Ethical Investment Summary Notes from a Philanthropy Australia Seminar ‘Ethical investing for foundations: generating returns and fulfilling your foundation’s mission’ Presentations by Mark Wootton, Director of the Poola Foundation and Louise O’Halloran, Executive Director of the Ethical Investment Association Followed by a facilitated discussion with an expert panel and Members of Philanthropy Australia in Melbourne 29 March 2007 Introduction Amanda Martin, Executive Officer of the Poola Foundation, acted as facilitator for the session. She began the session by welcoming guests and providing some background to the session. Amanda informed guests that in January of this year the Los Angeles Times published two articles that charged the Bill & Melinda Gates Foundation, in Seattle, with reaping, “vast financial gains from investments in companies that contributed to the human suffering in health, housing and social welfare that the foundation was trying to alleviate.” This raised a question that has long-troubled the philanthropic sector: should profit-maximisation be the sole focus of a foundation’s investment decisions? There are some who argue that to have any other focus would be in breach of a Trustee’s “prudent person” duties. Whereas others argue that ethical considerations and profit maximisation don’t have to be mutually exclusive. Furthermore, they say that if on average, less than 10% of a foundation’s assets are distributed in grants each year, then it is illogical to not give at least some consideration to how the other 90% of a foundation’s assets can be used to support the foundation’s charitable objectives. One commentator in the US went so far as to say that, “Creating an immutable firewall between a foundation’s investments and grants is nonsensical, a strategy worthy of ostriches, not leaders."1 At this point Amanda introduced the speakers and panel members (information about the speakers and panel members provided at the end of these notes) and invited Mark Wootton to speak for about 15 minutes. The Poola Foundation’s approach Mark began his presentation by explaining that the Poola Foundation is a charitable entity. He and his wife (the Director’s of the Poola Foundation) consider it to be the ‘divestment arm’ of their family company. The Foundation’s primary areas of focus are on the environment, social justice, and peace. In its activities, the foundation aims to inspire, to educate and to demonstrate solutions. The Foundation tends to provide larger grants but has made grants ranging from $2,000 to $10 million in size. By 30 June 2007, the Foundation expects to have distributed about $30 million in grants. In terms of its investments the Poola Foundation has a mixed portfolio that includes shares, residential and commercial property, bank bills, venture capital and direct-controlled assets. These investments are generally of a positive nature and complement their grantmaking. A family company connected to the Poola Foundation built and owns the 60L Green Building in Carlton, Victoria - www.60lgreenbuilding.com. The Directors made a conscious decision to construct premier green commercial building. Through the building the Directors wanted to demonstrate that it was possible to achieve a commercially viable, healthy, low energy, resource-efficient workplace with minimal impact on the environment. The building focussed on energy use, water consumption and the use of recycled and re-used material during construction. The building is now fully leased with a waiting list of potential tenants. Mark noted one minor dilemma the Directors have is that in support of their charitable objectives a number of their tenants are nonprofit organisations paying a discounted lease. However, there is a waiting list of tenants willing to pay full commercial rates to get into the building. Mark also noted that the Foundation asks its grant applicants to demonstrate that they too are investing ethically. If they can’t then the Foundation will not grant funds to them. In concluding his presentation Mark noted that climate change is currently a headline issue and is one that the Poola Foundation has been concerned with for some time. It is also an issue that the Foundation is considering when reviewing its existing investments and when assessing investment opportunities. He urged guests to consider the long-term effects of companies operating in carbon-intensive industries on the environment and on their investment portfolios. The Foundation’s views are that such companies will not make good long-term investments. Furthermore, he asked guests to think about how they could support their grantmaking and charitable objectives through their investment portfolio; and to consider, at the very least, how they could avoid confusing or counteracting their grantmaking objectives through their investment decisions. His final comment was that ethical investing doesn’t have to be ‘all-in’ or ‘all-out’. Foundations can dip their toe in the water with say 10% of their investment portfolio and as their comfort level grows with the concept they can increase the percentage of their portfolio that is dedicated to ‘ethical investments’. A view from the Ethical Investment Association Louise O’Halloran began her presentation by noting that the ‘ethical investment’ field has undergone significant changes in the past six to twelve months as more fund managers have come to understand the importance of sustainability issues. There has been significant growth in sustainability investing with fund managers looking much more closely at environmental, social and governance issues for the impact that they may have