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Putting Your Money Where Your Mission Is

nonprofits

We work closely with our nonprofit clients to ensure their investments, whether endowments or unrestricted reserves, maximize investment returns. Our clients’ investment strategies are designed to be consistent with their cash flow needs, long-term goals, and comfort with market risk and volatility. In recent years we have witnessed an increasing desire by clients to apply Socially Responsible Investing (SRI) principles to their investment strategies.

What is SRI?
Socially Responsible Investing is the process of integrating personal or institutional values and mission, and/or societal concerns into investment decision-making. The process considers the social and environmental consequences of investment within the context of financial analysis.

Just as there is no single approach to SRI, there is no single term to describe it. Depending on the emphasis, investors use terms like: ESG (environmental, social and governance) investing, “mission-related investing,” “community investing,” “impact investing,” “green investing,” and more. SRI is also an acronym for Sustainable, Responsible and Impact investing.

Some point to the Bible as the genesis of what is now SRI. Momentum for more socially responsible investing grew in the 1980’s when private and public institutions formally adopted the anti-apartheid investment strategy of divesting from companies doing business in South Africa.

Where Does Your Organization Lie on the SRI Continuum?
To better sort out all the approaches to SRI it is helpful to think of SRI as being on a continuum of increasing social impact through investing. Starting from the lowest impact to the highest:

Negative Screening - Our organization wants to avoid investing in companies that conflict with our mission. A relatively easy to implement and popular form of SRI is to screen for and exclude public companies that conflict with your organization’s values and mission. Health-oriented nonprofits may expressly exclude tobacco companies from their portfolio and nonprofits dedicated to preventing domestic violence might avoid gun manufacturers and distributors.

ESG Screening - Our organization wants to invest in companies that are “good” corporate citizens. On the flip side of avoidance, there is an increasing trend towards casting a positive net and investing in public companies that meet rigorous environmental, social and governance criteria. Is the company a good steward of the environment? How well does the company manage the relationships with its many stakeholders and lastly, how does the company lead its affairs? ESG investing can be relatively straightforward to adopt today given the many ESG mutual funds and ETFs to choose from. A subset of positive screening is thematic screening which looks at specific factors like women’s rights or solar energy.

Impact Investing - We want our investments to have a direct and measurable social impact.  Impact investing is intentional investing that is most commonly implemented through private debt and equity and real assets. It is a relatively new and growing market that provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance and affordable housing, education and healthcare. Returns vary from below market to those competitive with the market. Industry metrics for impact are a work in progress.

Does SRI Compromise Investments Returns?
More than one of out every five dollars under professional management in the U.S., or $8.72 trillion, was invested in some form of SRI in 2016. The limited but growing research on SRI returns indicates there is no negative impact to portfolio returns. In fact, some studies argue that companies with sustainable environmental, social and governance practices will be more profitable with better stock performance than their counterparts.

How Do We Get Started?
It’s important to first consider whether your organization’s investment philosophy is geared more toward financial returns or social and environmental impact. Return first or impact first?  Your Investment Policy Statement should clearly outline your target return and social impact objectives.

An organization that embarks on SRI-oriented investing will have its path shaped by its mission, priorities, and values. There are a broad array of investment choices in the SRI investment space.  Consider working with a professional investment advisor who is experienced in creating socially responsible investment policies and incorporating ESG criteria and other screens into the investment decision making process. Perform the necessary due diligence to construct a portfolio of investments that reflect your organization's unique approach to socially responsible investing.

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