Socially Responsible Investing (SRI)

Sundance Family Foundation is a nimble and progressive local private foundation with a mission to “strengthen youth development and support family stability.” Socially Responsible Investing (SRI) is an investment strategy that focuses on Environmental, Social and Governance criteria (ESG) to measure sustainability and ethical impacts of investments in a company or business. A triple bottom line investment looks for impact in these three areas, using internal and external screens as a broad set of concerns that measure return on investment. Factors such as employee discrimination policies (an internal screen) and avoidance of investing in traded companies with perceived social harm such as tobacco production (external screen) are examples of filters used for ethical decision making inherent in Socially Responsible Investing. This vehicle for driving philanthropic impact is endorsed by numerous investment houses throughout the world, as well as the U.S. based Mission Investors Exchange.   A glossary of Socially Responsible Investing terms compiled by the Mission Investors Exchange can be found here.  As well a downloadable PDF document funded by the H.B. Herron and developed by the Rockefeller Philanthropy Advisors is available here.

Social Responsible Investing Definitions

Socially Responsible Investing is similar to Mission Related Investing (MRI). MRI is a type or subcategory of an SRI. Both consider social, environmental and financial returns, employing various methods to achieve these returns. However, MRI is individually targeted to each individual organization’s specific mission, and, is actively using investing as a means to furthering the individual organization’s mission. The institution’s core values are directly connected to its financial activities.

The Mission Investors Exchange (MIE) provides resources for foundations and other organizations that use investments as tools for achieving their values based philanthropic goals. MIE is a resource for more than 200 foundations and other organizations.

Founder and Sundance Family Foundation President Nancy Jacobs along with an engaged Sundance Board of Directors, strives toward triple bottom line impact as the Foundation adheres to a values-based, empowerment model of philanthropy. This investment strategy is also exemplified through Sundance’s supportive grantmaking to Youth Social Entrepreneurial (YSE) organizations, and through its work to develop the YSE Twin Cities ecosystem. Sundance also works to leverage community initiatives by joining forces with philanthropic, private and government partners.

Values Based Investing (another term for Socially Responsible Investing) can be advanced through other methods which Sundance also employs including:

  • Program Related Investments (PRI) and other community loans
  • Purchasing economic goods and services from local vendors, especially those from under-resourced communities
  • Banking through a Community Development Financial Institution (CDFI) and joint capital investments
  • KIVA International micro financing and other loans and programs that connect entrepreneurs in developing countries through the Internet with their local lenders
  • Microfinance loans

The Sundance Family Foundation has joined the ranks of national leaders by investing the largess of the Foundation’s assets into triple bottom line Mission Investment Funds. Click here to discover a bit more about social impact investing around the country.

The impact of Sundance’s strong investment policy has served the foundation and the global community in four important ways:

  1. Sundance’s mission investments leverage grantmaking impact by actively investing corpus dollars into domestic and global funds that create community redevelopment, including housing and job creation
  2. Sundance’s investments give Shareholder Advocates powerful advocacy opportunities to expose unethical corporate policies and practices, and promote internal and external social changes in historic and profound ways through proxy voting, direct dialogue with corporate executive leadership, influencing the development of public policy, and positive impact on company policies, practices and performance. Their effective influence on corporate change produces industry-wide positive improvements
  3. Socially Responsible Investing enhances the impact of the Foundation’s grantmaking dollars exponentially by investing in community redevelopment efforts
  4.  Sundance has secured a financial Return on Investment (ROI) that is consistently commensurate with or exceeds standard market rate benchmark indices

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The Minnesota Council on Foundations published an article in the Spring 2014 Newsletter featuring the Sundance Family Foundation as follows:

The Sundance article in Giving Forum: http://www.mcf.org/news/giving-forum/sundance-impact

SRI Investing: A View from an Investment Manager piece: http://www.mcf.org/system/asset_manager_pdfs/0000/4034/sri_extra.pdf

Both articles are linked from the Spring 2014 Giving Forum page on the MCF site: http://www.mcf.org/news/giving-forum/spring-2014

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How to Develop a Socially Responsible Investment (SRI) Program for Your Foundation

Introduction: 

