As part of Alliance’s 13-week focus on foundation investments (take a look at our new issue on the topic if you haven’t had the chance), last week we hosted a webinar on investment transparency, kindly sponsored by Western Union. Moderator Charles Keidan (Alliance magazine) was joined by guest editor Danielle Walker Palmour, (Friends Provident Foundation, UK) and contributor María-Laura Rojas (Transforma, Colombia). Joining them on the panel was Rien van Gendt (an advisor to the Calouste Gulbenkian Foundation, and based in the Netherlands).

Keidan asked the audience of attendees to ‘really think about the credibility of today’s foundation, which depends on how it invests its assets – not just where it makes its grants.’ At a time where foundation assets amount to an estimated $1.5 trillion, this eclipses the size of annual grants. ‘This seems to justify greater attention in our sector. But where to start, and what questions to ask?’

Palmour was the first to begin. ‘The golden thread running through the whole issue is that foundations have a huge range of assets, and we spend a lot of time thinking and talking about them… but quite often we just don’t talk about our large financial resources, the trillions of dollars’ worth of assets that we control.’ Foundations are eager to speak on their networks, the expertise of their staff and the knowledge of their trustees; but they run the risk of missing out on the importance of their assets, which should support their mission.

‘Considering the wider range of assets, it’s an opportunity to some degree to think really creatively,’ Palmour continued. This includes ‘mission investing, direct investing, social enterprises, ESG investing… and gender lens investing.’ This is an opportunity to think about capital markets, as well as social investments and impact investing – to think about both in how, and what, foundations do. ‘The process is incredibly important.’

‘There is not only distrust with respect to politics, governments and media, but there is distrust about us. Therefore, I think there ought to be transparency about the endowment.’

Last year, Friends Provident Foundation (FPF) decided to reckon with the transparency of the investment process and create an ESG Investment Olympics. ‘As anyone who’s managed an endowment, we all sort of… pretend we’re commercial institutions. We have to have these terribly commercially-sensitive discussions… [so] we had this idea that we would open it up to stakeholders.’ There are grantholders within institutions who are now turning down grants because of their discomfort with the origin of the money, or by whom it is managed. In opening up this process, FPF also brought in two other foundations who were also looking for an investment partner, ‘so we put our money together. £30 million, which is smaller than our actual full endowment, but we opened it up and said “Look. Tell us what you’re good at – show us some really good ESG practice” to the investment world.’ They had a huge number of responses. ‘People want to showcase what they’re good at, and the investment world doesn’t get the chance.’ With one hundred people in the room, questions were taken from the floor from younger people, older people, grantholders, and people with lived experience. ‘It was just an incredibly invigorating opportunity.’

Here a poll was given to attendees to answer: Should foundations’ impact be judged on their investments as well as their grants? 90 per cent of the audience answered yes, they should. If one looks at the focus of the debate in the philanthropy sector, and public understanding, the focus is the reverse – on grantmaking rather than investments. ‘So if they are going to be judged on their investments, there’s going to be big questions about understanding investments, and the transparency of those approaches,’ said Keidan.

Stronger to stay?

Van Gendt was next to speak – ‘let me try to convince the remaining 10 per cent,’ he began. ‘The first point is: why is transparency needed?’ Van Gendt spoke of the difference between foundations based in tax-exempt countries, and those who aren’t. ‘If you have a tax-exempt status, it implies – in my opinion – accountability to society.’ There you should see a transparency of spending; not necessarily around individual grants, but in broader information as to how foundations spend their money. ‘But this only represents four per cent of the corpus of assets, and for me this has always been strange… why do you have tax-exempt status, but you only show transparency with respect to your payout… and there [nothing] about the other 95 per cent of the assets, the endowment?’ Payouts, van Gendt added, are an obligatory five per cent in the US, but on average in Europe it’s even lower, sitting at around three and a half to four per cent.

This brings in a lot of cynicism around the sector. ‘There is not only distrust with respect to politics, governments and media, but there is distrust about us. Therefore, I think there ought to be transparency about the endowment.’ This doesn’t necessarily mean around who the investment managers are, but in van Gendt’s view this should be like an investment policy statement, with questions such as:

• What is your strategic asset allocation?
• What is your governance with respect to investments?
• What is your risk management?

Public discussions are about the alignment between the values of a foundation’s spending and the implied values in their investments. Focusing on this, van Gendt noted ‘Intervision Groups’ in the Netherlands: ‘groups of 5-10 foundations that are of similar size, who meet and exchange – in detail – the managers they work with, the fees that they pay, their strategies.’ Similarly, van Gendt cited the Association of Charitable Foundations (ACF) in the UK who organise peer-reviews around investment policy. ‘I myself have created EFFIO – the European Foundation Financial Investment Officers Group – in Brussels, and that is a peer network of about 40 foundations that exchange detailed information.’

