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Foundation portfolios, proxy action leverage social change

Mission-related investing has been around for a long time, but there seems to be a growing interest among philanthropists these days.

Back in 2004, the Northwest Area Foundation dedicated $10 million in its investment portfolio to a special venture capital fund. It not only aims for a 12-15 percent annual rate of return but also to serve the foundation’s anti-poverty mission.

Millie Acamovic, the foundation’s chief financial officer, said the venture capital fund invests in promising new for-profit companies in its eight-state region. As an additional criterion, the fund chooses businesses that have the potential to preserve and create full-time, good-paying jobs with benefits.

In the foundation world, it’s called mission-related investing or MRI. Acamovic said MRI brings together the foundation’s investment arm with the grant-making arm to work toward the same goal: “In our case, the reduction of poverty and our mission of job creation.”

The idea behind MRI is pretty simple. A foundation might give away 5 percent of its endowment every year, but it also makes a powerful impact with how it invests the other 95 percent. Take an extreme example. It wouldn’t make much sense for a foundation working to end lung cancer to invest in tobacco stocks. So how can a foundation invest to meet its mission without losing its shirt?

Same idea as SRIs for individuals
The MRI topic came up at a recent meeting of the Social Enterprise Network that I attend. It caught my attention. A few years ago, I switched my funds into socially responsible investments (SRIs). (It’s the same idea as MRI, only for individuals. You align your investments with your values. And yes, I took a big loss this past year, too.)

Seemed like a good a time as any to call foundations trying MRI programs to see how they were faring.

Bill King, president of the Minnesota Council on Foundations, said MRI has been around for a long time but there seems to be a growing interest among philanthropists. Historically, foundations have taken the view that better total market return means more grant-making, he said. Over the last 15 to 20 years, a number of grant makers have questioned whether they should try to align their investment strategies with their mission.

“There has been an appetite — and it has been a groundswell in the last few years — to grow the tools in the tool kit of foundations to work in communities,” he said. “One of them is mission-related investment.”

Several options
Jean Adams, vice president for finance and administration for The Minneapolis Foundation, said foundations could take three approaches to mission-related investing.

One is screening. Foundations could use a negative screen, choosing not to invest in companies that they believe contribute to social ills. Depending on the worldview, those could include companies involved in tobacco, alcohol or gambling. Or they could use a positive screen, choosing to invest in companies they want to support, such as community development.

Second is a direct investing approach, similar to the Northwest Area Foundation’s venture capital fund, where actively selects specific companies to support.

Third is shareholder advocacy, where a foundation use its proxy votes to influence corporate policy. (In 2008, the Jesse Smith Noyes Foundation in New York published a “Proxy Season Preview” (PDF) to help other foundations identify key social and environmental issues they could influence.)

Some foundations, such as the F.B. Heron Foundation, have elaborated on their mission-related investing philosophy on their website.

The Minneapolis Foundation manages money for smaller foundations. Adams said it has talked about doing more with MRIs. “Our donors are getting more and more interested,” she said, and the foundation hopes to begin to offer MRI products.

Faith-based trend-setters
Faith-based investors have done screening for years. Heather Williamson, senior investment manager for the Evangelical Lutheran Church in America (ELCA) Board of Pensions, said it holds approximately $5 billion in pension funds for employees. They can choose among several funds, and they have put more than $1 billion in socially screened funds. (The Board of Pensions also invests $250 million for the ELCA’s foundation. That is invested 100 percent in socially screened funds.)

“We work in the intersection of our fiduciary obligation and the social interests of the church,” Williamson said. “We can only act in the best interests of our members. These companies need to make money.”

A lot of the socially responsible investing movement evolved after the push to divest from South African companies during apartheid, she said. The movement has matured since then. “One thing you are seeing is more positive social investing,” Williamson said, looking at companies promoting community economic development or good environmental practices. “It used to be just [negative] screening.”

When the ELCA started social purpose investing in 1988, the investment pool was small and didn’t perform as well as the unscreened funds. That was because it was not as diversified, Williamson said. Starting five to seven years ago, the social purpose funds became structurally identical to the unscreened funds and on average they have performed as well.

The Board of Pensions is involved in identifying key proxy votes, (see also here).

It also tries to have informal conversations with companies and get ahead of problems, Williamson said. For instance, the Board of Pensions worked with a consumer products firm which had a factory in sub-Saharan Africa. The community had significant challenges with HIV, tuberculosis and malaria. The company was hiring four people for every job, because everyone was sick or having to take care of sick relatives.

The Board of Pensions worked with the company to modify the way it approached health care and services, both with its employees and the whole community, Williamson said. “There was real meaningful change.”

Saving jobs
OK, back to the Northwest Area Foundation. Among its MRI investments is Behrens Manufacturing Co. in Winona. It makes galvanized steel garbage cans and other containers. It has provided stable manufacturing employment, Acamovic said. As a result of venture capital money from the foundation and others, the company has been able to respond to demand in the market, retain jobs and grow.

The foundation has invested $8.5 million of the $10 million target. It represents less than 3 percent of total investments. Acamovic said it’s too early to tell if the investments will hit their targeted returns. It typically takes eight to 10 years to see if private equity investments pay off.

The other Minnesota investments in its MRI fund are: Diversified Graphics, Minneapolis; Door Engineering,  Kasota; Hoffco, Wood Lake; Infinity Precision, LLC – Chanhassen; JobDig. Inc.,  St. Louis Park; Nash Controlware, Inc. dba As One Technologies, Inc., Minnetonka; and Spineology, Inc., Minneapolis.

Northwest Area Foundation hires an outside evaluator to assess its progress on MRI goals. According to last year’s data, the venture capital companies offered above median wages for the majority of workers, compared to similar companies in the region. They had a 79 percent increase in salaried jobs and a 75 percent drop in part-time jobs.

The MRI portfolio has not performed well recently, but neither has the rest of the market, Acamovic said. The foundation’s internal conversations have been around whether it should do more MRI, not less. “We remain very committed,” she said.