Children's Voice Oct/Nov 2005

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Foundations with substantial endowments must take responsibility for ensuring their investments do not support products and services that damage their mission. This ethical imperative may also motivate organizations to make positive investments in corporations that further their social commitments.

Casey Family Programs' board of trustees has, throughout its history, tacitly acknowledged basic precepts of socially responsible investing. In the mid-1990s, Casey adopted an investment policy that incorporated its sense of responsibility. Because of the board's prior commitment, Casey experienced a smooth transition, learning valuable lessons that can help other organizations ensure the success and longevity of their socially responsible investment philosophy.

Defining Socially Responsible Investing

CEOs, CFOs, and COOs interested in using funds for more than just returns must first define what values will drive their socially responsible investing. The challenge comes in translating social values into investment screens--automated filters held with an organization's portfolio custodian. For large organizations, reliable screens will typically map directly to industry codes, which track only a company's primary product or service.

Demand is increasing for more thoroughly researched mutual funds that invest in businesses committed to diversity, fair labor practices, fair trade, and environmental sustainability.

Investment managers are meeting this demand, but their services are primarily available to individual investors and are not extensively supported among mangers of large portfolios. The investment filtering used in smaller mutual funds is substantiated by in-depth, ongoing research, analysis, and evaluation of available documentation, including public reports and press releases.

In the absence of mature screens compatible with their values, large organizations may undertake their own social research. Such research is complex and time-consuming, however--many organizations may decide they lack the resources or skills to devote to an undertaking of such magnitude.

Casey's decision to focus on its mission "to provide and improve--and ultimately prevent the need for--foster care" meant that other social values would not be emphasized in its portfolio. For instance, issues around pollution and the natural environment, though important from a broad social perspective, were not considered to be the primary priority for Casey. This makes good sense from a financial standpoint as well--if Casey focused on every possible social value, it would have a hard time maintaining a portfolio diverse enough to produce adequate returns over time.

Casey selected alcohol, tobacco, and firearms from among the mature screens available for filtering out products that could have the most direct, negative impact on Casey's constituents--youth, foster care alumni, and families. Casey also put its investment managers on notice to report or avoid investing in corporations thought to engage in regressive child labor practices.

Setting Expectations

After mapping your mission and values to available screens, the next step is to set expectations within your organization. This expectation-setting should highlight the limitations of enforcing social principles; more importantly, it must rationally pro-ject the financial implications of socially responsible investing.

Financial projections presented to an organization must, of course, be supported by careful research and analysis. The first step in this process of rational analysis is to build a sample portfolio using proposed screens. Next, compare this sample portfolio to your organization's investment history, determining how your screens would have affected past returns. Although historical comparison is not foolproof, it provides valuable data for understanding how changes in investment policies will affect future returns.

The danger of embracing socially responsible investing without doing analysis and setting expectations upfront is that boards, confronted with unexpectedly low returns, even over a short period, may act in the financial interest of the organization and withdraw from a socially responsible investment plan. With adequate planning and analysis, this doesn't have to happen.

Casey has experienced lower returns during isolated short periods--in comparison with both its past portfolios and Standard & Poor's 500-stock index (S&P 500). But because Casey's board was prepared for deviation and had already decided that the value gained from socially responsible investing offset projected financial costs, the board remained unanimous in affirming its policy. This affirmation has paid off: Over the long term, Casey's returns have not declined as a result of its socially responsible investment policies.

Not all organizations should expect to see such minimal impact on long-term investments. Regardless, the key feature of successful implementation resides in the ability to maintain a rational approach to setting expectations, without allowing emotional perceptions to overshadow careful analysis.

Finally, the board must decide what level of involvement it will have in interpreting and enforcing its screens. The board may be called upon to make decisions about whether to sell its stock in certain companies, or it may decide to apply filters strictly within the portfolio custodian's automatic system, with minimal opportunities for interpretation and judgment on the part of the board.

