Asset management: the beginning of a new era?

9 November Nov 2015 1615 09 November 2015

The Rockefeller Brothers Fund’s decision to divest from fossils fuels is raising the stakes of transparency and coherence in the foundation sector. But could this herald the start of a new asset management era for philanthropic institutions? Are other foundations ready to follow and can they preserve their endowment and remain entirely true to their philanthropic mission?

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The Rockefeller Brothers Fund’s decision to divest from fossils fuels is raising the stakes of transparency and coherence in the foundation sector. But could this herald the start of a new asset management era for philanthropic institutions? Are other foundations ready to follow and can they preserve their endowment and remain entirely true to their philanthropic mission?

At the beginning of 2014, the word ‘divestment’ was rarely heard in the media or elsewhere. But by September, it had begun to filter into the mainstream as news broke that the Rockefeller Brothers Foundation (RBF) was divesting millions of dollars from fossil fuels. The fact that a foundation built largely on wealth from the oil industry was planning to make such a move garnered significant attention.
“The Rockefeller announcement carried powerful symbolism,” says Trevor Neilsen, president of the consultancy Global Philanthropy Group. “No family is more closely associated with fossil fuels, and the message they sent was one that many other wealthy families have paid careful attention to.”

Speaking in The Guardian, Beth Dorsey, CEO of the Wallace Global Fund – which runs the anti-fossil fuel campaign Divest-Invest – said the divestment represented about US$60 million or 7 per cent of RBF’s money. The move lends substantial weight to the campaign, adding to the $4.2 billion of fossil fuel divestment by other foundations. In its statement, RBF said it had been working to better align some of its endowed assets with its mission since 2010 and that “given the RBF’s deep commitment to combating climate change, the Fund is now committing to a two-step process” to address its desire to divest from investments in fossil fuels.

The decision represents a huge victory for the divestment movement, which has grown from the halls of American universities over the past two years, sparked by climate change organisation This year, the movement sprouted into two strands run by the Wallace Global Fund: one for individuals and the other for philanthropic foundations.
Early in 2014, 17 organisations had signed up to the initiative. Now there are more than 70, says project manager, Jenna Nicholas – although, fewer than 10 of those are European foundations. “It’s gaining momentum beyond what we could have imagined,” says Nicholas. Divest-Invest is also encouraging the positive redirection of money, for example, to green funds and agriculture, rather than simple divestment, she says.
RBF’s divestment may only represent a small portion of the $5 trillion in fossil fuels (this figure comes Bloomberg New Energy Finance’s August 2014 white paper on fossil fuel divestment). But could it lead to a steep rise in the number of foundations looking to follow?
By the end of next year, the initiative hopes to have 200 signatories on board, along with another $15 billion divestment on its books, to add to the $50 billion already there.

Nicholas says the financial reasoning for divestment is as compelling as the environmental argument. Financial experts, including the governor of the Bank of England (in a World Bank seminar on October 10, 2014), have said that investments in fossil fuels are likely to be built on ‘stranded assets’ or a ‘carbon bubble’ and so might well be overvalued. Are we, then, heading towards a new era for foundations wanting to ensure that more of their money goes into projects and businesses that support their mission, as well as bringing a return? Yes, says Nielsen at Global Philanthropy. “We are seeing more and more philanthropists tearing down the old, arbitrary wall between their for-profit and non-profit investments,” he observes.
But behind the headlines, it is clear that there will be no instant, simple and complete fossil fuel divestment by Rockefeller nor, most likely, by any other foundations. RBF makes divestment sound like a complicated process.
“Given the structure of some commingled investment funds and investments in highly diversified energy companies, we recognise there may continue to be minimal investments in our portfolio in those energy sectors,” said the statement.
However, RBF did go on to say that it was committed to reducing its exposure to coal and tar sands to less than one per cent of its total portfolio by the end of 2014.
The statement added: “As we take the steps to divest from coal and tar sands investments, we are also undertaking a comprehensive analysis of our exposure to any remaining fossil fuel investments and will work with the RBF investment committee and board of trustees to determine an appropriate strategy for further divestment over the next few years.”

The Fund said it was not planning to compromise its longstanding goal of keeping its pot of money preserved. “In uncertain and volatile markets, these financial goals are not easy to achieve,” it said. “Therefore, our divestment from fossil fuels, which is now under way, will be accomplished through a careful process of evaluating our exposure and a phased approach that proceeds as quickly as is prudent.” Nicholas agrees that divestment is not always simple, but says it is becoming easier as it becomes more common. A mass of foundations are sharing best practices and increasingly signalling to fund managers that they want something different.

So what is the best way to go about aligning mission with investments? Is divestment the answer, or do foundations have different approaches? Netherlands-based Boudewijn de Blij, says that, other than cluster bombs and land mines, his foundation Fonds 1818 does not generally discriminate or divest in any sector specifically. But that does not prevent him from trying to follow ethical practices, he says. “The fund is a passive investor (tracking indexes, like many other foundations) in the equities of developed markets, but looks for the ‘best in class’ companies with a good ESG (environmental, social and governance) strategy,” says de Blij. The foundation also actively engages with companies about their practices, to bring its mission and investments closer together. “We have divested from Rio Tinto (mining company), because they did not want to talk to the people we employed to engage them,” he says.

