Blended value: financial returns, SDGs and gender in harmony

This blog originally appeared on the Rien van Gendt Philanthropy Services website on 11 January 2021

How enlightened would it be, if foundations were to use gender lens investing as one of their strategies to contribute to a more sustainable world!

There is a genuine interest among philanthropic institutions to explore the opportunities to reorient investment policies to ‘Environmental, Social and Governance’ (ESG) strategies. At the same time, I have to admit that it also becomes fashionable to move in this direction. What for a long time was seen by foundations and other institutional investors as a threat for their risk adjusted return objectives, gets reformulated as there is growing evidence that the performance of ESG portfolios is at least as good as regular/traditional portfolios. At the same time there is clear evidence that in addition to financial returns, there is social impact. In my opinion we have reached a tipping point in this debate in favor of ESG strategies to investing philanthropic money. I found it interesting to note, that even one of the main global financial institutions: UBS, in Zurich, had the finger at the pulse of society and issued recently a press release under the title: ‘UBS makes sustainable investments its preferred solution for clients of its USD 2.6 trillion global wealth management business’.

I am personally convinced, that philanthropy and sustainable investing are natural allies with a common DNA. Most foundations take a long-haul approach with respect to both philanthropic spending and investing and want to be there in perpetuity. Hence it is natural that foundations take an interest in the sustainability of the environment in which they operate. Foundations serve the public interest, and this is another reason that sustainability cannot be ignored. As foundations have both a spending side and an investment side, it seems both natural and desirable that there is an alignment between the values of spending and investing: avoid a firewall between these two sides, walk the talk.

Different terms are used in the discussion about sustainable investing: ESG investing, socially responsible investing, impact investing etc. This in itself is a set-back for sustainable investing to be embraced and flourish, because unclarity and confusion may hamper an effective implementation. I will not dwell on this issue in this article and will restrict myself to the observation, that the term impact investing is normally used for private equity approaches of investing. Such impact investing propositions are characterized by a blended value of both social and financial returns, with the emphasis on the social returns. Foundations, interested in impact investing, can either choose to make a direct investment in a social venture or to become a limited partner in a fund, that represents a basket of diversified impact investment opportunities. Impact investing, although potentially very relevant, is by its very nature complicated and time consuming and hence will not amount to something very substantial from a quantitative perspective for regular foundations.

Where philanthropic institutions really can create momentum with respect to ESG strategies, is in the public market of listed equities and corporate bonds. These asset classes tend to be more significant in the strategic asset allocation than the strategic exposure to private markets. An ESG approach with respect to public markets implies, that the regular criteria used in portfolio construction of return and risk are broadened to include the way companies deal with impact, with issues of sustainability like Environmental, Social and Governance and the interfaces between them.

I have been involved in numerous discussions in Board meetings, where the initial steps to ESG strategies in public markets were made. Normally the first discussion is about negative screening, i.e. excluding companies whose products or services are not in sync with the values of the investor and/or even in violation with international norms. Board members would argue: let us exclude controversial weapons and tobacco from our portfolio. But as soon as one goes beyond these two exclusions, it gets complicated. ‘Let us exclude the weapon industry’ becomes a more complicated topic for discussion, because we have and want to have a police force and an army. ‘Let us exclude activities that involve child work’ is complicated, as we realise that under certain circumstances child work may be a better socialization for young kids than the lousy school around the corner. We all want to exclude child exploitation, but there can be disputes about the interpretation of child work, particularly when it is combined with formal education. Exclusion strategies, except for the obvious ones that are generally accepted (like controversial weapons) are cumbersome: whose ethics are we talking about. Supervisory or Executive Boards, that decide about it, consist of individuals that will come and go; they have tenure and will rotate off the Board and be replaced by other individuals with possibly other sets of values. Should their personal values color the decision of the Board to exclude the liquor industry or gambling from the foundations investment policy? This is of course different when the mission of the foundation is seen as the determining factor for exclusion. It would be a bit bizarre if a cancer research foundation would invest its endowment in the cigarette industry.

It is for this reason that foundations interested to invest in ESG strategies, rather embark on positive screening (or ‘best in class’ approaches) than on negative screening. Positive screening can be done in a passive manner by selecting ESG filtered indexes or through active management. It allows you as a foundation or institutional investor to invest across the whole range of listed companies irrespective of their products/services or geography, as long as companies contribute in a positive way to ESG criteria.

When foundations take an active approach to positive screening, they can add other lenses to their investment process, and I want to mention two of such lenses. First of all, there is the lens of companies contributing to the ‘Sustainable Development Goals’. I am the advisor of a Dutch independent investment manager DoubleDividend dedicated to sustainable investing and their funds (equity, fixed income and real estate) and their tailor-made investment management relate selected companies to SDG’s. DoubleDividend aims to invest in companies that have a significant positive impact on climate, ecosystems and/or wellbeing. These three global challenges relate to the seventeen SDG’s and hence investing in the companies identified by DoubleDividend in a dynamic fashion, means a contribution to the SDG’s and reaping both a financial and a social return.

Secondly there is a lens of companies taking a serious interest in diversity and particularly gender in their business operations. Diversity/gender can be seen as a proxy to achieve sustainable development. Companies that score highly on gender and diversity policies are likely the companies that are well governed and managed. There is a high probability that a screening on diversity/gender policies leads us to the better companies to invest in: companies with higher financial returns, lower risks and greater resilience. In the EFC publication ‘Championing Diversity’ of 2009, I wrote in the concluding chapter, that in addition to the imperatives of equity: ‘For me the single most important argument in favor of diversity is, that heterogeneous groups are likely to deliver better results than homogeneous groups’. Gender lens investing is offered by a range of investment managers, but we have to be aware of greenwashing or more specifically gender washing. Sometimes gender lens products are based on very slim research data, like the number of women in leadership positions. More robust data are needed next to data on gender balance and leadership, like gender balance in workforce, equal compensation and work/life balance and commitment to women’s empowerment. That is where Equileap comes in, as an organization established in 2016 by Diana van Maasdijk and Jo Andrews. For me the essence of Equileap is that it has turned gender into an investable proposition for institutional investors including endowed foundations. The organization has broadened and deepened the database; it researches over 3500 public companies using 19 criteria to measure their progress towards gender equality. One of the results of their analysis is a ranking of listed companies and this provides the basis for selecting companies to invest in. Recently the Government Pension Investment Fund of Japan decided to put nearly $3 billion in a gender equity fund powered by Equileap’s research.

If foundations are interested in active ESG management of their portfolio, the SDG lens and the gender lens offer fascinating opportunities to have a sound investment and contribute to a better and equitable world.