The Sundance Family Foundation was established to support and strengthen family stability worldwide and has a particular focus on supporting projects that encourage youth social entrepreneurship.  In the summer of 2009, Sundance embarked on a quest to incorporate socially responsible investments into their investment program.  Socially responsible investing (SRI), also known as sustainable, socially conscious, “green” or ethical investing, is any investment strategy which seeks to consider both financial return and social good.  Sundance wanted to invest their assets more in alignment with their core values and to make a positive impact on the world with their investments.  This is a recap of how Sundance has pursued this socially responsible investment strategy over the past several years in collaboration with an independent, fee-only registered investment advisory firm.  Both parties have learned much as they have built an investment program for Sundance that is in alignment with their mission, their core values and their socially responsible investment (SRI) mandate.

The Sundance investment committee decided to search for an investment advisor to help them to develop a socially responsible investment program.  They wanted to pursue a comprehensive and disciplined investment approach to ethical investing which combines prudent investment management (including diversification to manage risk and the objective to earn market returns) with the equally important goal to “do good” with their money.

Allodium Investment Consultants is an independent fee-only registered investment advisory firm based in Minneapolis.  Allodium understands that socially responsible investment preferences are by definition going to be unique to the core values that are present in a foundation or endowment investment portfolio.

Initial Inquiry at Allodium

In September of 2009, Allodium was approached by Sundance to help with socially responsible investing.  Sundance wanted to develop a socially responsible investment strategy and to get their investments in alignment with their core values.   In the initial call to Allodium, the Allodium team agreed to help Sundance to clearly define and document the socially responsible goals and preferences of the Foundation.  In a subsequent meeting with the Sundance investment committee, Allodium listened to the needs of the organization and agreed to help Sundance to clarify their investment objectives and to help them to design and develop an investment program that would get their investments in alignment with their SRI investment preferences.  Sundance shared that they wanted to “do good” with their money and “avoid the evil” by not funding companies that are destroying the world.  They wanted to use their money to make the world a better place.

Allodium worked with Sundance to help them to define what they meant to pursue “socially responsible investments”.  Allodium uses a values questionnaire that helps an investment committee to clarify and define each investor’s unique socially responsible investment preferences.   Allodium summarized the results of the completed questionnaire for Sundance and developed a matrix of the key socially responsible investment preferences to avoid and/or to emphasize.  From the analysis of the socially responsible investment questionnaire, the Allodium team learned that the socially responsible investment priorities for the Sundance investment committee revolved around making investments in companies that are protecting the environment, promoting economic development and community development as well as providing financing for low income housing, while at the same time “screening out” companies that have poor business practices that harm society at large.

The primary benefit provided by the investment consultant at this initial stage was to listen to the investment committee, to document what they said and to reflect back to the investment committee what they were saying.  Allodium was then able to develop an investment plan that was tailored to the needs of the Sundance Family Foundation.

Allodium believes that fiduciary investors can balance socially responsible investing with fiduciary best practices.  While listening to the priorities of the Sundance investment committee, Allodium documented two specific investment goals for Sundance:

  1. Broad diversification.  The investment committee defined broad diversification as a key goal and wanted to implement as many socially responsible investment strategies as could be achieved within the parameters of investing with broad diversification to manage investment risk.   Allodium strives to help fiduciary investors to fulfill their fiduciary obligations under the law.   This decision to diversify by asset class helped the investment committee to fulfill their fiduciary duty to be prudent in their investment decision-making process.
  2. Competitive Market returns.  The investment committee did not want to add socially responsible investment strategies at the expense of achieving market returns.  The investment committee wanted to incorporate socially responsible investments while earning competitive, market returns on their investments.

Successful investing has a lot to do with the concept of avoiding mistakes.  Socially responsible investment strategies may actually lead to an investment decision-making process that minimizes the number of problems related to the environment, social issues like work place policies and corporate governance.   A socially responsible investment strategy may actually lead to a reduction in certain types of investment risk over time.  If socially responsible investing actually reduces the number of problems in an investment portfolio, this reduction in mistakes could potentially lead to enhanced investment performance over long periods of time.

At this point in the process, the Allodium team drafted an investment policy statement for Sundance that documented the investment objectives for the Foundation as well as a specific paragraph that described their socially responsible investment mandate.