Keidan noted that as well as his current experience with Calouste Gulbenkian Foundation, van Gendt was also formerly the director of the Bernard van Leer Foundation and asked him to comment on what he has done with these two organisations. ‘Mr Gulbenkian – known as Mr Five Per Cent… his company was Partex, which is a subsidiary of the Gulbenkian Foundation,’ he answered. ‘The foundation realised that fossil fuels aren’t going very well for the long-term nature of endowments. Another argument is how can [a foundation] manage an oil and gas company, or any company?’

‘…it is the fundamental activity and responsibility of trustees to consider the life course of the entity that they’re managing.’

In the case of the Van Leer Foundation, they were the owner of Van Leer Packaging – not a corporate foundation, but ‘the founder had disinherited his family in order to put all the shares in the foundation.’ The same question arose – as a foundation, how can you manage a company? For many reasons, Gulbenkian has now divested from Partex, and VLF are looking to do the same, in order to align the values between the values of their spending and the values of their endowment.

‘This means ESG strategies,’ continued van Gendt. ‘Once you are in Index Trackers… you can go into ESG Trackers. Then you have active management equities, or in fixed income you can look for ESG types of investments. But it is also important to discuss whether you should be an engaged shareholder, whether you should use your proxy voting mechanisms in order to raise your voice. …It is not always a matter of divesting; maybe it is stronger sometimes to stay invested in a company to see that there is an energy transition.’

Alliance then launched a second poll to attendees: should foundations be required to say who manages their assets, and how much their investment managers are paid? 50 per cent of the audience responded ‘Always’.

Disclose and engage

Last to speak was Rojas. In agreement with the other panellists, Rojas acknowledged that transparency is key as it allows decision makers and other stakeholders to have a better quality of information. This would ‘help redirect financial flows into addressing global challenges, something which is really needed because of the scale of resources [required].’ Why is this important to philanthropy? ‘Financial resources have an impact, wherever they are. This is true both for grantmaking and for investment. Financial resources are always incentives, so where are we putting them? What are we enabling with our resources?’

Rojas spoke of this context within Latin America. ‘We have a different philanthropic system [than] the US, or in Europe, because while 90 per cent of foundations globally are independent, in Latin America that close to 50 per cent are corporate, or semi-corporate. In Argentina, this goes up to 75 per cent and in countries like Brazil and Colombia, it goes above 60 per cent.’ This speaks to the independence of foundations, and how markets work. ‘Because we are very dependent on commodity exports and fossil fuels, many of the biggest companies we have – who are foundations – are in oil and gas, aviation and construction’ – all carbon-intensive industries.

These foundations, who are not as independent from their parent companies as in other regions, in many cases do not also have big endowments. ‘They of course do engage in grantmaking, they have investments, even if it’s not a traditional form of endowment. However, the issue of transparency really remains fundamental.’

Rojas suggested a few key, specific actions that can be taken to improve transparency:

1. Disclosure. Once you have information, you can take action. Rojas suggests divestment, but also understands the restrictions of this approach. In Colombia, there are substantial market limitations. ‘Even if you wanted to, it’s not like you have a huge range of options to do that because of the way the market is built, so sometimes you can’t. But also, sometimes you really want to take advantage of the chance to influence the chain of stakeholders… to influence them to do better, to disclose, to reduce emissions, to increase resilience.’ Another option is engagement. Citing BlackRock, who announced their intention last year to divest from companies who were not disclosing and not addressing climate change, this has had a lot of impact in Colombia. ‘We have had a lot of stakeholders really take it seriously, because it is consequential. But for other actors we have in Colombia… it’s not as easy because BlackRock is of course huge, it’s not a local stakeholder. So, engagement is key to help move actors in the system, rather than just moving away.’
2. Think of innovative financial instruments that help to decrease the risk of investment and to increase impact. Looking again to climate change, ‘if you’re depending on your endowment to be able to continue your grantmaking, then you really need to consider climate change as a material and transitional risk to your resources. It makes sense, from both a mission perspective and from a business perspective, and it needs to be taken into account quickly.’
3. Measures of success should include criteria on global challenges and not just local interventions. ‘This is not mutually exclusive, fortunately – I know it does sound like it sometimes – but it is connected, linked, intertwined and there are a lot of local interventions that will not be sustainable if we don’t address global challenges.’
4. Engage with parent businesses. ‘It’s easier of course for asset owners, which is what the Colombian Climate Asset Disclosure Initiative is focused on doing. But it can also be attempted from different access points in the system.’

Perpetuity is not a holy grail

Keidan turned to questions from the audience. Pat Rosenfield, consultant at Rockefeller Archive Center, asked if the panel could discuss whether there’s a right way to invest when weighing up present needs against future ones. Rosenfield also wanted to know what they thought about the need for foundations to maintain a longer-term view – maybe a perpetual one, but not necessarily – and how that should be communicated, if indeed it is justified.

