Insights for Non-Profits

Traditionally, endowments and foundations kept separate functions for their investment and mission related activities. Investment returns are typically used to fund a non-profit’s mission, but decisions on where and how to invest were usually made independently from philanthropy. This notion is beginning to change. Socially responsible investing (SRI) involves an investment strategy seeking not only a financial return, but also a social benefit. Total U.S. domiciled assets using SRI strategies grew from about $6.6 trillion at the start of 2014 to $8.7 trillion at the start of 2016¹.

SRI is a natural fit for many endowments and foundations. Yes, organizations must still consider the risk and return characteristics of an investment, but because of the greater focus and availability of SRI, non-profits can now also consider the social and community benefits of how they invest their money.

There is no universally accepted process for choosing an SRI strategy. In our view, endowments and foundations wanting to incorporate SRI, should have a clear understanding of not only their philanthropic mission but also the range of different investment options available. While every organization will have different motivations, the key is to match these motivations with what an investment portfolio can achieve. To help with this, we defined three broad approaches to SRI below. Which approach makes the most sense for your organization? Manning & Napier can help you decide.

Negative Screening

What is it?

The exclusion of certain securities or companies based on the business practices or industries that fail to meet an investor’s ideals.

Examples

Avoiding companies that derive a significant amount of revenue from “sin” industries like weapons, alcohol, adult entertainment, etc. Avoiding entire industries such as fossil fuels or defense contractors that an investor does not wish to be associated with.

Investment Considerations

Screens can be generally applied across many different investment strategies and processes. However, it’s important to note the impact screens might have on reducing the options in an investible universe.

Integrated Environmental, Social, and Governance (ESG) Factors

What is it?

The inclusion of specific ESG factors when selecting securities for investment. The idea is to give an explicit preference to securities with favorable ESG scores in the hope that investors can avoid unforeseen risks that less favorably scored companies might be exposed to.

Examples

Common factors include environmental (climate change impact, history of fines and regulatory compliance, policies), social (human rights policies, workplace and product safety, workplace diversity, animal testing), and Governance (board compensation and independence, board diversity, corporate transparency).

Investment Considerations

Like negative screening, ESG factors can be integrated into many different investment strategies and processes. Unlike screening however, the investment manager chooses which factors to apply and in what ways, meaning that the investor may have less involvement in what is actually included in the portfolio.

Impact Investing

What is it?

Targeted investments aimed at directly tackling social or environmental problems. The biggest distinction is investors are more directly involved in achieving a specific goal with their investment.

Examples

An equity or debt investment might be directed toward a business targeting underserved individuals or communities in the areas of housing, energy, microfinance, food, security or education.

Investment Considerations

Impact investing is most akin to private equity or direct loans. Significant due diligence might be required to effectively vet, monitor, and value investments. Liquidity constraints may make it difficult to move assets on short notice. In some cases, impact investments may help satisfying IRS annual distribution requirements for private foundations.

SRI can be a great tool for many endowments and foundations, but it’s important to get a clear understanding of the different options available. From there, an organization can choose an approach that best balances both its financial and philanthropic goals.

¹Report on US Sustainable, Responsible and Impact Investing Trends 2016, The Forum for Sustainable and Responsible Investment