowment. It has used a Bullseye framework to think about how it does this: investing directly into UK charity or social purpose bonds as its central priority; international charities or social purpose bonds after that; and the remaining portion of its endowment in best-in-class ESG funds.
The Bullseye model is, in some ways, the reverse of the way many foundations have traditionally thought about their endowments. Generally, they describe the main portion being invested in mainstream equities or bonds, with as much as possible in ESG funds where these can still offer market-rate returns. The extent to which they are accessing high-quality ESG funds varies. And a smaller “carve-out” is dedicated to direct social impact – of different forms.
Neither model is inherently better than the other – the resulting allocations could, in principle, be similar. It’s a question of what Investment Committees find helpful to guide their investment decisions in line with their mission. That said, it has long been known that mental models play an important part in decision-making, as do anchoring biases. One large foundation described raising their grant spending and ‘carve out’ for social impact, after re-evaluating whether its historically cautious % carve out was still the right reference point.
In practice, Access invests around 35% of its endowment directly into social purpose organisations. For several larger foundations, the ‘carve outs’ are more typically 5-10% of their endowments. Whether this % could increase in more foundations is, of course, not only a question of the guiding model, but of the quantum of relevant investment opportunities available, as well as the risk appetite, capacity and cost for the individual foundation.
An advisory firm suggested foundations can use the ‘spectrum of capital’ (see p11) approach to thinking about the range of opportunities available: from grants (impact first, no return) to mainstream investing (return first, no impact). There are likely to be ESG and impact investment opportunities in between, but one large foundation explained that even where the level of return may be comparable to mainstream investing, the associated overhead fees for advisers or in-house staff costs of identifying those investments are likely to be higher. No surprise then that pooled investment funds or networks that share information about investment opportunities are popular. Several of the foundations we spoke to were involved in one or more such network, or were interested in creating their own.
Active investor approaches
The same is broadly true of foundations that seek to take an “active investor” stance, bringing motions to shareholder AGMs and actively engaging with companies (usually via fund managers) on issues such as worker pay, climate commitments and supply chains. Again, foundations often find it more impactful and efficient to take actions jointly. Charities Responsible Investment Network, based at Share Action, has played an important infrastructure role here. Foundations can also take action on an individual basis – one gave an example of writing a letter to the Chief Executive of a major company to explain why they were divesting of its shares. There are examples of such active engagement making a difference.
But some interviewees questioned whether that difference was significant enough. They suggested publicly divesting from certain companies or industries was the most impactful shareholder action available; and again, suggested doing so loudly and jointly in significant numbers would send a stronger message than acting quietly or alone.
A more radical view
Finally, a few foundations that have wrestled with responsible investment for some time have concluded that the various existing approaches may not go far enough. They are wondering what an alternative would look like.
Behind this lies a critique: that the extractive aspects of capitalism – exploiting the world’s natural resources and workers in order to maximise returns to shareholders – lie behind many of the social problems that foundations exist to remedy. In particular, the twin climate and biodiversity crises pose an existential threat to all of us, but particularly people in the Global South and those marginalised in all societies. Are foundations seeking to maintain the value of their endowments implicitly investing in business-as-usual? ESG funds may try to identify relatively good companies, but they do not fundamentally challenge the system.
One interviewee said that the foundation sector should be developing a ‘leapfrog strategy’ instead. To bypass financial markets altogether and find ways to invest as directly as possible into communities. Barking and Dagenham’s GROW fund was one example offered. To use Access’s lens, it would mean to put all the resources available into the centre of their Bullseye. And going further by delegating funds and decision-making to communities. It inevitably re-opens the question of foundations’ time-horizons.
A time for questioning
For foundations seeking to invest in line with their missions, perhaps it’s best to start at the start: What kind of a future do we want to invest in? The role of the individual foundation and its investment strategy ought to flow from that, even if it means re-examining some long-held assumptions.
This blog was authored by Charlotte Ravenscroft, a consultant from Lucent, who has been supporting Access’s work on responsible investment.
To find out more about this work, contact Chloe Stables, Access’s Director of Advocacy and Partnerships.