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Mission-Based Investing

Some institutions have for decades leveraged endowment dollars to align with their core values. Student activism, in large part, is drawing others to the idea.

By Karla Hignite

Founded by the Sisters of St. Francis of Philadelphia, Neumann is a Catholic coeducational college rooted in the Franciscan tradition, which emphasizes respect for individuals and concern for the environment. As is the case at other religiously affiliated institutions, Neumann’s commitment to socially responsible investment (SRI) emerged from its core faith values. For other institutions—large and small, public and independent—student protest and inquiry have urged leaders toward divestment or use of various screens for avoiding investment in corporations or industries whose products or practices are deemed unsafe or unjust. More recently, investors are scrutinizing market opportunities based on positive behavior they wish to support financially, such as a company’s commitments to reduce waste or to use renewable energy.

A special report on corporate social responsibility in the January 17, 2008, issue of The Economist suggests growing interest by company executives in working jointly with nongovernmental organizations to tackle social and environmental challenges around the globe. While far from mainstream practice, SRI in its various degrees and applications may be gaining ground within the higher education endowment arena.

NACUBO Endowment Study and SRI

In 2000, the first year the NACUBO Endowment Study (NES) began asking about socially responsible investment (SRI) practices, 17.8 percent of institutions responded that they consider SRI criteria in their investment decision making, including 10.4 percent of public institutions and 21.7 percent of independents. That discrepancy between public and independent institutions has continued as a general pattern. In 2007, 16.9 percent of public institutions reported considering SRI criteria in their investment management decisions versus 27.7 percent of independents.

Something that does not appear to correlate is investment pool size. Larger endowments are as likely to consider SRI criteria as are the smallest. For 2007, 28.2 percent of the largest endowments considered SRI in their investing compared with 31.8 percent of the smallest investment pools. This also held true in 2000, where 19.4 percent of institutions with portfolios greater than $1 billion considered SRI criteria compared to 20.4 percent of those with endowment pools of less than $100 million.

Figures 1, 2, and 3

Data from the 2007 NACUBO Endowment Study (NES) reveal an uptick in the number of colleges and universities indicating that they consider social responsibility criteria in their endowment investment management decisions. While this percentage had remained stable for the past several years (18.3 percent in 2006, 18.5 percent in 2005, and 18.5 percent in 2004), there was a measurable increase in 2007, with 24 percent of institutions overall indicating that they consider SRI criteria (see sidebar, “NACUBO Endowment Study and SRI”).

One explanation for the increase could be a rise in student-led efforts across the nation during the past several years to encourage institutional leaders to divest from companies whose business activities aid the Sudanese government in its sponsorship of genocide and human rights violations in Darfur. Whether the increase is a blip or the start of an upward trend in actual SRI-related activity, the stories vary as to how institutions became engaged in this practice, which criteria they apply and how, and what processes they use to involve campus constituents. For many, their story starts with South Africa.

To Divest, or Not to Divest

When Richard Wynn came to Haverford College, Haverford, Pennsylvania, in 1985, the institution was already involved in SRI issues on an ad hoc basis, largely propelled by student interest in cosponsoring stockholder resolutions. “At that time, we did not have a formal committee for addressing investment concerns,” says Wynn, vice president for finance and administration and treasurer. As it did for a number of campuses, the big issue of the day—apartheid—galvanized a process for future SRI involvement at Haverford. During Wynn’s first year, students staged a small protest at which they threatened to take over the building where the board was meeting. “The board responded by saying, ‘There’s no reason to take over the building. Come on in and let’s talk,’” recalls Wynn. From the conversations that ensued, a 12-person committee composed of students, board members, faculty, and staff was formed to study the South Africa situation and develop an institutional response.

As an ethical dilemma facing the entire higher education community, the issue of apartheid likewise greeted V’Ella Warren in her new role at the University of Washington, Seattle. Her arrival 20 years ago came on the heels of the launch of UW’s first capital campaign. Up to that point, the university had not had internal staff focused on the university’s endowment, explains Warren, senior vice president, finance and facilities, and treasurer, board of regents. Staffing has since grown to include a chief investment officer who oversees a team of eight.

By the late 1980s, both Haverford and UW had divested their portfolios of all holdings of companies doing business in South Africa. They maintained this exclusion until the early 1990s, when then President Nelson Mandela requested reinvestment in the country. “Although our endowment was much smaller in those days—less than $100 million—we sold approximately 40 percent of our portfolio,” says Wynn. “The transaction cost alone was about $150,000. But we felt it was such an important issue that we needed to make a statement, and the board was willing to give up some return.”

