Should a Foundation Invest for Social As Well As Investment Return?
Looking at the simplified decision tree at the bottom of this page, the first choice a foundation needs to make is between two avenues to maximize its social return:
- Many institutions believe it is most effective to separate their endeavor to generate financial return from their endeavor to generate social return. The goal of these institutions' investment activity is to provide consistent financial returns using practices that meet generally accepted legal and ethical standards. This financial return provides resources to the grantmaking team which then attempts to maximize social return.
- Many other institutions believe that social return will be maximized by generating some of it through a variety of socially motivated investing practices, thus integrating social and financial criteria into investment decisions.
While not oblivious to the social impact of its investment decisions, the Hewlett Foundation until now has focused on optimizing its financial return on investment. The policy recommended by the Investment Committee modifies that historical approach in carefully selected ways. (1)
We believe proxy voting on social issues can be considered without affecting the investment process. Guided by the thought that we should focus our effort on proxy proposals that are congruent with major Hewlett Foundation grantmaking initiatives, we began a "dry run" process early this year to see whether we could keep the diversion of internal effort at a minimal level. This effort was discontinued for 2007, as suggested in footnote 1, after we realized that the Foundation did not own directly in its name any of the companies with global warming or sustainable forestry proxy proposals. However, we were encouraged that we could have completed the process at an acceptable level of effort. In early 2008, we plan again to see which companies have proxy proposals on these subjects and whether we own any of them directly at that time.
We are not enthusiastic about applying either negative or positive screens for these reasons:
- The range of issues upon which one can run positive or negative screens is so broad that significant resources would be needed to reach agreement within the Foundation about which issues it wishes to emphasize and then to sort companies accordingly.
- The evidence as to whether screening managers tend to outperform or underperform is ambiguous. Conceptually, they should be expected to underperform slightly over the long term because they are selecting from a smaller opportunity set. Also, since some of their effort is devoted to screening, they have less bandwidth left to simultaneously choose top performing stocks.
- In addition, we believe the portfolios run by conventional managers and those run by managers employing screens such as Domini and Calvert are converging. This is occurring because both investment managers and corporate managements are increasingly recognizing that good environmental and labor practices are not only ethical but profitable.
However, as described in the recommended policy, we do believe that an exception should be made to exclude tobacco manufacturers since their products do significant harm to individuals and to society even if used as intended.
(1) Program-Related Investments (PRIs) are not considered in this discussion, since the Board has already adopted a policy on PRIs and since those that are made are not held in the Foundation's investment portfolio (per HF Board direction and IRS regulations).