Philanthropy Experts Debate Merits of Socially Responsible Investments

Foundations may hamper their charitable efforts if they invest only in companies that say they are socially responsible, said a scholar last week during a debate on whether grant makers should align their investments with their missions.

Jon Entine, an adjunct fellow at the American Enterprise Institute, in Washington, argued that efforts to promote such investments were based on “slippery and superficial” data and could result in poor financial returns, thereby reducing the pool of money philanthropies draw upon to support causes.

The financial firms and corporate watchdog groups that rate businesses on how they benefit society, or at least avoid harming it, have not developed objective criteria and often provide conflicting advice, he said. “They have a very simplistic, unnuanced, black-and-white structure,” Mr. Entine said. It’s “the kind of ways we used to look at things in junior high school about good or bad.”

Gates Foundation

Mr. Entine spoke on a panel organized by the Hudson Institute’s Bradley Center for Philanthropy and Civic Renewal, in Washington, to discuss foundation investing. The meeting was prompted by two articles published last month in the Los Angeles Times that charged the Bill & Melinda Gates Foundation, in Seattle, with undermining its own grant making by owning stock in companies with questionable environmental practices, among other concerns.

In response to the newspaper’s series, the foundation said that it would not change its investment policy, which specifically prohibits only the buying of tobacco stocks, and that a firewall exists between its grant making and investment staff members. It also said that it was “naïve” to think one stockholder could improve the problems the newspaper identified.

Differing Opinions

After the articles were published, Mr. Entine said the Gates fund hired him to collect research on socially responsible investing.

Mr. Entine emphasized at the Hudson meeting that his work for the foundation had ended and that he does not speak on its behalf.

Indeed, Mr. Entine said he disagreed with the fund’s policy not to invest in tobacco companies, saying again that the foundation should seek only to maximize returns. “For the life of me, I can’t understand why” it has made this decision, he said.

Mr. Entine’s comments and the Gates Foundation’s defense of its investing brought a heated rebuke from other members of the panel. While the participants agreed that devising a stock-buying strategy that promotes a grant maker’s goals is not an easy task and raises many thorny questions, they insisted it was important for Gates and other foundations to consider the approach.

“Creating an immutable firewall between investments and grants is nonsensical, a strategy worthy of ostriches, not leaders,” said Allison H. Fine, a senior fellow at Demos: a Network for Ideas and Action, in New York. She pointed out that the Nathan Cummings Foundation, in New York, uses its investments to pressure corporations by introducing shareholder resolutions.

Lucy Bernholz, a foundation consultant, agreed, though she considered the Gates fund’s grant making and its investing to be in line, in that both have a pro-business approach. She said more foundations should follow suit and ensure that their investing policies take into account their social values, no matter if those values are conservative, liberal, or other.

“Foundations are a pile of money that are there to support a set of causes that are defined by a set of values,” she said. “To say you leave your values at the door when it comes to the investing side of the house doesn’t make a lot of sense to me.”

Ms. Bernholz also strongly disagreed with Mr. Entine’s assertion that socially responsible investing can hurt financial returns, one of several disagreements between the two that resulted in testy exchanges.

“There is no tradeoff between investing in line with a foundation’s mission and reaping strong returns,” she insisted, as Mr. Entine shook his head.

A transcript of the event is available on the Hudson Institute’s Web site at http://pcr.hudson.org.