Both Wynn and Warren note that a broad base of support for these actions came from students, faculty, staff, and board members. No single issue has since generated such unified reaction from all corners of campuses across the country. The need to formulate a response to the South Africa crisis also became the catalyst at many institutions for learning to engage campus constituents on a range of investment-related issues and formalizing a process for vetting concerns.

Giving Shape to SRI

On the heels of the South Africa issue, Haverford’s board made permanent its Committee on Investments and Social Responsibility (CISR), which turned its attention to other concerns. Chief among them was how to mesh the heritage of Haverford with its endowment holdings. Although the institution is nondenominational today, the college’s Quaker roots still influence many of its values and processes, which include a strong focus on peace and mediation, diversity, community, and consensus.

Committee members quickly learned the complexity of their task, says Wynn. “If you say you won’t own any company that does business with the military, you soon find you are eliminating dairies that provide milk to military bases. Through our discussions we were able to agree that we should specifically focus on weapons manufacturing,” he says. From this understanding, the committee could more easily develop a list of companies to exclude from the college’s portfolio.

Over the years, Haverford’s CISR continued to examine specific issues and to vote stockholder resolutions. Then, during the mid- to late 1990s, Haverford’s investment committee changed its investment model, moving to its current approach of indexing all domestic and international equities, primarily to help streamline an increasingly complex portfolio, says Wynn. Since the college endowment no longer held individual stocks, the CISR was left without a shareholder advocacy role. After discussing how the college might keep the committee active and get back in the business of cosponsoring shareholder resolutions, the board settled on buying a small portfolio of eight companies. “Selection was based on picking companies from a variety of industries that receive significant numbers of stockholder resolutions on issues relevant to our concerns,” says Wynn.

While UW does not have a formal advisory committee, a formal process has developed to address issues on a case-by-case basis, says Warren. “We don’t pre-identify issues, but instead allow issues to emerge from within the campus community.” Students, faculty, and other interested parties are encouraged to meet with members of the investment office to discuss their concerns and pose recommendations. “If there is a clear and broad base of support for the issue, staff will work with individuals and groups to identify exposures within the university’s investment portfolio, explain the process for bringing an issue in front of the board of regents, and help identify a plan of action for moving forward,” explains Warren.

Emphasis is placed on broad support. “The very first question we ask is whether the issue has demonstrated support across the entire UW community,” says Warren. “Some issues may evoke passion from a particular segment, yet have no consensus from within the campus community about the right course of action.” In the case of Sudan, UW’s board of regents agreed to hire a student for an hourly research position to staff a letter-writing campaign to companies doing business in Sudan to learn more about their specific activities in this region. This student provided a brief monthly update for senior administration and the chair of the finance committee, explains Warren. Both the recommendation to initiate the letter-writing campaign and the recommendation one year later to divest from companies supporting the Sudanese government were jointly written and presented by the student group and the administration.

“In this example, the process proved successful not only for strengthening the decision-making function surrounding UW investments,” says Warren. “It also provided an educational opportunity for students by helping them understand how to operate within an environment where you need to engage in research and develop coalitions to achieve a common goal.”

In addition to its current screen on Sudan, UW does not invest in companies involved in the manufacture and marketing of tobacco. “This exclusion is in place to address what university leadership believes would be contrary to the mission of the institution as a major regional hospital and medical research center,” explains Warren.

Mission-Centric Decisions

Mission and mutuality drive the investment decision making at Goshen College, Goshen, Indiana. Goshen is a Christian liberal arts and sciences institution within the Mennonite Church USA, a denomination whose core values include strong commitments to peace and social justice. The college pools its endowment funds with approximately 30 other Mennonite higher education and secondary education institutions, individual Mennonite churches, and church agencies. All funds are jointly managed by an investment committee appointed by the Mennonite Education Agency (MEA), which oversees the educational institutions of the denomination. Currently, Goshen’s endowment funds comprise approximately 60 percent of the MEA investment committee’s total pool, in large part because Goshen began accumulating endowment funds well ahead of the five other participating higher education institutions, says Jim Histand, Goshen’s vice president for finance.

For the past 10 years Histand has served as an appointed member of the MEA investment committee. In addition to managing the combined pool of funds, the committee engages Mennonite Mutual Aid (MMA) to screen investments, participate in shareholder advocacy, and manage proxy voting. MMA, an early leading voice in the SRI world and an agency of the denomination responsible for stewardship education, offers investment, insurance, and retirement savings products to organizations and individuals.

