For a charitable foundation investing money to fund good works, whether to own British Petroleum stock is a complicated question.
The Bill & Melinda Gates Foundation owns shares of BP Ã¢â¬" a company accused of fouling the air with its oil refinery and paper mill in South Africa. Since the foundation spends billions of dollars to improve the health of Africans, that investment strategy would seem to conflict with its mission.
Yet Walden Asset Management, a Boston-based trust company that has been a leader in socially responsible investing, also own BP shares and regards it as one of the better-run oil companies. The Seattle-based Brainerd Foundation, which supports energy conservation, decided after a lengthy internal debate to invest in BP, too, since the company has begun to embrace alternative energy.
And for the environmental group Greenpeace, owning BP shares was a way to promote change from within. It helped sponsor a shareholders' resolution demanding BP stop any activity to open up the Arctic National Wildlife Refuge to oil drilling.
As the Gates Foundation embarks upon a review of its how its $32 billion endowment is invested, officials insist they won't change their basic investment philosophy.
Still, the BP example highlights the dilemma facing the world's largest philanthropy.
Some critics might have the foundation simply shun investments in oil companies; others would have Gates use its shareholder clout to change the behavior of those companies.
And many experts on responsible investing say it's about time that charitable foundations started asking the hard questions about the 95 percent of their money they invest, not just the 5 percent they spend Ã¢â¬" and that the Gates Foundation should lead the way.
Calls for change have grown since a recent investigation by the Los Angeles Times revealed the foundation has invested hundreds of millions of dollars in companies that contributed to the same social and public-health problems that the foundation aims to solve.
The foundation, though, is taking a more cautious approach. In an interview last week, Chief Operating Officer Cheryl Scott discussed the foundation's plans to review investments in a more explicit way than before.
But a later statement by Scott, posted on the foundation Web site Thursday, made clear the foundation wasn't planning the type of changes some critics were calling for.
The statement said that evaluating one company over another based on social criteria would be too difficult, and the foundation would not embrace alternatives such as shareholder activism.
Scott defined the foundation's philosophy narrowly, saying Bill and Melinda Gates "have chosen not to get involved in ranking companies based on factors such as lending policies or environmental records." She added that besides voting proxies consistent with good management, "the foundation is a passive investor because we want to stay focused on our core issues."
Following "the norm"
So far the foundation has managed its investments separately from its grant programs. It invests in a diversified portfolio for a steady return, and then uses the profits toward greater social goals.
"What they were doing, unfortunately, is the norm in the foundation world," said Timothy Smith, senior vice president of Walden Asset Management and president of the Social Investment Forum.
A study last year by the Chronicle of Philanthropy found that 30 of the 50 largest U.S. foundations did not try to influence companies through their investments. Three out of five foundations left such decisions up to money managers, who rarely use their shareholders' votes to challenge company policy, even if that policy is thwarting the foundation's broader mission.
Only two of those foundations, Ford and Rockefeller, have policies specifically designed to ensure consistency between investments and program goals, the study said.
But with accounting scandals and other bad behavior across the corporate world, "More and more investors are saying they believe it's important to pay attention to the companies you own and vote accordingly," Smith said. He said such an activist strategy is more effective than trying to screen out potentially troublesome investments.
The Carbon Disclosure Project, for example, has asked thousands of companies to disclose their carbon emissions and their plans to reduce them. A coalition of global investors worth more than $30 trillion is now behind the project, Smith said, including financial giants such as Goldman Sachs, Morgan Stanley and Merrill Lynch.
The Gates Foundation is not part of the project.
"The foundation community was lagging behind what even many Wall Street firms were understanding Ã¢â¬" that some environmental, social and governance issues were affecting shareholder value and that you need to be proactive," Smith said.
Scott, who was president and CEO of Seattle-based Group Health Cooperative before joining the Gates Foundation last year, said the foundation had been discussing its investment policy before the Los Angeles Times series appeared.
She acknowledged the foundation's current method of investing its assets in a diverse portfolio and voting as a shareholder to encourage good corporate governance is "not 100 percent effective."
But it's difficult, Scott said, for any investor to keep abreast of a company's actions.
"When you say I'm going to invest in company A, how do you know what company A is doing in every single nook and cranny of their business? At the end of the day, having run Group Health, it's impossible to know all the complex transactions a company does.
"You would have to have a staff of 500 people screening investments. We would like to have a staff of 500 people doing program work."
In a review of investments, she said, the foundation would want to want to screen out the most egregious examples. The foundation's current decision not to invest in tobacco companies is one such example.
Scott named only one instance when the foundation investment manager voted against a company's position Ã¢â¬" on an HIV-AIDS proposal "at odds with our beliefs about good HIV policy." She declined to name the company.
Lance Lindblom, president of the Nathan Cummings Foundation, which has guided foundations to take active stands as investors, would like to see the Gates Foundation go further as an activist shareholder.
"By using their resources and prestige, they could through their proxy and shareholder status make some real difference in corporate behavior," he said.
Paul Brainerd, a Seattle technology entrepreneur who made his fortune as founder of the Aldus Corp., said 10 years ago he was in the same position as Gates, trying to decide how to invest his foundation's assets. His first thought was to maximize his portfolio's return.
He soon realized his money would be much more effective by "managing both sides of the equation," he said.
"When you initially start this work, it is overwhelming, it is complicated," Brainerd said.
But over the years, he asked for outside advice, learning and adapting his investment policies to align with his foundation's environmental goals. And he now works actively with Goldman Sachs, his primary investment manager, to change corporate actions.
"Is it perfect? No," he said. "But as you get smarter, you can do a better and better job."
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