Blog - Is intentional investing beyond returns becoming a moral, social and financial imperative?

6 September 2019

ACF’s Stronger Foundations initiative aims to open challenging discussions about foundation practice and identify what it means to be a ‘stronger’ foundation. As part of the project, we will be publishing a series of provocations offering personal views on the initiative’s themes.
This contribution comes from Max Rutherford, ACF's head of policy. Share your thoughts on Twitter using #StrongerFoundations.

The top 300 foundations in the UK award £3bn each year, a major contribution to civil society, through which an incredible amount of good is achieved. They also hold more than £65bn in assets, most of which is invested in the market and private equity. Next year, ACF will publish an analysis based on the material gathered by the Stronger Foundations working group on Intentional Investing, which will set out what we consider to be the ‘pillars of stronger foundation practice’ in this area.

A key question emerging is whether intentional investing of foundation assets - beyond returns - is fast becoming a moral, social and financial imperative. The implications for the way foundations use their resources are potentially huge and could result in unprecedented change.

Charities, like other civic institutions, including universities, religious bodies and cultural centres, are increasingly seeking to do more through their investments to achieve their objectives. This is partly due to increased scrutiny from donors and the general public about their investment choices. For now, the spotlight shines brightest on those holding equities that directly contradict aspects of their missions, often held inadvertently as part of a broader fund.

Yet while ‘negative screening’ – tasking fund managers to avoid, for example, ‘sin stocks’ like alcohol and tobacco – was once sufficient cover from criticism, the bar of expectation is rising. Civic institutions and charities are increasingly expected to invest proactively in ways that further their mission.

Charity regulation is generally understood to place an expectation on charity trustees to invest in the financial interests of the charity, which has traditionally been interpreted as a requirement to maximise investment returns. But this interpretation is being tested by a range of parties, including foundations. In some parts of the UK, the ground has already shifted. The Scottish Charity Regulator last year placed the emphasis on ‘value’ rather than financial return, noting:

“It’s not the case that charity trustees in Scotland have ‘a duty to maximise financial returns’. An investment doesn’t have to make money at any cost. It can provide both financial and non-financial returns but charity trustees have to consider all relevant factors and act in the interests of the charity at all times.”

For most charities, returns from investments are only a small part of their income and, as public pressure on investment choices increases, the reputational damage that could arise from investing purely for returns may impact negatively on other income streams, particularly public donations.

Most foundations, however, operate on the basis of an endowment model, where its assets are invested for the long term, with investment returns providing the majority of its income. It is this income that pays for its operations and grant-making activities. Given that most foundations don’t seek to generate income from the public, the likelihood of scrutiny and challenge is arguably lower than for fundraising charities.

Yet their ability to achieve their missions may still be compromised, for example by reputational damage and questions about their legitimacy. We have heard from members that fund projects across a wide range of issues that applicants are more frequently asking them about the way they invest, as well as the origins of their wealth. In some cases, this has resulted in the applicant declining the offer of a grant.

But are there other reasons that foundations might consider an overhaul of their traditional investment practices?

First is the contention that all charities have a moral obligation to use their assets for public benefit in alignment with their charitable objectives. Second, we’ve heard many foundations express the view that deploying all their assets in a way that aligns to their mission enables them to achieve greater social impact than if they only did so with the income these assets generated each year. Third, we are hearing from more foundations than ever that they are achieving high rates of return through mission-aligned investment, making the financial arguments about investing for returns something of a moot point.

For foundation boards and investment committees, ‘intentionality’ – beyond returns – looks set to be an essential watchword.

Max Rutherford, head of policy, Association of Charitable Foundations
Views presented in the Stronger Foundations blog series are those of the author, and do not necessarily reflect the views of the working group, ACF, or its wider membership.