While MMA’s specific SRI focus has evolved over time, core to its investment practices has been to avoid investment in companies involved in weapons production and military contracting or the production or marketing of alcohol, tobacco, or gambling establishments. Commitments to human rights and environmental justice likewise guide decisions to exclude support of companies that gain profits from unfair labor practices or excessive waste of natural resources.

For some institutions like Brown University, Providence, Rhode Island, SRI-related efforts may not be religiously motivated, but they do take place within the context of the institution’s mission, notes Elizabeth Huidekoper, executive vice president for finance and administration. “A significant part of Brown’s mission is to exercise a positive influence on the larger society through our education and research activities,” says Huidekoper. “We are very aggressive with socially relevant issues on all fronts, whether through initiatives to reduce our campus carbon footprint or ensuring that our investments are in line with our moral and ethical values related to everything from animal rights to equal employment opportunities and executive pay.”

Brown has had a formal group in place to address social concerns related to university investments since 1978, when it established its Advisory Committee on Corporate Responsibility in Investing (ACCRI). The group of nine voting members (three faculty, three students, and three alumni) was originally set in motion to study issues of investment in companies doing business in South Africa while the apartheid system was still in force, explains Huidekoper. Today ACCRI considers issues of moral responsibility in the university’s investment policies, examines and votes on proxy resolutions, and monitors issues of investor responsibility, largely focused on the environment and human rights. In her role, Huidekoper attends Brown’s investment committee meetings and works with ACCRI, the Brown community, and Brown’s president to develop and present specific recommendations to the board about the institution’s SRI activities.

According to Huidekoper, while the specific issues change, a healthy and ongoing interest by students has remained to give voice to social concerns. Most recently, students led the charge through ACCRI to encourage the institution to develop Brown’s Social Choice Fund, an option made available in 2007 to donors contributing $25,000 or more. Unlike some SRI initiatives that apply screens to rule out investments, this fund is composed of companies actively working toward sustainability by various means, including more efficient use of natural resources or a strong focus on alternative energy.

Rewarding Right Behavior

Make no mistake, Neumann College does want to maximize the return on its endowment investments, says O’Beirne. “We just want to do so in a manner that is always respectful of the dignity of people.” At a minimum, that means no investment in companies involved in anything that supports human trafficking or sweatshops. Yet, the screens that Neumann applies focus as much on what companies are doing right. “We use five criteria as the guide for our portfolio,” says O’Beirne, who votes all proxies on behalf of the college. They include how well companies promote health and human dignity, protect human rights and political freedom, empower employees, protect the environment, and address the culture of violence in society.

To determine positive ratings, O’Beirne assesses companies based on a range of indicators that include charitable giving; support for education and volunteer programs; diversity within their boards of directors; employment of women, minorities, and persons with disabilities; work-life benefits; and employee compensation and health care packages. “In the same way that we don’t want to make money by supporting the production of weapons or adult entertainment, neither do we want to profit from companies where top executives are allowed to walk off with millions at the expense of employees,” says O’Beirne.

Similarly, when determining which companies are most appropriate to invest in, MMA applies a set of six positive core values to evaluate corporate behavior, understanding that few companies may adhere to an ideal standard, says Histand. More recently, MMA is focusing attention in the area of community development investing. Through a fund that channels investment dollars to underserved communities across the country and around the world, investors support projects that contribute to building healthy and sustainable economic opportunities for others in need.

Factoring Performance

One question that often surfaces in connection with SRI is that of performance. The fact that college and university boards have a fiduciary role to earn the best returns on donor contributions and to ensure the ongoing institutional financial strength of programming and operations may be enough for some to remain skeptical about the viability of this investment arena.

Some have responded by putting safeguards in place to preserve portfolio value. Since Brown’s Social Choice Fund is an equity fund focused on long-term capital growth, it will understandably be more volatile than the university’s overall pool, says Huidekoper. That’s a primary reason Brown decided to establish the fund as a quasi-endowment so that its performance won’t adversely affect the payout of the overall endowment in the event that the fund does not provide strong returns.

For Goshen, volatility is an acceptable business reality. During Histand’s tenure on the MEA investment committee, much conversation has centered on how to better understand the impact of SRI criteria on performance. “We’ve tried to determine appropriate benchmarks for our portfolio, but this is a real challenge since many commonly accepted benchmarks are not socially screened,” says Histand. To date, the investment committee has had limited success in getting help from managers to develop a socially screened index for comparison. For now, Goshen is able to compare its own overall performance to that of peer higher education institutions. “We haven’t led the pack, but we haven’t trailed either,” Histand says.