In 2002, Casey's investment consultants discovered that a major soft drink manufacturer in which Casey held stock owned a small share of an alcoholic beverage distributor in Brazil. This flag arose informally and would not have appeared on Casey's automatic screens. Since this constituted a potential violation of Casey's policies on socially responsible investing, Casey's consultant brought the issue before the board. Ultimately, Casey's board decided not to liquidate the stock. The soft drink manufacturer's connection to the alcoholic beverage market represented an inconsequentially small fraction of the manufacturer's total business and was the result of local regulations surrounding beverage distribution in Brazil.

Although Casey's board voted not to sell its stock in the soft drink manufacturer, the incident exemplifies some of the issues that can face organizations involved in socially responsible investing. Casey's automatic screens are limited in the amount of information they can provide, particularly in international markets. Not all of a company's secondary products and services will appear on the screens, and without the resources to delve deeper, similar undetected situations may exist in Casey's investments. Nonetheless, Casey's commitment to avoid investing in products and services harmful to its constituents remains strong. As demand for socially responsible investment options increases, more screens may become available to help Casey select investments even more carefully.

Positive Alternatives to Investment Screening

Withholding funds from products and services that are harmful or opposed to an organization's mission is a common level of involvement. But the philosophy driving socially responsible investing may also lead organizations to examine companies to target for affirmative or strategic investing--not just negative exclusions.
Venture Capital
For some foundations, venture capital investments may be made through program budgets rather than investment portfolios. These programs can have positive financial implications if they are successful in creating new, self-sustained entities that carry on the organization's work with increasing financial independence. Program funds formerly dedicated to these new entities then become available for other programs within the organization.

In 2000, Casey provided all the funding to create the infrastructure of the San Antonio Community Services Transition Center. Among other services, the center provided employment training, independent-living assistance, education services, counseling, and substance abuse treatment to an array of transitioning youth, including youth emancipating from substitute care. Within three years, the center acquired 10 significant collaborators in addition to Casey, and Casey's support represented less than 17% of the center's total resources. Through its initial investment, Casey was able to create a center that directly promoted its mission and, over time, became less reliant on funding from Casey. From the perspective of socially responsible investing, the transition center represented an excellent return on investment.
Corporate Partnerships
Foundations interested in forming strategic alliances may wish to consider investing in corporations as a way to further entice them to support programs. This may of course result in positive financial returns for your organization, but, more importantly, it builds relationships with potential future partners.
Shareholder Activism
Shareholder activism leads to investments in companies whose policies and procedures you want to change. Shareholder activism is a time-intensive process: It requires marketing plans targeting other shareholders and managers, including meetings, letter campaigns, resolutions, and other attempts to influence opinion.

Because of the time, skill-set, and monetary implications of shareholder activism, organizations pursuing this strategy must have evidence that the changes they are striving for will result in positive practices affecting their constituents without affecting financial returns in the long run. Shareholders who do not consider financial implications are less likely to sustain their activism successfully over time.
Mission-Driven Investing
Related to venture capital is the more general category of mission- driven investing, which targets like-minded companies whose products directly promote the investor's objectives or values. In child welfare, most organizations are nonprofit foundations or government agencies, so opportunities for mission-driven investing are scarce. Organizations working on environmental issues have more obvious opportunities, particularly in commercial alternative energy research and development.

Whether you are an individual interested in socially responsible mutual funds, or an organization interested in investment screening and positive, strategic investing, the principles remain the same: Go slowly, and spend time analyzing the social and financial implications of your decisions. Within organizations, set expectations based on rational, methodical analysis and not exclusively on the obvious emotional value of socially responsible investing.

Dave Danielson is Chief Financial Officer of Casey Family Programs, Seattle, Washington. He is a former senior manager with Price Waterhouse and senior officer and corporate treasurer with Bank of America. Casey Family Programs is the largest national foundation whose sole mission is to provide and improve--and ultimately prevent the need for--foster care. The foundation draws on its 40 years of experience and expert research and analysis to improve the lives of children and youth in foster care by providing direct services and support to foster families and by promoting improvements in child welfare practice and policy. Established in 1966 by United Parcel Service founder Jim Casey, the foundation has an endowment of $2 billion.

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