MISSION-RELATED INVESTING

16 May 2008
Northhaven United Methodist Church
Dallas, Texas

Investing and Giving - Chris Lelash

Chris Lelash, a financial consultant with First Financial Equity and a trustee of the LeLash Foundation, gave an overview of the connection between foundations’ financial and grantmaking sides, and a summary of the opportunities to leverage the impacts of gifts with responsible investing.  He noted that there’s a false dichotomy between non-profit and for-profit entities:  both exist to create value, whether that value is in the economic, social or environmental realm.  These values are blended in our real lives.  The tax distinction between the for- and non-profit areas has been blown out of proportion.  Mission-related investing can help break down the artificial barrier between a funder’s use of 5% of its corpus for “doing good”, and 95% of its assets for solely making money.

Mission-related investing seeks to align a funder’s investments with its gift goals in a number of ways: negative screening, positive screening, proxy filing, or proxy voting.  Negative screening would seek to remove companies that had poor governance, social and/or environmental records from the foundation’s portfolio.  Positive screening would seek to add companies with best-in-class ESG (environmental, social, governance) traits to a grantmaker’s portfolio.  With those companies that a funder ends up owning shares in, the funder can engage the companies’ management through filing shareholder resolutions or voting their proxies to press executives to consider foundations’ concerns about corporate impacts. 

Foundations might go further in bridging the gap between investments and gifts by direct investments in companies that address the mission, goals or values of the funder.  Examples here might include investing in clean tech companies, green builders, or medical research firms.  Or, the funder could invest in Community Development programs that might promote green building ideas.  Finally, a foundation could buy into a Program-Related Investment, which would happily count toward the 5% minimum payout. 

To illustrate these ideas, Mr. LeLash presented a “Tale of Two Foundations”, highlighting the experience of the Gates Foundation and the Heron Foundation.   The Gates Foundation received bad press over the $10 billion of its $33 billion corpus it had invested in companies with poor records.  For the $10 billion, $432 million was held in companies with poor-performing petrochemical plants in Africa.  The Los Angeles Times wrote that the Foundation was spending $500 million on inoculating children who might later get respiratory ailments from the air pollution thrown off by the petrochemical industries that the Foundation owned stock in:  a strange irony.  The Gates Foundation had three traditional choices of ways to respond - to divest of the problem investments, ignore the critique and continue to hold the investments, or hold the investments and engage the management of those criticized companies.  The Foundation ended up choosing a fourth alternative (which may be closest to the second option mentioned above):  to ignore or at least transfer concerns about conflicts between investments and grants.  The Foundation transferred investment responsibility to an independent entity, the Gates Foundation Trust, basically institutionalizing the firewall between investing and giving, and eliminating the potential for finding synergies between the two.

Mr. Lelash then talked about the contrasting example of the Heron Foundation.  In 1996, the Heron Foundation trustees decided that they were spending an inordinate amount of time reviewing their $300 million corpus for conflicts and other problems.  They also realized that their 5% annuity was insufficient to make a real impact on social ills, and sought a bigger toolbox for addressing social needs.   In sum, they felt that they should be “more than an investment firm that used its excess cash flow for social purposes”.  As a result, they turned to mission-related investing, where 24% of their assets now lie.  Despite the fact that 10% of their portfolio was in below-market-rate investments, their corpus still performed in the second quartile for purely financial returns 

Mr. LeLash continued by pointing out that the Heron Foundation was not alone in blending the values of investments and gifts.  The Susan B. Komen Foundation and Novo-Nordisk Foundation are other examples of grantmakers that incorporate social concerns in their investments.  TIAA-CREF is another case:   begun in 1918 as a Carnegie Mission-Related Investment, it now invests $400 billion for over 3 million teachers, medical professionals, and researchers, and looks closely at governance issues (such as executive compensation questions). 

Investing and voting - Sister Susan Mika

Sister Susan Mika spoke next.  She is a member of the Benedictine Sisters of Boerne, which in turn is a member of the Bendectine Coalition for Responsible Investing, the Socially Responsible Coalition, and the Interfaith Center for Corporate Responsibility (ICCR).  The ICCR is the mother national group for pressing corporations to be more socially and environmentally responsible, representing 275 denominations, faith-based groups, foundations, pension funds, hospitals, mutual funds, and individuals.  It was established in 1971, and was long associated with the effort against apartheid in South Africa, a divestment and negotiating process that lasted 23 years.

Sister Susan began her participation in socially responsible investing somewhat later, in 1982, in an effort to dissuade Houston Lighting and Power from building the South Texas Nuclear Project.  Her corporate activism, like that of the ICCR and regional investing coalitions, is based in SEC rules that date back to 1934.  These rules allow shareholders who have held $2000 in stock in a company for more than 1 year to file and vote on resolutions, supported by 500-word rationale statements.  These resolutions are filed in the fall, usually challenged by the company, appealed to the SEC, and if passed, voted on in the spring by the company’s stockowners.  Typically they petition the company’s board and management to undertake a study, report, or to adopt a new policy.  Often, filers withdraw their resolutions if company leadership shows an interest in negotiating an agreement.  In any case, it is a slow and deliberate process, a “dance” with corporate management to move the companies in a more progressive direction.