Even looking to peer institutions is a bit of an apples-to-oranges comparison, he admits. Especially during the past decade as more institutions have moved significant allocations into alternative asset classes, Goshen’s portfolio has remained heavily tilted toward equities, since ownership in individual companies offers the most straightforward approach for applying SRI criteria.

“Because of our commitment, we don’t shy away from volatility,” says Histand. “We are aware of the potential risks, and we accept those risks, but we also believe there is as much evidence of some actual gains in performance if you narrow your selection to companies that work in a positive manner.” That said, one measure the college takes to mitigate the impact of any short-term volatility is to base its annual 5-percent spend rate on a 10-year rolling average.

Part of the System

For Mary Ann Rodriguez, vice president of administration and finance at California State University, Dominguez Hills, the choice between performance and a commitment to SRI may not be an either-or decision. When the CSUDH endowment became actively managed in 1999, the university’s foundation developed formal SRI criteria to ensure that its management company was clear from the start about the institution’s objectives. Screens for tobacco, alcohol, and firearms are currently applied to all investments, which include a mix of equities and bonds.

One decision presently before the university is whether to leverage the foundation’s investments in conjunction with a new opportunity negotiated by the California State University System. Historically, each CSU campus has managed its own endowment and set its own investment criteria, explains Rodriguez. The system recently hired a firm to provide investment management consulting services to all CSU campuses and their auxiliaries on a voluntary basis as a way to improve returns on endowment funds. According to Colleen Nickles, assistant vice chancellor of financial services for the CSU chancellor’s office, these contracted services allow for greater asset diversification, access to best-in-class investment managers, and reduced fees and expenses compared to what may be available to individual CSU campuses and their foundations.

While the opportunity offers definite benefits, CSUDH’s finance and investment committees must determine whether the pros outweigh the cons, says Rodriguez. “On one hand, we understand the critical fiduciary purpose of our endowment to raise scholarship dollars for students. The better our returns, the more aid and services we can provide,” she acknowledges. “On the other hand, this raises questions about whether we could continue applying the social screens that we believe are important to the mission of our university.”

According to Nickles, the potential exists within the contract for investment in socially responsible funds. Currently, no participating CSU campus or auxiliary has specifically indicated a desire to include these kinds of investments in its portfolio, says Nickles. “For any that express an interest, CSU would ask the firm to add managers and funds to its platform. The only issue would be if there is a minimum required by the manager to invest.” In that case, CSU would first need to generate additional interest from other campuses, notes Nickles.

Drumming Up Support

A lack of strong enthusiasm may be another reason that more investors have not moved as quickly or comprehensively into this arena. Institutions within the University of Wisconsin System have their own separate fundraising arms, so the system’s endowment funds are largely the result of unsolicited gifts and bequests, explains Deborah Durcan, the system’s vice president for finance. While the business, finance, and audit committee of the system’s board of regents is prepared to explore options for contributors who want their donations invested in socially screened funds, to date no donors have made such a request, says Durcan.

Something the system’s board of regents put in place in the late 1990s to give voice to SRI concerns is its annual investment forum. The widely publicized event is held each November in the middle of the afternoon on the heart of the Madison campus to make it as convenient as possible for all university stakeholders to come and express their concerns related to university investments, says Durcan. The forum is also an opportunity to make known to campus constituents and the larger community the specific proxy voting activity and results for the year, which the system posts to its Web site along with a regularly updated listing of endowment holdings.

In the 18 years Histand has been at Goshen, he can recall only a handful of conversations with students raising concerns about the college’s investments. He attributes this lack of activism surrounding investment decision making to the fact that the college has led the effort to apply SRI principles at the leadership level. A more likely point of inquiry in recent years has been an increased interest related to preserving the value of the college’s investments, he says. Historically, Mennonites have been largely agrarian by vocation, not necessarily known for their sophistication in the realm of investment and finance, explains Histand. Within the past several decades, many more within the denomination have become working professionals and have gained awareness and knowledge in the area of fiduciary responsibility.

“More recently, there has been renewed concern that even as we gain additional wealth, we continue to operate within the context of our Mennonite values,” says Histand. That objective has become more challenging as investment vehicles have grown in complexity—yet another reason that some may find it difficult to engage in SRI.