Phase One:  Equity Mutual Funds and Exchange-Traded Funds (ETFs)

Allodium is independent of the traditional Wall Street banks and brokerage firms to eliminate the conflicts of interest related to proprietary investment products.  This allows Allodium to search for investments that are in alignment with the unique investment goals and preferences of investment committees using an open architecture approach that includes all possible investment options for the foundation.

The initial thrust of the Sundance SRI Investment strategy was implemented primarily with domestic equity mutual funds and exchange traded funds (ETFs) because the domestic equity asset class has the most choices for SRI investments.  The Morningstar database currently has approximately 27,000 individual investment choices in their mutual fund and exchanged-traded fund universe. Of that fund universe, only 466 funds are currently categorized as SRI choices (approximately 2% of the fund choices).   The challenge at this point was to help the Sundance investment committee to develop a process to screen the SRI investment managers to identify a smaller set of suitable investments for the foundation.  Allodium used the fi360 Toolkit (www.fi360.com) to screen the specific funds on nine due diligence criteria to reduce the fund choices to a more manageable subset of the SRI fund universe.

SRI investors can choose from both active investment managers and lower cost passive investment managers.  In the course of the due diligence research process, Allodium found active domestic large cap SRI equity investment managers at established SRI investment firms such as Parnassus Investments and Calvert Investments.  The due diligence research also uncovered several passive strategies such as exchange traded index funds from investment companies such as iShares and low cost institutional mutual funds from Dimensional Fund Advisors.

The international equities asset class proved to be more difficult due to a limited number of high-quality choices but investment firms like Boston Common Asset Management have introduced commingled accounts and mutual funds to provide international equity exposure for SRI investors.  These new vehicles provide SRI investors the opportunity to diversify with international equities to help to manage investment risk with broad diversification.

At the end of phase one, Sundance had accomplished 13% exposure to pure SRI investments.

Phase Two:  Fixed Income Mutual Funds and Exchange-Traded Funds (ETFs)

After the initial implementation phase with domestic and international equity mutual funds and exchange-traded funds, Sundance wanted to be more proactive with their fixed income investments.  Their focus turned to professional investment managers who would be more active lending in low income communities that would encourage community development and redevelopment.  Allodium was able to identify several mutual fund managers who were making investments in low income communities to provide more capital to urban areas that need low cost capital.  Community Capital Management and Access Capital Community Investment are fixed income investment firms that provide investment capital in urban areas that need funding for low income housing and urban redevelopment.  Sundance learned that some of the best impact investments with high social impact happen to be in the fixed income arena.

To complement the community redevelopment funds that focused on proactive investment in low income urban communities, Sundance also wanted to find fixed income investment managers that would be able to screen out poorly rated investments similar to the screening out process that the SRI equity managers were using.  Allodium was excited to uncover unique SRI fixed income strategies from both mutual fund companies like Praxis and separately account managers like Breckinridge Capital Advisors that provided the capability to screen out specific types of unattractive investments.

At the end of phase two, Sundance had increased their exposure to 30% SRI investments.

Phase Three:  Professionally Managed Separately Managed Accounts (SMAs)

Up until this time, primarily mutual funds were being used by the Foundation due to the ease of access to mutual funds subject to relatively low investment requirements.  The Sundance Family Foundation received a major contribution to the foundation in 2013 that allowed for the investment committee to consider new types of investment vehicles such as separately managed accounts which have higher minimum account sizes but which also have the ability to invest in individual securities that are more in alignment with the SRI objectives of the foundation.  Interest in moving beyond mutual funds and into separately managed accounts (SMAs) took shape when Sundance learned that a separately managed account manager like Breckinridge Capital Advisors for fixed income could not only screen out investments that did not pass environmental, social and governance (ESG) screens but that they actually had the capability to target their investments in specific geographic areas and or sectors of the economy that could provide high positive impact in ESG factors.  Separate account managers have a much greater opportunity to invest in individual companies that are cooperative in SRI shareholder resolutions and collaborate with socially responsible investors.

Sundance felt that they had fulfilled their fiduciary obligations by building a broadly diversified and socially responsible investment portfolio, but the Sundance board of directors wanted something more – to have even more positive impact on society and the environment with their liquid assets.  The Sundance investment committee challenged their investment advisor to seek out professional investment managers who would be able to engage in shareholder advocacy and public policy work.  Sundance had built a portfolio that was good at screening out unattractive investments but the investment committee wanted to pursue a more proactive socially responsible investment strategy with more social impact.

