Money with a conscience
Recently, I was contacted by a survey bureau for the Dutch government that was conducting a survey on the social commitment by it citizens. I was asked dozens of questions about how involved and supportive I was to Dutch society. How many voluntary organisations did I support; ie, community centres, sports accommodations, hospitals, schools, community. When I was responding, I kept saying none.
As the interview continued, it struck me that I did not make a distinction between doing a job that added no social or environmental value and using the capital accumulated to invest for social good, whether it was money or time. My integration of work and social benefit was the complete exception. I did not fit in any check boxes. That struck me very odd, but extremely common.
The same holds true for our understanding of organisations that have a ‘social mission'. We expect them to do good, without asking how do they generate their capital to be able to do good. It has always been maintained that the four financial wealthy organisations with a clear social mission, church, NGO's, foundations and trade unions have been the most difficult to convince to commit their assets to sustainable development. That stuck me as extremely odd.
After speaking to several wealth managers over the past few years, they all said the same. These four groups were the most difficult to convince to commit their assets to SRI or sustainable investments. Why would an organisation that has as a mission, ‘the improvement of society', use its most powerful tool, money, not to improve society or the environment?
Foundations are established with an endowment. That endowment is managed by a fund manager, internally or externally, with the purpose of achieving enough returns to allow 5% of the fund to be give away in the form of grants, and sometimes loans or mission related investments. The only instructions that the fund manager, usually gets is ‘don't lose the money'. Make it grow. That is it. The fund manager follows those instructions and tries to focus only on financial return, irrespective of the negative benefits.
You often find foundations devoted to health, having their portfolio invested in tobacco. This creates a situation where you are giving away money to help improve the health of citizens, but you are profiting by actually worsening their health. Other foundations support community development, while investing in toxic waste of companies who are destroying these communities. Remember the church in the UK that campaigned against the use of land mines while investing in companies that produce land mines. Investments in oil companies who core business is CO2, are embraced by those organisations fighting climate change. This goes on all the time, either intentionally or unknowingly.
This old, almost primitive approach to fund managers for institutions with a social mission is looking more and more indefensible. If we look at what many of the private banks are doing with philanthropy for private clients and institutional clients, this self defeating fund management approach is being perpetuated even more, by saying: "Give me your money, we will invest in toxic waste and environmentally and socially destructive industries, set up a foundation and you can give away 5%." I am exaggerating the point, but the concept is the same. If you target your principal without looking at how that money will impact society, and you are set up to improve society, then you are fooling yourself and being ignorant. Why leverage 5% of your money to help society, when you can take the principal (100%) invest it in a sustainable portfolio, generate returns and if you want to give away 5%, fine. The difference is that you have leveraged 105% impact.
The future direction of foundations, and other social mission driven institutions will be leveraging 105% impact for societal benefit. This will dramatically speed up the process, and create more money flows. As everyone knows, money follows money. If many billions go in a certain direction, then that will attract more money, which will create a snowball effect. In addition, it will speed up the process of raising awareness among fund managers, because large clients will be asking for this. Nothing like getting buy in, when people see their bonuses growing.
It is important, to keep in mind that there are no angels, there are many heroes. With that I mean that many individuals and organisations that are established to provide social or environmental benefit are not perfect and often work not in the interests of those groups they are trying to aid. My hope, is that when the owners of capital (money, property, intellectual etc) see that they can achieve a market based return, and provide a social and environmental added value through their assets, they will embrace this form of high impact investing. The old way is only perpetuating a broken system, that is not working. We need an integrated, systemic form of investing. One, in which we all benefit.
Robert Rubenstein is founder and CEO, Brooklyn Bridge - TBLI Group, based in Amsterdams