Questions, Comments and Answers:

Q: Are proxy-voting instructions available?  Sister Susan said that the ICCR (www.iccr.org) publishes the “Proxy Resolution Book” which summarizes the resolutions, their sponsors, the reasoning behind them, and the suggested vote.  She urged that shareholders get a copy of the Book, since there are increasing instances of anti-climate resolutions appearing on proxy ballots, muddying the voting choices. 

Q: Corporations face too much scrutiny and market penalties for short-term financial returns and shortfalls, ignoring the more long-term issues of worker loyalty, environmental benefits, etc.  Is there a way to persuade corporations to focus more on long-term issues?

Chris LeLash added that companies need to be more conscious of the values that do not appear in their bottom line.  He reminded us that Merrill Lynch lost ½ of its market value in 2008 when lies over its collateralized debt and subprime holdings cut into its public good will.

Sister Susan noted that consistent, long-term work with corporate management can yield good results.  For example, after 17 years of stockholder votes and negotiations, Wal-Mart now issues its own sustainability reports, and requires all its suppliers to develop similar sustainability reviews.  Another success involves Alcoa, which operates maquiladoras in the Valley.  Investors filed resolutions, had company workers speak about abuses at corporate annual meetings, and persuaded Alcoa’s CEO to visit the border plants.  As a result, wages were raised, local managers were fired, money was invested in the local town, toilet paper and soap were put in the plant bathrooms, and exit doors were unlocked.

However, Sister Susan stressed that these results required a long-term commitment.  In fact, simply to keep a resolution before shareholders required a 3% “yes” vote in the first year, 6% the second, 10% the third and succeeding years.   This is a high bar since many mutual funds and individual investors automatically support management’s position on shareholder resolutions, despite the real merits.  The highest support seems to be for limits on executive pay where management conflicts seem most evident:  a vote at Coke recently showed 31% support for capping pay.

Q: What response has been there to the bid by Rockefeller heirs to press Exxon Mobil to turn from fossil fuels towards more of a focus on renewables?  Sister Susan said that many proxy statements are limited to the 500-word annual report limit, but the Rockefeller family is making a more complete pitch through sending a letter directly to shareholders. 

Q:  What efforts are there to press companies based in India and China toward more social responsibility?  Sister Susan said that corporate governance rules abroad made this work more difficult, but advocates are having success with American multinationals, such as Wal-Mart, that have subsidiaries and vendors in many foreign countries.

Q:  There are many non-profits are approached by corporations for cause-related marketing joint ventures, where a company might pay a non-profit for its endorsement of a commercial product.  Are there ways for the non-profits to know about such a corporation’s social record?  Sister Susan suggested looking at profiles in the Interfaith Center on Corporate Responsibility, because there are significant differences among companies within a single industry:  for instance, Ford is much more responsive on climate change questions than is GM.

C:  It was noted that there were green mutual funds, such as Neuberger Berman, which bought stock more responsible companies, and voted proxies in a more conscientious way.

Investing and inventing - Joel Serface 

Joel Serface, director of the Austin Clean Energy Incubator (ACEI), spoke next, focusing on early-stage green investments.  The ACEI is under the wing of the University of Texas, and supported by Austin Energy, the Texas State Energy Conservation Office, and the National Renewable Energy Laboratory.  It seeks to bring venture capital and advice to start-up companies in the clean tech industry.  He has a B.S. in environmental engineering from UT and a M.B.A. from M.I.T.  Prior to being at the ACEI, he worked in California for private venture capital firms, where he saw clean tech start-ups get the endorsement and investment of the CALPERS pension fund.  Nationally, he has seen the area grow from $0.78 billion in 2001 to a $5.2 billion campaign in 2007, making it the fastest growing segment with the highest market return of any sector.  He believes that the clean tech, particularly clean energy, industry offers the greatest economic opportunity of the 21^st century. 

He sees the interest in renewable energy being driven by a number of forces:  terrorist fears and unstable regimes in fossil-fuel producing nations, hurricanes, declines in petroleum production, and the growth of energy demand in China and India.  He says that legislation for carbon caps and market-trading of carbon credits is already happening in Europe, is inevitable in the U.S. (such as that sponsored by Warner and Lieberman) and elsewhere, and will help level the playing field between fossil and renewable fuels.  He foresees a 50-year investment cycle benefiting clean energy, with much of the innovation coming from labs, not companies.  He sees analogs in the Apollo spaceflight program and in the auto industry’s response to the CAFÉ fuel efficiency standards of the 1970s, both instances where American ingenuity responded well and quickly to technical challenges.