Sundance Family Foundation learned how to generate high impact with shareholder advocacy in a liquid investment strategy by utilizing separately managed accounts.  Sundance learned about the methods that can be used by impact investors to effect positive social change through shareholder advocacy by engaging the professional investment management firms that are engaged in shareholder advocacy for impact investors.  They learned that they can leverage the power of stock ownership to promote social and environmental change by engaging in shareholder advocacy for environmental, social and governance factors.

Allodium learned about practical socially responsible investment solutions via networking with other foundations and endowments both in the local community and also at national investment conferences.  Also, in October, 2013, Allodium attended the annual SRI Conference in Colorado Springs, Colorado with the primary objective to identify the professional investment managers engaged in shareholder advocacy.

Working with Allodium, Sundance was ultimately able to identify and retain a number of professional separate account managers who are actively engaged in shareholder advocacy which includes proxy voting, filing shareholder resolutions, engaging in company dialogues and influencing the development of public policy.  Client-centric SRI solutions include separate account managers at Trillium Asset Management, Zevin Asset Management and Breckinridge Capital Advisors.  Sundance understands the benefits of separately managed accounts and has been fully engaged with the opportunity to engage in shareholder advocacy and the opportunities with the separate account managers to add emphasis to a particular investment sector.

After implementing the SRI separately managed accounts and adding to existing SRI mutual funds and ETFs, Sundance had achieved 80% SRI exposure and was positioned to investigate the opportunities in more illiquid impact investment strategies.

Phase Four:  Illiquid Impact Investments

The Sundance committee has challenged Allodium to find illiquid investments that will have even greater positive social impact, often called “double bottom line” or “triple bottom line” investments.  Liquid investments are typically publicly-traded, daily liquid investments like mutual funds, exchange traded funds, index funds, and individual stocks and bonds which are easy to liquidate and easy to benchmark with common market benchmarks and indices.  Illiquid investments offer some interesting opportunities for high impact but also might create difficulties with minimal daily liquidity, a lack of valuations at daily market prices and higher costs.

Sundance is interested in exploring the potential to have even greater social impact with illiquid impact investments.  Allodium has recommended that Sundance compare the benefits of liquid versus illiquid social impact investments.  While there are some disadvantages to illiquid investments, high impact investors may want to incorporate high social impact investments into their portfolio.

High impact, illiquid investments are the new frontier and provide some interesting opportunities for socially responsible investors who want to have a great positive impact on the world with their investments.  Allodium has been monitoring illiquid impact investment databases such as Impact Assets and Mission Investors to search for unique investments that are in alignment with the Sundance SRI mandate.

Illiquid impact investments are sometimes high cost, may provide low returns and a lack of disclosure that may lead to a lack of transparency that makes prudent investment decision-making more difficult.  Also, the lack of historical performance data may make this type of investing seem like a venture into a highway turnpike in the middle of a dense fog.  It is appropriate that investors move with caution and be deliberate to minimize the chances for costly mistakes.

Sundance decided to limit their initial allocation to illiquid, high impact investments to 10% of their overall portfolio and to insist upon at least quarterly valuations to provide for some opportunity to monitor the investment performance of these investments.  They decided that it is important to have performance data on illiquid impact investments and to receive periodic investment reports with accurate valuations so they can track progress and make informed decisions about their investments.  Allodium also recommended a diversified and professionally-managed portfolio of illiquid high impact investments to provide some additional risk management to minimize the risk of loss.

Summary

Socially responsible investing is becoming main stream and practical.  This is clearly a burgeoning field and the future of investing will incorporate the ideas being developed by leading socially responsible investors.  Leaders in the nonprofit community like Sundance are leading with their actions.  You can also pursue investment strategies that are in alignment with your core values.  You just need to take the first step.

Nancy Jacobs is the co-founder and President of the Sundance Family Foundation which supports family stability both globally and locally, as well as projects that encourage youth social entrepreneurship.

The Sundance Family Foundation is harnessing and deploying 90% their capital into Socially Responsible Impact Investing strategies that do good for more.

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