Towards unified and sustainable social investing

31 May 2016 | Graeme Wilkinson | Opinion

In the alphabet soup of development finance, one can be forgiven for conflating SRI with Social Investment. Sustainable, responsible investing (SRI) might be thought of as being something very conscientious, high net-worth individuals and highly regulated pension funds concern themselves with. Corporate social investment (Social Investment) might be seen as something corporates do to score some SED points on their broad-based black economic empowerment (B-BBEE) scorecard. Yet socio-economic development (SED), as it is understood within the framework of B-BBEE regulation, very seldom qualifies as SRI. “Surely these are two very different things?” you might exclaim.

 

Graeme Wilkinson

And yet, are they really so different? Surely a sound investment in sustainability, by any other name, still smells as sweet? Indeed, the contrary experience is certainly true – unsound investments are bound to emit a pungent smell.

The LA Times published a story in January 2007 that gave two cases where the Bill and Melinda Gates Foundation was paying for life-saving medical procedures through its donations for children in need. One child, in Nigeria, received a polio vaccine funded by the Foundation. The other, in South Africa, was saved from contracting HIV from his mother during birth, thanks to medication funded by the Foundation. However, both of these children were suffering other medical conditions brought on by pollution caused by refineries in their neighbourhoods, firms in which the Bill and Melinda Gates Foundation owned substantial shares.

The LA Times exposé implied that the Gates Foundation’s one hand was undoing the good work of the other. Within two years, the Foundation no longer depended on the Gates’ family wealth management house to manage the Foundation’s investments. Instead, the Foundation established its own SRI-oriented investment team internally, where it could ensure much closer alignment between the aims of the Foundation and that of its investments.

It is common knowledge that South African social investment funds are not as equally endowed as the Bill and Melinda Gates Foundation, however, there are quite a few grant-making vehicles locally that have been able to accumulate sustainability reserves and rainy-day funds. Others depend on their own portfolio of investments to finance their grant making, or social investments.

The challenge that the LA Times exposé puts to the trustees and directors of these social investment funds is: do you know which companies your sustainability reserves have been invested in? Have you given your banker or asset manager a clear brief to ensure that your rainy-day fund is only invested in companies and industries aligned to your social mission?

There is a real risk that a grant-making trust’s investment assets could be exposed to ethically questionable business practices. A real-life South African example is that some money-market funds available to retail investors were exposed to the money-lenders that the Benchmarks Foundation cited as having contributed to the highly volatile socio-economic conditions in Marikana and across the Rustenburg platinum belt during the winter of 2012.

There is also an even bigger opportunity cost to leaving your sustainability reserve in a fixed deposit. Doing so, you lose out on the opportunity of using that investment to directly achieve social impact. Why just earn interest when you could be earning competitive risk-weighted returns while also achieving social outcomes?

There are a number of asset classes that meet these dual criteria which your trustees (and their financial planner/investment professional) can and should be considering, such as renewable energy, property and infrastructure development, high-impact debt financing, and (now finally in South Africa) social impact bonds.

Trustees of endowed social investment trusts, and those with reserves and savings, should realise the power and responsibility that they have – similar to institutional investors. These endowed and reserve funds are not theirs, but ultimately belong to the stated beneficiaries. As such, trustees have an added fiduciary responsibility to invest the funds to hand, not only to avoid loss of capital, but also to avoid the opportunity cost of not using these resources to help drive development proactively, for the benefit of their beneficiaries.

This calls for additional care, and a mindedness towards a more unified approach to fund and foundation management. Only concerning ourselves with how the resources as reflected on the income statement are managed is no longer sufficient. We need to be just as concerned with how the assets on the balance sheet are being employed.

In this way, we can – as Jed Emerson (2002) put it – “achieve the greatest social, environmental, and financial value from our precious philanthropic resources as we strive to contribute to the creation of a better world.”