Foundations often exist to do public good. Their mission should be both to invest and provide grants. Protecting capital should be a priority; foundations do not need to be liability driven, have no reason to herd, and could use their long-term nature as a source of competitive advantage.
So are foundations investing differently from institutions or high-net-worth individuals, who try to shoot the lights out? Sadly, they are not.
Small and mid-sized foundations, with investment strategies that often have little to do with their missions, are particularly likely to be the proverbial dog wagged by the investment manager tail. But larger foundations make mistakes too - Google ‘Fondazione Monte dei Paschi di Siena' for one horror story.
Direct evidence of European foundations' ESG failures is harder to come by, so I will use US examples to illustrate this global challenge. More4Misson was established to get US foundations to align their investing with their mission. But foundations willing to be linked to this "radical" idea account for just $39bn (€30.8bn) in assets, or 6% of total US foundation money. Even with this leadership group, only about 1% of assets is invested in alignment with mission.
The US Foundation Center has documented a major increase in foundations giving grants related to climate change. Yet the foundations that have even started to align their investing activities with what they know from their programme work can be counted on one hand.
The Union of Concerned Scientists (UCS) published a report showing that many corporations "speak with forked tongues" on climate change. As corporate citizens, they posture as part of the solution, yet through their trade associations they prevent government action. The report, supported by foundations concerned about climate change, proposed sensible recommendations for investors.
So are supporting foundations implementing these recommendations? The UCS says: "It's an interesting question, but we haven't looked into." I use this example not because the UCS is ‘bad', but because it is the norm.
What stops foundations from taking an integrated approach in delivering their mission?
The belief that foundations should maximise returns to spend more is a big factor. As Archbishop Oscar Romero said: "When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a Communist." Translated into management language, it is well known that only 1-2% of executives understand system dynamics.
Overcoming silo mentality is critical. Finance committee members are often the retired ‘good and great', ie, the people who have the mental models that have created so much of the triple crisis that the IMF's Christine Lagarde recently acknowledged. Frequently, they are not even on the main board. And the governance oversight - from the mission arm over the investment side - is often too weak to resist the dominant but incorrect narratives - that taking a ‘joined-up' approach will lead to performance drops and that fiduciary duty is being breached.
Some foundations believe that if they invest 1-5% of their assets in a niche way, then they are ‘safe'. ‘Shifting the burden' manoeuvres of this kind are well known for relieving symptoms but, collectively, they exacerbate underlying problems. There is no reason why foundations should invest 95-99% in a way that undermines their mission, as Towers Watson has shown with its impressive Telos project.
Investors today need to empower themselves to be responsible owners. Otherwise capitalism will fail. On issues directly related to their mission, foundations must take the lead. It's the Start In My Back Yard approach!
Raj Thamotheram is an independent strategic adviser, co-founder of PreventableSurprises.com and president of the Network for Sustainable Financial Markets