June 4, 2018; Bloomberg Markets
As Janet Lorin writes in Bloomberg Markets, in 2013, North Carolina State University (NC State) in Raleigh received a pledge for a $50 million donation from Park Foundation, established by Roy H. Park Sr., a 1931 graduate. The $50 million commitment—$10 million has been donated so far—was one of the largest in the school’s history. Lorin adds that, “The Park Foundation expects to donate the remaining $40 million…after the estate of Dorothy Park, the widow of founder Roy who died in 2016, is completed, likely sometime this year.”
The donation came with two conditions. One was that money donated must support “need-blind, merit-based scholarships for undergraduates.” The second condition, however, referred not to the donation’s use but to its management—namely, the donor insisted that the donated funds be invested in a “socially responsible” fashion. To ensure compliance, the school decided to create a separate investment portfolio for the donated funds, which created an interesting experiment.
Lorin notes that the socially responsible fund “has outperformed the school’s larger $1.1 billion endowment—20 percent vs. 12 percent—in the year through June 30, 2017.”
According to Lorin,
The fund so far invests 50 percent of the first $10 million in screened stock funds. The other half is in a pool managed by former Vice President Al Gore’s Generation Investment Management, a London-based money manager that focuses on sustainability. When the school receives the remaining $40 million, the money will be invested in responsible ways under seven general principles: environment and natural resources; labor rights and supply chain management; human rights; community impact; product quality and safety; corporate governance; and companies that don’t test on animals for nonmedical purposes.
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Of course, the higher return could be a fluke. But NC State is not alone. Lorin notes that, “Hampshire College in Massachusetts decided to rebuild its endowment in a socially responsible manner after its value declined 25 percent during the financial crisis, to $27 million.” Its entire $48 million endowment is now invested according to the new criteria. Hampshire reports a return of 24.5 percent through June 2017, compared to a benchmark average return of “12.7 percent for endowments and foundations, according to data from 450 nonprofits compiled by Cambridge Associates.” Richard Hurd, who chairs Hampshire College’s investment committee, claims that socially responsible investing is “really a quality screening technique.”
Another college making the switch is Pitzer in California, whose endowment is currently valued at $136 million. Pitzer began its switchover in 2014, when it began divesting from fossil fuel. It has since liquidated nine stock funds and all direct holdings of individual stocks, according to Donald Gould, who chairs the school’s investment committee.
“The Park Foundation itself,” Lorin points out, is also “invested in a sustainable way through 16 managers, and returns have been stellar: 21.6 percent for the year ended June 2017. The foundation excludes companies that don’t comply with its “ESG” policy, a phrase that refers to investing that takes into account environmental, social, and governance criteria. The foundation, adds Lorin, also “specifically excludes the fossil fuel sector and companies with more than five percent revenue exposure to weapons, nuclear power, tobacco, alcohol, and gambling.”
Of course, achieving higher returns is one thing. Achieving social impact is another. Two years ago, NPQ published an article by Morgan Simon, a leader impact investor, who cautioned that community accountability in impact investing is most often lacking. In response, Simon called for “the establishment of effective mechanisms to empower ‘beneficiaries’ to be actively involved in the planning, execution, governance, and ownership of enterprises, and in the flows of capital connected with them.”
In short, two things are clear. One is that some forms of socially responsible investment are simply smart investing, economically speaking. At the same time, while “easy wins” where you can achieve both high economic returns and social impact certainly exist, this does not preclude the existence of other cases where social impact and economic return can and will conflict.—Steve Dubb