Recently, on a plane we were flipping through an issue of The Economist, which made us feel smart, when a full-page ad made us freeze, mid-flip.
Beneath a photo of a giant wind turbine, big, bold type asked, “Is my life sustainable? What about the way I invest? Can I do good and do well?”
Isa Catto, executive director of the Catto Shaw Foundation, explores issues affecting nonprofits and the donors who support them in a series of columns for the Chronicle.
The ad, from global financial services titan UBS, is an eye-opener. It reveals just how far socially responsible investing has crept into the mainstream and indicates that funds focused on environmental, social, and governance improvements (often referred to as ESG funds) have become a selling point for large financial firms.
Enough people want to do well by doing good — and enough legitimate vehicles are now available — that impact investing is worth promoting on a massive scale.
Count us among the interested people. As officers of a third-generation successor family foundation, we are in the midst of shifting a largely inherited portfolio of investments in a direction that will be profitable and beneficial to society. We’re thrilled to see more opportunities to align investing and philanthropy.
To help others considering this path, we’d like share our story.
Inherited Wealth With Strings Attached
About a decade ago, we inherited a family foundation that was originally established in the early 1960s and supported conservation and cultural institutions, including the Environmental Defense Fund and National Public Radio. When it was created, donors gave mostly to large, well-established organizations, and there was no such thing as impact investing — at least not anything readily available, reliable, and profitable.
We inherited foundation assets that were divided evenly among four inheritors, and we started a new foundation with a mission of our choosing. However, we didn’t get to choose the invested assets we inherited.
Many of those assets had been invested two generations earlier and included holdings of Air Products and Chemicals, Altria, British Petroleum, Carnival Cruise Lines, Canadian Natural Resources, Colgate-Palmolive, Imperial Oil, McDonalds, Nestle, and Northrop Grumman.
Those are companies working largely against our mission: “The Catto Shaw Foundation funds initiatives that empower women and help preserve the planet through the intersection of environmental advocacy, social justice, and creativity.”
Hoping to Do Well and Do Good
The ability to form a new foundation was the greatest gift imaginable, but we wondered: Could we maintain — and even increase — the value of these assets while replacing the traditional blue-chip stock holdings with companies that shared our principles? The prospect made us nervous, but we are now about a year in, and the answer is a resounding yes.
When we began our research, we soon realized we needed advisers who had access to a wide range of socially responsible investment vehicles and could perform serious due diligence. Our search led us to Merrill Lynch, which surprised us because we didn’t equate the firm with impact investing. Yet a supremely talented team of analysts and advisers (led largely by women) working around the globe is committed to impact investing.
We work with a two-person team, so it’s like having a personalized, boutique firm within a larger one. They’ve guided us through the first steps as impact investors, from “do no harm” to “do good!”
The first thing we did was divest all the holdings that made us uneasy or ran counter to our foundation’s mission and our personal beliefs. When it came time to reinvest, we did so with screens: Our advisers excluded companies that didn’t meet our values or our foundation’s mission.
On the equities side, they steered us to funds such as ClearBridge Large Cap ESG, PAX Global Environmental, and Mirova Global Sustainable, all of which invest in companies that are working on behalf of the environment. Until recently, fixed-income ESG opportunities have been limited to “green” bonds, some of which weren’t very green at all. But now the fixed-income world is creating and marketing more complete, more creative ESG strategies. Our foundation now holds stakes in the Breckinridge Taxable Sustainable Gender Lens Fund and the TIAA-CREF Social Choice Bond Fund.
Financially Viable and Socially Conscious Investments
Today, either through screens or active management, our foundation is 71 percent invested in some sort of ESG strategy. So how are the returns after one year?
As of this writing, the ClearBridge fund is up 28.1 percent for the year, versus 24.3 percent for the S&P 500. PAX Global Environmental is up 28.2 percent, while its benchmark, the MSCI All Country World Index, has risen 22.4 percent. The Mirova Global Sustainable Equity Fund’s returns have been twice those of the S&P since we invested in October 2018.
We focus heavily on empowering women, and in our personal portfolio, Merrill directed us to the PAX Ellevate Global Women’s Leadership World Leadership Fund, which invests in companies that invest in women. That fund also has outperformed the S&P this year.
Scrutiny Required
It takes a fair amount of sleuthing to completely align your investments with your mission or to go further and find investments that promote your mission.
