Market News

 April 15, 2007
Responsible Investment Forum - A Cure for Cognitive Dissonance

 (Source Greenbiz, by Steve Schueth) - A Cure for Cognitive Dissonance

More often than not, the investment side of philanthropic foundations makes decisions that contradict the organization's mission. Fortunately, there's an easy cure for this kind of organizational disconnect.

Foundations are non-profit entities charged with advancing the public good. In return, they are not required to pay taxes. As such, one might think that foundations would be subject to a higher standard of accountability. But it simply isn't so. More often than not, the program side of the house (grant-making) and investment strategy are separated by a thick firewall. This creates an affliction that Steve Viederman, former Executive Director of the Jesse Smith Noyes Foundation, has called "cognitive dissonance."

As a culture, the United States generally subscribes to a philosophy that says: Make as much money as you can, however you can, then give some small portion of it away to alleviate suffering and solve problems.

This approach has given us a vibrant economy and an ever-growing universe of non-profit organizations. However, it has done little to solve the most serious problems of our world.

Dirty Little Secret

Foundations, with their admirable missions focused on making the world a better place, are required to pay out 5 percent of their corpus (the value of their portfolio) annually. As a practical matter, this means that 5 percent of a foundation's power is wielded by the grant-makers, while 95 percent of its assets are invested on the other side of the house in ways that often undermine its mission.

A January investigative report in the Los Angeles Times put a spotlight on the Bill & Melinda Gates Foundation, the largest private foundation on the planet, with an endowment larger than the gross domestic product of 70 percent of the countries of the world. The Times reported that the Gates Foundation is invested in hundreds of companies that "contribute to the problems of health, housing and social welfare that the foundation tries to solve."

One example: A polio and measles vaccination program in Nigeria that takes place amidst pollution filled with "toxic byproducts" from nearby petroleum plants-owned by oil companies in which the Gates Foundation has invested $423 million.

The Gates Foundation is not alone. A 2006 survey by The Chronicle of Philanthropy found that of the nation's 50 wealthiest private foundations, only one actively screens investments for conflicts with its mission, and only two had formal policies designed to ensure that their proxy votes are cast in a manner consistent with their grant-making objectives.

The Cure

"Any business model that uses only 5 percent of its assets to advance its mission surely needs improvement," says Jed Emerson, a visiting fellow at the Skoll Center on Social Entrepreneurship at the University of Oxford and a senior fellow at the Generation Foundation.

This may be especially true now. The publication of the U.N. Principles for Responsible Investment a year ago, which have attracted institutional signatories representing some $7 trillion in global investment assets, has advanced the notion that environmental, social, and governance (ESG) issues are important factors in the long-term profitability of global corporations. The process of considering ESG issues in the analysis of potential investments is becoming widely recognized as a viable way to achieve better long-term investment returns and support more sustainable markets.

Cognitive dissonance occurs when there is a disconnect between belief and behavior. According to Emerson, the first step toward a cure is "for the foundation board of trustees to state clearly and with conviction" that it seeks to have the full resources of the foundation focused on maximizing returns as well as impact.

The next step is to engage a knowledgeable consultant or asset manager who can integrate screening for ESG issues, provide guidance on shareholder advocacy, and help harness the full power of the foundation's corpus to achieve its mission.

Large investors, like the Gates Foundation with its $35 billion endowment, often think it will be difficult to place money in such a way as to maximize returns while avoiding problematic companies. But just because it's a bit more difficult doesn't mean it's impossible. Like many specialty areas, there are experts who can assist the foundation in this effort.

The most effective approach, however, especially for very large investors, might be to continue to invest in problem companies while pushing for change in areas of concern. Utilizing the influence that comes with owning large chunks of a company's shares can be a powerful way to maximize social as well as financial returns while alleviating cognitive dissonance.

is president of First Affirmative Financial Network, LLC. An independent investment advisory firm registered with the SEC, First Affirmative provides consulting and asset management services to socially conscious individuals and mission-driven institutional investors. He is also a former director and spokesperson for the Social Investment Forum.

Reference to a specific company or mutual fund should neither be considered an endorsement of the company or fund, nor an investment recommendation. Past performance is never a guarantee of future results.