Socially Responsible Philanthropic Investment

The goal of a philanthropic organizations is, presumably, to increase human well-being. How can these organizations best achieve their missions? The question in this Los Angeles Times article is how these organizations should invest the money in their endowments used to support their philanthropic giving. Should they maximize profit without regard to the types of businesses they invest in so that they can give away as much as possible in support of their missions, or will they do more good overall by using their investments to promote their human welfare goals even if it means they might earn less on their investment portfolios?:

Dark cloud over good works of Gates Foundation, by Charles Piller, Edmund Sanders and Robyn Dixon, LA Times: Ebocha, Nigeria - Justice Eta, 14 months old, held out his tiny thumb. An ink spot certified that he had been immunized against polio and measles, thanks to a vaccination drive supported by the Bill & Melinda Gates Foundation.

But polio is not the only threat Justice faces. Almost since birth, he has had respiratory trouble. His neighbors call it "the cough." People blame fumes and soot spewing from flames that tower 300 feet into the air over a nearby oil plant. It is owned by the Italian petroleum giant Eni, whose investors include the Bill & Melinda Gates Foundation. ...

The makeshift clinic at a church where Justice Eta was vaccinated and the flares spewing over Ebocha represent a head-on conflict for the Gates Foundation. In a contradiction between its grants and its endowment holdings, a Times investigation has found, the foundation reaps vast financial gains every year from investments that contravene its good works. ...

The Gates Foundation has poured $218 million into polio and measles immunization and research worldwide, including in the Niger Delta. At the same time that the foundation is funding inoculations to protect health, The Times found, it has invested $423 million in Eni, Royal Dutch Shell, Exxon Mobil Corp., Chevron Corp. and Total of France — the companies responsible for most of the ... pollution, beyond anything permitted in the United States or Europe. Indeed, local leaders blame oil development for fostering some of the very afflictions that the foundation combats. ...

At the end of 2005, the Gates Foundation endowment stood at $35 billion, making it the largest in the world. Then in June 2006, Warren E. Buffett, the world's second-richest man after Bill Gates, pledged to add about $31 billion in installments....

Like most philanthropies, the Gates Foundation gives away at least 5% of its worth every year, to avoid paying most taxes. In 2005, it granted nearly $1.4 billion. It awards grants mainly in support of global health initiatives, for efforts to improve public education in the United States, and for social welfare programs in the Pacific Northwest.

It invests the other 95% of its worth. This endowment is managed by Bill Gates Investments, which handles Gates' personal fortune. Monica Harrington, a senior policy officer at the foundation, said the investment managers had one goal: returns "that will allow for the continued funding of foundation programs and grant making." Bill and Melinda Gates require the managers to keep a highly diversified portfolio, but make no specific directives. ...

The Times found that the Gates Foundation has holdings in many companies that have failed tests of social responsibility because of environmental lapses, employment discrimination, disregard for worker rights, or unethical practices. ... In addition, The Times found the Gates Foundation endowment had major holdings in:

Companies ranked among the worst U.S. and Canadian polluters, including ConocoPhillips, Dow Chemical Co. and Tyco International Ltd.

Many of the world's other major polluters, including companies that own an oil refinery and one that owns a paper mill, which a study shows sicken children...

Pharmaceutical companies that price drugs beyond the reach of AIDS patients the foundation is trying to treat. ...

This is "the dirty secret" of many large philanthropies, said Paul Hawken, an expert on socially beneficial investing... Moreover, investing in destructive or unethical companies is not what is most harmful, said Hawken and other experts, including Douglas Bauer, senior vice president of Rockefeller Philanthropy Advisors, a nonprofit group that assists foundations on policy and ethical issues. Worse, they said, is investing purely for profit, without attempting to improve a company's way of operating.

Such blind-eye investing, they noted, rewards bad behavior. At the Gates Foundation, blind-eye investing has been enforced by a firewall it has erected between its grant-making side and its investing side. The goals of the former are not allowed to interfere with the investments of the latter.

The foundation recently announced a plan to institutionalize that firewall by moving its assets into a separate organization... The trust will invest to increase the endowment, while the foundation gives grants. "We've been operating under these principles for many years," said Harrington, the foundation policy officer. "But having an official separation makes it even more clear."

With the exception of tobacco companies, asset managers do not avoid investments in firms whose activities conflict with the foundation's mission to do good. ...

Finally, the foundation does not invest any portion of its endowment in companies specifically because they advance its philanthropic mission.

Much of the rest of philanthropy, however, is beginning to address contradictions between making grants to improve the world and making investments that harm it. According to recent surveys, many foundations, including some of the nation's largest, have adopted at least basic policies to invest in ways that support their missions.

Major foundations that make social justice, corporate governance and environmental stewardship key considerations in their investment strategies include the Ford Foundation, worth $11.6 billion, the nation's second-largest private philanthropy; the John D. and Catherine T. MacArthur Foundation; the Rockefeller Foundation; and the Charles Stewart Mott Foundation.

Moreover, nearly one-third of foundations participate directly in shareholder initiatives, voting their proxies to influence corporate behavior. A few have become shareholder activists. ... Harrington told the Chronicle of Philanthropy that the Gates Foundation did not get involved in proxy issues.

At the Charles Stewart Mott Foundation, on the other hand, Michael J. Smith, its chief investment officer, said voting proxies to improve corporate behavior had become a fiduciary necessity. "Companies that have good governance are generally well-managed," he said, "and have a good record of profitably." ...

Leadership ... is open to the Gates Foundation. It has unique power to move the debate, Bauer said. If Gates adopted mission-related investing, Bauer, of Rockefeller Philanthropy Advisors, said in an interview, the shift in the world of philanthropy would be "seismic."

The foundation did not respond to written questions about whether it might change its investment policies. ...

By refusing to invest in cigarette companies they've opened the door to the socially responsible investment question. Is this a fair criticism? Should every investment be demonstrably in support of its mission, or at least not at odds with it?