Background

Responsible investing, sometimes referred to as socially responsible, sustainable, socially conscious, or impact investing, is not a new concept. Being morally and ethically conscientious of one’s finances can be traced back to roughly 1758, when the Religious Society of Friends (Quakers) prohibited participation in slave trading. Similarly, John Wesley, the founding father of Methodism, made the case for a responsible investing approach in his sermon “The Use of Money,” which focused on the longstanding philosophies of “…do no harm to your neighbor through your business practices…” and “… avoid that which can harm the health of your workers…”[1] The religious influence continues today, with many spiritual investors requiring that personal or professional portfolios avoid the use of so-called “sin stocks,” which are typically associated with companies that produce tobacco products, liquor, or weapons.

As the religious influences on investment strategy grew, other similarly strong opinions and philosophies began to make their impact on modern responsible investing.

The political turbulence of the 1960s, such as that surrounding the Civil Rights Act of 1964, helped create initial concerns that affected philosophy and investment. In addition to chronic partisan apprehensions, the responsible investor’s demands have expanded to address environmental concerns, including air and water pollution, exploitation of other natural resources, and expanding anxieties over global warming. This mounting amalgamation of issues and concerns has evolved into an important developing opportunity in both the U.S. and European markets.

The principle of responsibility can be a significant motivator in strategic planning, and with stronger returns demonstrating effective productivity, charitable foundations and other charitable gift planning vehicles are exploring the potential of adopting responsible investing as part of their investment policy statements.

Responsible Investment Strategy

Given the interest in socially responsible investing (SRI), in July 2016 the Council on Foundations and the Commonfund Institute released the joint Council on Foundations-Commonfund Study of Responsible Investing. The extensive analysis of data from 186 U.S. private, public, and community foundations revealed that approximately one-third of this group had implemented or were in the due diligence process of scrutinizing the concepts of SRI to potentially adopt in governing their endowments. We view this as a powerful affirmation that, within the foundation realm, responsible investing is considered a viable strategy for meeting the regulatory demands of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). While there was support to embrace and adopt mission-related investment strategy, there appeared to be a considerable segment within the group that was still apprehensive. These obstacles encompassed the traditional concerns over performance and return, uncertainty that responsible investments are congruent with fiduciary obligations, or a perceived lack of comprehension of the actual strategies. According to the study, 31% of the group felt their boards of directors would have no awareness of the differences between SRI and environmental, social, and governance (ESG) screenings. 

The responsible investment strategy is being studied, considered, and implemented within the foundation and charitable planning community.

Still, numerous articles seem to support the negative views of SRI investing for a variety of reasons, including:

  • SRI strategies are overly expensive because of the time required for prescreening and ongoing compliance monitoring.
  • Ultimate performance of an SRI strategy is underwhelming due to the combination of the fee expense with the risk of higher concentration on one sector and lack of diversification. 
  • It is impossible to achieve all the goals expectations of SRI investing because the ultimate decision about what is a sin stock and what is a safe stock is in the hands of the fund provider, whom some financial advisors do not see as impartial. 

Regardless of expense, performance, or who holds the decisions of “bad stock versus good stock,” the strategy of responsible investing is having an impact on charitable gift planning and planned giving vehicles.

In fact, there is growing interest in using an impact investment strategy as the actual charitable gift. 

As recently as May 2017, The Chronicle of Philanthropy published the article “What Happens to Giving as Impact Investing Grows?” The author opines that impact investing might have an effect on charitable planning by potentially diminishing actual grants and gifts. A 2016 study conducted by Indiana University’s Lilly Family School of Philanthropy and U.S. Trust indicates some wealthy donors view impact investing as their giving, 34% viewed it as part of their gifting goal, and 5% reported this style of investment strategy has replaced their charitable gifting altogether. Of these philanthropic households, 60% stated impact investing is a part of their portfolios, but they still practice the more traditional means of gifting. Although the concept of bringing the various “responsible” considerations is apparently having a noticeable influence on nonprofit portfolios and charitable giving, we question if this concept is being embraced in charitable gift planning vehicles.

A charitable organization’s trustee’s and board’s fiduciary responsibility and obligations under the Uniform Prudent Management Institutions Act add another level of pressure on trustees and boards regarding investment performance of charitable and nonprofit portfolios.

Once again, the concerns over lack of thorough diversification, expense, and performance may come into play.

When considering charitable planning vehicles, in particular so-called “life income” charitable instruments, the stress level may increase. The trustee has an obligation to the (individual) income beneficiaries of the charitable gifting instrument, as well as the ultimate distribution to the named charity/charities and the philanthropic intent. Because today’s grantors and donors continue to see philanthropy as another platform to propagate their political, social, or environmental views, discussions and questions about an SRI strategy may arise. However, charitable gift planning vehicles structured as trusts are generally not subject to UPMIFA but rather are subject to state laws governing trusts and trustees. A careful analysis of these state laws is required to determine whether an SRI strategy is consistent with the duties imposed by state law. Donors and trustees should consult their legal and other professional advisors before embarking upon an SRI strategy in a trust.

The original impressions and opinions aside, support from numerous community foundations, federations, and other respectfully recognized parent organizations of philanthropy continues to grow.

The confidence gained from due diligence exploration has helped encourage these charitable entities to use SRI strategies within their own endowments and portfolios that support the planned giving infrastructures they offer the donor community. Many of the well-known financial service providers, including PNC, have established robust SRI platforms designed to meet the ultimate charitable goals of gift planning vehicles. Mounting improvements in the overall performance of SRI investment strategy, the growing support of parent organizations, and the changing focus and requirements of today’s donor seem to indicate new parameters to consider in generating investment guidelines and constructing portfolios for charitable vehicles. To that end, the donor’s planning team, including legal, tax, financial, and charitable advisors, should learn all they can to embrace the more conscientious humanitarians in their current and ongoing charitable goals.