Because of these geopolitical strains, ecological threats, and technical innovations, Mr. Serface sees renewable energy quickly becoming cost-competitive with traditional fossil fuels.  Wind turbines are already priced at $2000 per kiloWatt, compared with $3500/kW for coal, $4500-$5000/kW for “clean” IGCC coal, and $6000 to $12,000 for nuclear power.  Solar is still quite high at $7000-$8000/kW, but is slated to drop to $2500/kW by 2011 as economies of scale kick in for polysilicon production.  However, solar energy will become competitive even sooner if time-of-use electricity metering is adopted, since solar would be so plentiful at peak use times (the afternoons of late summer) when marginal costs are high for fossil fuels (25 to 30 cents per kilowatt, vs. only 8-10 cents at base rates).  With net-metering, solar energy pays for itself after only 1-2 years, without any subsidies.

Mr. Serface sees broader benefits from investment in clean tech.  Studies have shown a high correlation among high technology, progressive politics, environmental protection and rapid growth, as creative industries attract young people with that profile to a community.  Austin is benefiting from that kind of industry.  The entire state of Texas could similarly gain.  Among the 50 states, Texas has the best aggregate profile for generating wind, solar, biomass and tidal energy.  Already, the state is the largest producer of wind energy, with 7000 megawatts installed, and 15,000-18,000 megawatts in the planning stage (equivalent to the nighttime baseload for the state!)  In additional, Texas has excellent experience in financing, trading and developing energy sources, from its long tradition in the oil and gas industry. 

Austin is the leader in the Texas clean energy field, and provides an example for what might be possible for the rest of the state.  Austin has managed to draw 600 megaWatts of energy from energy efficiency investments.  As well, it is the top green utility in the nation, for the 6^th consecutive year.  Plus, it is the leader in providing municipal solar rebates, the frontrunner in sales of biodiesel, the host of the oldest green-building program, and the vendor for the lowest electricity prices in the state.  Other Texas towns could follow suit, playing to their own strengths.  Dallas, for instance, has strong competencies in semiconductors and software that are key areas for clean technology development.  A number of other companies with presence in many Texas communities, including AMD, Applied Materials, Cirrus Logic, Dell, Freescale, National Instruments, and TECO have great skills and scale, but are somewhat captured by mature industries, and might benefit from breaking out into new sectors such as clean energy.

If some of these firms, and new ones, invested in clean energy, it could benefit the entire Texas economy by making it more efficient.  As a comparison, California produces three times the goods and services that Texas does on an equivalent amount of energy (and two times that of the whole U.S. economy).  The difference is that California started investing in energy efficiency 30 years ago.  But, Texas can catch up.  If Texas adopted California energy standards, the state could consume 9% less energy, and meet projected economic growth, by 2020.  Not only would the economy be more efficient if it were more invested in new energy technologies, but it would also offer more employment:  solar energy creates 8 to 15 times the number of jobs that coal does, while wind creates 3 times the number of jobs found in the coal industry.  Many of these jobs could be in depressed rural communities, where existing wind farms have already transformed local economies (such as in Sweetwater, Texas).  Or the jobs could be in stagnating semiconductor firms or silicon production fabricators.

The risk remains that these jobs could be lost abroad:  world production of photovoltaic systems are slated to grow from 1500 megawatts in 2005, to 4000 in 2008, to 10,000 in 2012.  As production grows, costs should drop dramatically, leading to still greater growth (witness the drops in transistor costs from 10 cents to 5 nano-dollars from 1974 to 2004, and in LCD costs from $30,000 per square meter in 1995 to $1500 in 2005).  The U.S. has already lost the lead in wind turbine production, and is lagging in solar production (behind China, Germany, and Norway).  But, if a portion of the solar business can be brought to Texas it could be a 3000 megawatt, $18-20 billion per year industry, with elements in silicon ($2 B), wafers ($3 B), solar cells ($3 B), modules ($2 B), power electronics ($3 B), and installation ($3 B).

Questions, Comments and Answers:

Q:  What has been the impact of Perry’s $295 million Enterprise Fund, designed to spur new investments in the state.  Has it been successful in bringing clean tech to the state?  Mr. Serface said that the Fund has not been effective, and seems to be a captive of the old economies, the traditional utilities and oil and gas funds.  It seems that the major trade groups which lobby the Governor most effectively (the Texas Chemical Council and Texas Association of Manufacturers) are dominated by the larger companies such as Exxon Mobil and Occidental, to the disadvantage of younger, smaller firms that might benefit most from the clean tech investments. 

Q:  What is the nature of the Austin Clean Energy Incubator?  Mr. Serface said that it is a non-profit engaged in building an angel network of venture capital investors, and in leading project development for young innovative firms.  The ACEI has also spun off the CleanTX Foundation, a tax-exempt NGO that seeks to educate entrepreneurs about this new clean economy.  He added that the green opportunities in this new economy are by no means limited to energy:  water conservation is another possible venture.  For example, Texas industry uses 40% of the water consumed in Texas, but offers good chances for conservation.  He said that there were educational workshops listed at cleantx.org.

Q:  What is financial rate of return on social investing?  Mr. Serface said that passive investing in the Domini screened index closely tracked the S&P 500 returns, in a diversified and low-cost way.  However, more targeted investing can yield higher returns:  the NASDAQ Clean Edge index has returned 66%, while the S&P has only generated a 5% return during the same period.