Addressing Complexity

“Although our investment guidelines would not preclude us from any particular kind of investment, the question of how we can move into a particular investment space in ways consistent with our values and strategies has been under active conversation within the investment committee with each new category of investment we consider,” says Histand. While MMA has invested significantly in real estate, has moved cautiously into venture capital, and is beginning to discuss opportunities in timberland, commodities, and infrastructure, the agency has so far steered clear of hedge funds, primarily because of an inability to easily identify and track where such funds are investing dollars, says Histand.

Some institutions respond by applying SRI criteria to portions of their portfolios. UW applies its screens to direct investments only—that is, public investment managers (equity or bond) with whom the university has a separately managed account. Commingled funds, index funds, and limited partnerships are excluded, as are alternative investments, since they are typically entered into through limited partnerships, says Warren.

Whether an institution’s investment committee determines that it is willing to apply criteria where it can easily do so or to allow its commitments to keep it from certain areas of the investment space altogether, the primary objective is to be sincere with the effort and clear about parameters, says Histand. He believes it’s important for institution leaders to wrestle with the alignment of institution values to investment philosophies and practices in the same manner as when creating a new academic program. “At the same time, recognize that you need a variety of perspectives around this debate,” says Histand. “Some may want to move strongly in a certain direction, while others will be much more skeptical.”

Know also that you don’t have to reinvent the wheel, suggests Histand. While not pervasive in the investment arena, the practice of social screening has been taking shape for decades. Institution leaders can look to what a variety of colleges and universities have already done in applying specific criteria they’ve identified as compatible with institution mission and values. Chief business officers often play a key role in these discussions as well as in SRI-related activity.

The CBO’s Role

Among the key challenges of Warren’s liaison role at UW is to confer with student groups and impress upon them that any solution will require more on their part than passionate belief. “While divestment is often the first recommendation offered by students, it is often a choice of last resort for board members who must consider their fiduciary role,” notes Warren. “That conflict of interest is important for everyone to understand up front as you work toward the best solution in each case.”

Other advice Warren offers centers on establishing a clear channel of communication with investment staff, regardless of whether an institution has a formal SRI advisory committee. “We believe this campus community interface with university investments is better handled by those who are one step away from the investment process so that investment staff are free to focus on what they do best,” says Warren. At UW, that interface includes Warren, the endowment’s head of accounting and operations, and one member of the investment team.

Furthermore, consider which forms of social activism make sense for the institution in each case, whether that is proxy voting, sponsorship of shareholder resolutions, prohibited investments, or the use of positive screens, advises Warren. UW’s investment policies specifically identify all issues requiring action as well as the type of action to take. Finally, says Warren, recognize that attention to these issues takes time, and that time spent with concerned constituents can generate goodwill.

Goodwill, no doubt. But can SRI really influence corporate behavior, and is it worth a potential sacrifice in return? South Africa proved that large-scale divestment can help pressure a system of human injustice to the point of dismantlement. For Wynn, one positive development he senses from his long-standing focus on SRI is that the corporate world is slowly waking to the notion that it can make financial sense to be a good global citizen, to be accountable, and to treat employees well.

The Economist backs up that view. According to its January special report, globalization and the green movement are two primary factors that have corporate leaders taking a new look at social responsibility concerns. With increasing attention to climate change, opportunities to save money through reduced consumption and carbon emissions provides another way for companies to achieve a leading edge over competitors.

For an institution, SRI may help distinguish it from its peers.

A Point of Difference

As a relatively young institution, founded in 1965, Neumann College did not begin amassing significant investment holdings until this past decade, establishing a professionally managed endowment portfolio only seven years ago. Because of Neumann’s strong focus on shareholder advocacy, the vast majority of its assets remain in equities and bonds. Joseph Gorman, Neumann’s vice president of finance and administration, has been with the college less than one year. “Although there are concerns about missed earning power and fiduciary responsibility, one thing I’ve been able to glean in my short time here is that if a particular investment does not align with Neumann’s mission and commitment to social responsibility, then it simply won’t happen,” says Gorman.

“We are a small institution surrounded by many others,” notes O’Beirne. “We believe we must have a point of difference and that our difference must be pervasive.” For Neumann, that includes where and how it invests its financial resources. No matter how an institution chooses to engage in SRI, there must be ownership across the campus community, says O’Beirne. “It should come from the fabric of who you are. When we unwrap what it means to be Franciscan, we couldn’t not do this.”

KARLA HIGNITE, Kaiserslautern, Germany, is a contributing editor for Business Officer.