For example, we support organizations that work for gun control. It’s easy to spot gun manufacturers in investment funds, but it’s harder to know who makes bullets for AR-15s. General Dynamics is considered an aerospace company, and huge numbers of funds hold its stock. But General Dynamics also makes bullets for AR-15s, the mass-shooter weapon of choice.
What’s become clear is that we are far from alone in our desire for socially responsible investing. According to McKinsey & Company, fully one quarter of the world’s invested money, about $22 trillion, is now invested with ESG guidance, and the amount invested this way has risen 38 percent in three years.
A New Future?
Seventy-seven percent of millennials own or are interested in adding exposure to “impact investing” vehicles, according to the 2018 U.S. Trust Wealth and Worth survey. If one assumes that a conservative 30 to 40 percent of their wealth is invested in equity ESG funds. that could mean $15 to 20 trillion flowing into those funds in the next 20 to 30 years.
As Merrill investment strategist Savita Subramanian puts it, “We conservatively estimate that inflows into ESG-type strategies over the next few decades could be roughly equivalent to the size of the S&P 500 today.”
About $36 trillion is expected to flow from one generation to another over the next 30 years, according to wealth manager United Income. “Wealth equal to nearly two times the size of the U.S. GDP is expected to be gifted to charities and heirs over the next few decades,” United Income founder Matt Fellowes told the Los Angeles Times recently. “It’s a historically unprecedented amount that is almost incomprehensibly large.”
Despite this pending avalanche, or maybe because of it, philanthropy and impact investing have come under fire of late from a wide spectrum of social commentators, most notably Anand Giridharadas, author of Winners Take All: The Elite Charade of Changing the World, as being self-serving and agenda-driven.
We’re somewhat baffled by this criticism — especially in light of society’s increasingly complex problems and opportunities. Is there greenwashing and other fudging of ESG credentials? Of course. And a recent Wall Street Journal piece reported that eight of the 10 biggest U.S. funds marketed as “sustainable” still hold positions in oil and gas companies. And the biggest challenge to holding companies accountable is that there isn’t a globally accepted set of ESG standards.
However, if market pressure and a genuine desire for sustainable investments force corporations to behave better, diversify their ranks and their boards, and become better global citizens, how is that a bad thing?
We simply believe this kind of investing gives us greater credibility with our grantees. Organizations of all types are becoming more focused on the origins of their donations. Witness the Whitney Museum, where board vice chairman Warren Kanders resigned last year following months of protests over his company’s production of tear gas used against migrants at the U.S.-Mexico border. All sorts of arts and educational institutions are trying to figure out what to do with the Sackler family’s money in the midst of the opioid crisis.
This debate is nothing new, especially in these pages. And Teddy Roosevelt famously said of robber baron philanthropy, “No amount of charity in spending such fortunes can compensate in any way for the misconduct in acquiring them.”
Fortunately, we all have options now. Instead of investing in a mining company, we can invest in an environmental cleanup company or fund and do just as well financially.
The Next Step
We’re thrilled that our investments that are focused on ESG and socially responsible investing have paid off and allowed our foundation to grow over the past year or so, while at least doing no harm and potentially doing a lot of good. We wanted to test the waters before delving into program-related investments, but that’s the logical next step. (Program-related investments allow foundations to make investments in nonprofit programs as loans or equity stakes with the hope of recouping those investments or even getting positive returns from them.)
For donors looking to go beyond ESG guidance, these kinds of opportunities are growing no matter what your interest. We’re looking into conservation finance as a way to more actively address climate change through investing. These vehicles are not returning profits at this point, but they are revolving funds that count as part of your 5 percent mandatory distribution. Organizations such as Conservation International and the Nature Conservancy are creating funds that hope to raise several billion dollars over the next few years to pay for conservation projects around the world. Investors won’t reap returns from these funds, but foundations can count the investment as part of their 5 percent mandatory distribution. Plus, if the programs generate enough money to pay back the investor, that money will go back into the fund to finance another program, giving the foundation multiple rounds of investments out of the deal.
Constructing a well-balanced investment portfolio that sustains a foundation and allows it assets to grow, while promoting sustainable and ethical living, is a challenge.
But it’s much less of one than it was a few years ago. Will our foundation soon be 100 percent invested in socially responsible companies? It’s possible, and it’s virtually a given for our children when they take over.
Daniel Shaw and Isa Catto are the president and executive director of the Colorado-based Catto Shaw Foundation.