Fellow Netherlands’ fund founder Ronald van der Giessen of Oranj Fonds, which has a pool of more than €200 million, has spent six years researching mission-related investment opportunities. “I try to look for investment aligned with our mission – which is geared towards social development,” says Giessen. Over the years, he has seen new categories of investment emerging that fulfil his social development criteria. “Most fall into real estate – public buildings, for example,” he says. “We are also investing in new areas which avoid costs to society, for example in social impact bonds focused on supporting those leaving prison.”
The fund now aligns about 15-20 per cent of its investments with its mission, and publishes its full holdings in its annual report. “We would love it to be 100 per cent, but it’s a long journey. It’s laborious to tailor-make investments.” says Giessen. “It costs a lot of time for a fund with only two people directly on the payroll. I’d rather be passive, but we have to play a role in seeking these investments, because otherwise, we won’t achieve our aims.”

In Germany, one foundation that has made significant progress in mission-related investment is looking at bringing like-minded foundations together, to effect ever greater social change. Matthias Fielder, spokesman for the Bewegugngsstiftung foundation, explains: “In Germany, we were one of the first foundations which started an ethical driven investment for 100 per cent of the endowment. These include renewables, social housing, alternative banks and more,” he says. “We were the first in Germany who put their portfolio online with every single investment, hoping that others would follow suit. Some others have now followed this approach, but it will take time. We are now looking at progressive foundations and ways to connect them, in order to drive forwards necessary changes in our society.”

ShareAction, a UK-based charity promoting responsible investment, encourages foundations to engage with fund managers and the actual companies that foundations invest in, as a means to increase social impact and deliver mission. “Some foundations still hold the more traditional view that investment and mission are entirely separate,” says Catherine Howarth, CEO of the organisation. “But more and more are making real headway in aligning their investments with their mission.” Howarth notes that many foundations are unfamiliar with emerging best practice in a fast-changing field. Initiatives such as ShareAction’s Charities Responsible Investment Network are designed to help with this, focusing on sharing expertise and experience. “The leading foundations are developing sophisticated strategies to use their shareholder rights in major listed firms, to open conversations with company directors about social and environmental impacts,” says Howarth. “However, it must be said that quite a number of asset managers still feel it’s too complicated to cater for charity clients wanting to move further into this space.”

The Joseph Rowntree Charitable Trust (JRCT) in the UK is part of the Charities Responsible Investment Network and has signed up to Divest-Invest with a commitment to divest from all fossil fuels by 2020. Up until last year, the Foundation’s approach to ethical investment was to screen every potential investment against ‘extensive ethical criteria’. “But, with limited resources and a huge universe of companies, this was not a sustainable process,” says Jackie Turpin, JRCT head of finance. Advances in knowledge among a selection of asset managers that JRCT trusts to be responsible, contributed to the move to a new strategy last year. “We still maintain some of our negative criteria, such as arms, gambling, tobacco and new generation nuclear power stations. We also avoid extractive industries with poor human rights or environmental practices,” says Turpin.

Through the Church Investors Group and the CRIN’s engagement programmes, the foundation has applied pressure to companies on a number of issues over the past year, including the UK’s living wage level. “We have also joined in other ad hoc collaborative engagements, including CCLA’s Aiming for A initiative (carbon disclosure project) and Rathbones’ work on the Modern Slavery Bill,” says Turpin. She says it is too early to report many outcomes of the new strategy, but she believes it is not affecting the balance sheet and is actively helping to create positive social change. For mission-related investments, that is to say those which are actively trying to create more social or environmental good, she might expect less financial returns. But JRCT is happy with social returns, says Turpin.

In addition to the networks to which JRCT belongs, the Divest-Invest movement has an Investment Working Group, so that foundations can share best practices. It is even set on launching an index of fossil fuel free funds, to show what such investments could look like. JRCT works with around eight asset managers who are active in ethical investments. The two that Effect spoke to, the CCLA and Royal London, both work extensively with clients in making funds more and more ethical, they say. CCLA says keeping an acceptable return while being ethical is a tough balancing act. “The majority of our clients have key income and overall investment return targets, which limits the number of ‘impact investment’ opportunities that are available to us,” says Niall O’Shea, head of responsible investment at Royal London. Royal London says it has a range of ethical funds and all have “performed well”. It adds: “There is no reason why a well-managed fund has to give up performance in exchange for principles, but it helps if they can positively screen to help identify resilient growth themes.”

However, not all asset managers are quite as well informed, as many foundations know – so much so that some foundations are exploring the option of setting up their own asset management companies. Fondaco SGR, is a foundation-owned asset management company which has been launched by half a dozen large Italian foundations. And, in the UK, the small foundation Tellus Mater, which believes in strongly activist investment, is using a grant to try to catalyse a large group of funds to approach asset managers for better social and ethical fund options related to their mission. Jake Hyman, CEO of the Social Investment Consultancy, who sits on a number of foundation boards, says the conflict in investment and grants has to stop. “The big problem is having a charitable organisation that has a net negative impact,” says Hyman. “The simple fact is that the vast majority of philanthropic capital is today being used to finance the growth of big (and often dirty) business, and this has to end at some point.”Hyman admits that the market is still immature, but says this is no excuse for what he describes as ‘laziness’. “The situation is that if you want to make the same amount of money while being socially positive, it is possible, but will take a fair amount of additional work and therefore does incur additional cost one way or another,” he says. “However, tools like the Social Stock Exchange, which aims to create an efficient, universally accessible marketplace where impact investors and social impact businesses can achieve greater impact, are making things easier, cheaper and more accessible.”

There definitely appears to be an increasing focus on where charity and charitable foundations’ investment money is going. The media is paying closer attention. It may have been the case that, in the past, traditional investment and grantmaking arms have been separate at foundations, but the need for a joined up approach is gathering pace. Foundations will increasingly need to justify their approach as they come under more scrutiny about aligning their mission and investments to make a net positive impact.

The author is a journalist who writes for several newspapers and magazines, including The Guardian, The Sunday Times, The Telegraph and Wired. She is currently editor of the Guardian Voluntary Sector Network.

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