Larry Kramer, Hewlett Foundation, was interviewed by Palmour for the September issue on foundation investments. In this, Kramer said that a focus on immediate needs, spending more now, could risk discounting the needs of future generations. With this interview also in mind, van Gendt spoke of the ‘orthodoxy of perpetuity. We live in a low-interest environment and… the expected returns of practically all asset classes are lower now than they were a few years ago.’ This creates an environment where foundations spend less at a time where it’s most needed. ‘Perpetuity is not a holy grail. There are urgent needs right now, and I think foundations should seriously discuss whether they ought to be there in perpetuity or not.’

Palmour stated that ‘it is the fundamental activity and responsibility of trustees to consider the life course of the entity that they’re managing.’ Whilst there are foundations who are legally constrained to maintain their assets in perpetuity, this is a minority. Speaking of existential threats and the option to pursue more aggressive action in the wake of them, Palmour feels ‘it is incumbent on those that [share this view] to spend and to invest accordingly, and to potentially spend down. We will spend down our endowment, as that is how we see the world. But not all foundations do, and some of them feel that the issue they’re trying to address will exist beyond and through the climate emergency.’

Van Gendt added that foundations don’t necessarily make a deliberate decision to spend down, but that rather the present emergencies requires more resources than before. ‘They take more risk and allow an endowment to become lower than is required to maintain purchasing power… that is why many foundations, in my opinion, are now moving to liquid investments with higher returns and higher risk. But they are prepared to take that risk at the cost of their perpetuity.’

Another question came from Joan Jose Guzman, who noted that the pandemic has induced capital flight from developing countries, most of which will face increasing rates of perceived risk without any equivalent increase in returns to offset the higher risks. Should foundation endowments be responsible for bridging this gap?

Rojas responded that this is not where she would place the responsibility of addressing this gap. ‘Foundations in the region probably do not have the power to do this… the scale of the resources they manage, and that are used for grantmaking, are not as big as to be responsible for bridging this.’

Should foundations’ impact be judged on their investments as well as their grants? 90 per cent of Alliance webinar attendees answered yes.

Ewelina Oblacewicz at OECD asked what some of the factors are that make responsible investment a challenging, or inadequate, alternative for foundations. Are there major barriers for foundations to do things in the way that the panellists have been describing?

Van Gendt responded that in comparison to public money, philanthropy is all just ‘nibbling around the edges’. However, it is not the quantity of money which matters but the quality. ‘This is true for impact investing, which is complex like investing in private equity is complex. There’s hardly a pipeline, it requires special competencies from a foundation and for programme officers to become involved with due diligence… [and] there are questions about how you evaluate it in your balance sheet. Is it against cost price, or net asset value? But having said that – it is highly important.’

Palmour acknowledged that tension highlighted in Oblacewicz’s question, played out in the interview with Kramer. ‘I think responsible investing, intentional investing… is the beginning of a conversation and an approach. The other thing that came out of [this interview] is the scale of their investments is the size of a medium-sized country. It’s a huge amount of money… and they have a relatively small investment team. So, us managers of foundations recognise resources do, to some degree, have an interplay with the way you approach investment.’ Palmour also noted that it is relatively rare for European foundations to have a large investment team, as this is mostly outsourced to investment houses. ‘We rarely have many staff, particularly in the UK, in-house to manage sometimes millions of pounds. There’s a foundation here who has a billion pounds, and two people inside.’

Keidan asked Palmour why so many foundations are uncomfortable even disclosing who their investment houses are. Palmour responded that she thinks it ‘a kind of faux commercialism’ where there are ‘old school’ advisors who come from a background of a lack of accountability and transparency. ‘I think that’s all changing. In the era of big data, these things can be found out and it probably behoves foundations to consider and disclose this information, so that stakeholders [understand] where this money comes from, how it’s managed and the costs of managing it.’

Daniel Ferrell-Schweppenstedde (CAF) asked if there are successful examples of trusts and foundations using their role as activist investors. Rojas replied that in Latin America, it’s not the foundations who have this power, but rather the asset owners – and that this comes with a challenging lack of regulation. ‘There are a lot of limitations [to divest] because of how our market is structured… so engagement is going to be more of a key action point than divestment.’

Palmour added that it is exciting that this ‘is beginning to be a tool for philanthropists in Europe and in the US. I think the Nathan Cummings Foundation is also quite active in New York, and this is really about voting your shares, engaging directly with companies.’ FPF itself has actively bought shares in companies they don’t hold in order to engage with them around problematic activities. ‘There is movement here to support philanthropists who want to take the next step.’

Amy McGoldrick is the Marketing, Advertising & Events Manager at Alliance magazine

To watch the full recording of the webinar, click below.