on the performance of companies. Louise stated that ethical funds under management grew by 56% to $12 Billion in the past 12 months. There is a much larger range of ‘ethical’ investing options available today and a number more in the pipeline. She also then went on to mention the UN’s Principles for Responsible Investment (PRI) developed in 2005 - www.unpri.org/files/pri.pdf - and the significant effect they are having on ethical/sustainable investing around the world. The PRi are an initiative of the UN Secretary-General implemented by UNEP Finance Initiative and the UN Global Compact. They are a set of voluntary and aspirational Principles to which institutional investors have been invited to sign up to. A number of the world’s largest and most well-known institutional investors. Initial signatories invited to support the Principles included large pension funds and invest managers - more than 50 institutional investors with an astounding $4 trillion in assets! The Principles state: As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following: 1. We will incorporate ESG issues into investment analysis and decision-making processes. 2. We will be active owners and incorporate ESG issues into our ownership policies and practices. 3. We will seek appropriate disclosure on ESG issues by the entities in which we invest. 4. We will promote acceptance and implementation of the Principles within the investment industry. 5. We will work together to enhance our effectiveness in implementing the Principles. 6. We will each report on our activities and progress towards implementing the Principles. Louise also informed guests that her organisation, the Ethical Investment Association (EIA), had developed the world’s first Certification Program for providers of Sustainable Responsible Investment (SRI) and Ethical Investment products and services. Currently, the Certification is offered in four categories: • Fund Manager • Superannuation Fund • Dealer Group • Financial Adviser Louise also referred members to a paper published in the UK, “Investing Responsibly: A practical introduction for charity trustees”. This paper can be downloaded from publications section of the website of Ethical Investment Research Services (EIRIS) in the UK - www.eiris.org/ Discussion Following the two presentations each of the other three panel members were asked for a brief comment and then the session was opened up for discussion between all panel members and guests. Some of this discussion is captured below: Angus Graham – ANZ Investment Bank • Angus started by stating that his focus was more on sustainable investing than on ‘ethical investing’. He then provided an example of the benefits of sustainable investing from the experience of VicSuper. About 10 years ago VicSuper, who felt because of the size of the companies, that had to have a position in the auto industry decided to invest in Toyota ahead of Ford and General Motors. This was because the governance and management practices and processes at Toyota were leading them to take note of various environmental, social and economic trends that was pushing them to develop smaller and more efficient (in terms of manufacture and operation) vehicles and engines while the others were continuing to build bigger and comparatively less efficient vehicles. Toyota is now one of the few AAA rated companies in the world while GM and Ford have ‘junk bond’ status. • He also suggested that carbon trading is coming in one form or another and whatever system we start with is bound to evolve over time. • Angus closed his brief comments by mentioning that presently, fixed income products tend to be managed funds. However, we should expect to see a broader range of ‘sustainable’ and ‘ethical’ fixed income products in the coming years as a result of increased demand. Michael O’Brien – Australian Ethical Investment Ltd • Michael began by informing guests that Australian Ethical Investment (AEI) currently manages a bit more than $500 Million across four trusts and they aim to be managing more than $1 Billion by 2010. AEI focuses on investing in ‘highly ethical’ companies. It uses positive screens (which seek out companies involved in the renewable energy sector, the production of ‘natural food’, recycling and public/efficient transport providers) and negative screens. This results in AEI screening out about 90% of the Australian market so AEI has sought out overseas investments. • AEI also has some direct investments. One such direct investment is in Tomra - www.tomra.com - a company based in Norway that is “a leading global provider of advanced solutions enabling recovery and recycling of used materials” including the distribution of ‘reverse vending machines’. These vending machines dispense cash in return for deposits of cans for recycling. Tesco in the UK has installed these reverse vending machines across their sites and provide depositors with discount coupons that can be redeemed at Tesco stores. John McLeod – Goldman Sachs JBWere Philanthropic Services • John informed guests that Goldman Sachs JBWere speak with a range of charities and not-for-profit organisations and philanthropic trusts about ethical investing. He said in doing this, he tries to simplify the issue for the organisations he is speaking with by asking them, “what’s the purpose of your organisation?” He then explains to them that if it’s something like ‘to maximise our social return’ then he says shouldn’t everything you do (including your investment activities) be about maximising this return. • John also suggested that having a written investment policy is very important. • John’s also commented on ‘program-related’ or ‘mission-related’ investing. As a quick example of a ‘program- related’ investment John suggested that a foundation might provide a below-market-rate loan to a grant recipient organisation. This is an issue he has spoken about a bit in the past and he directed interested guests to sites such as that of the Jessie Smith Noyes Foundation - www.noyes.org/mrinvest.html - and the F. B. Heron Foundation - www.fbheron.org - in the US for further information. • John’s final comment was to state that he absolutely expected that in time, sustainability would be an important criterion for all investors. How does the performance of ‘ethical investments’ compare to mainstream investments? • Michael O’Brien stated that they generally match the market with some funds/stocks outperforming the market and others being outperformed by the market. Louise O’Halloran informed the guests that research suggested that globally, ethical and sustainable investments have outperformed the market by 0.1%. • John McLeod noted that because there are a smaller number of ethical or sustainable investments to pick from there is likely to be greater volatility experienced in the performance because there is less opportunity to comprehensively diversify investment risk. Louise O’Halloran countered that whilst in principle this was true, an argument could also be made that the greater due diligence done by SRI fund managers on the non- financial aspects of companies (i.e. their social, environmental and governance practices and processes) should reduce performance volatility. • Mark Wootton made the final comment on this topic noting that the question is not entirely appropriate as mainstream benchmarks include the performance of ‘ethical’ and ‘sustainable’ funds and others. There is not a benchmark that includes only funds excluded by the ‘ethical’ and ‘sustainable’ fund managers. How do the management fees of ‘ethical investments’ compare to mainstream investments? • Guests were informed that competitive pressures mean that management fees of ‘ethical investments’ tend to be similar to those of ‘mainstream’ investments. Do we have an appropriate benchmark against which we can measure the performance of various SRI funds? • Michael O’Brien informed guests that we are getting there with indices like the FTSE4Good Index - www.ftse.com/Indices/FTSE4Good_Index_Series/index.jsp - the Dow Jones Sustainability Index - www.sustainability-index.com – and the Australian Sam Sustainability Index - www.aussi.net.au. • Guests were also advised that the Ethical Investor magazine lists all of the ethical and sustainable funds and their performances in each issue. This provides a good reference point for interested investors. An ‘ethical fund manager’ or a mainstream fund manager? • When a question was asked about whether an interested foundation should seek out a specialist manager or a mainstream manager to assist it with exploring its ‘ethical’ investment options the following points were some of those made in response: A specialist ‘ethical’ manager will have more experience in this type of investing. Seek out one that also understands the specifics of investing for philanthropic trusts and charities. The representative of one foundation informed guests that her foundation had deliberately stuck with their mainstream investment manager because they wanted to use the process to influence the practices and approach of that investment management company. The representative noted that at times the process had been a bit difficult but by asking their mainstream manger to research particular issues and make investment recommendations they had actually seen a change in the investment recommendations and practices of the firm with some of its other clients. The same representative also noted that her foundation very deliberately has its financial/investment meetings as part of its regular board meetings to ensure that finance and investment discussions are had, and decisions are made, within the context of the foundations overall philosophies and objectives. Close Amanda Martin thanked the speakers and panel members for their participation in the session and guests for their attendance and participation. Grant Hooper thanked Amanda Martin for her work in assisting to put the session together and in facilitating it. He also thanked the Poola Foundation for hosting the meeting at the 60L Green Building in Carlton, Victoria. About Louise O’Halloran, Executive Director, Ethical Investment Association – www.eia.org.au Louise was appointed Executive Director of the Ethical Investment Association in 2002. She has worked in senior management roles in the not for profit sector in Australia, the United States and Britain assisting corporations to build brand equity through the establishment of community business partnerships. Louise has also spent considerable time in senior roles in the arts including General Manager of Sydney’s Belvoir St Theatre, Development Manager of the Art Gallery Society of NSW and General Manager of the Australian National Playwrights Centre. She is author of the book Ethical Investment: The Unseen Revolution published by the State Chamber of Commerce NSW, has an MBA from Macquarie Graduate School of Management, a BA in journalism from Charles Sturt University, Bathurst and spent three interesting years working toward a PhD in business ethics at UNSW. About Mark Wootton, Director, Poola Foundation Mark Wootton is a 46 year old farmer and a father of four young children. Mark with his wife Eve own, manage and live on “Jigsaw Farms” which is a 12,000 acre Western District grazing property at Hamilton, Victoria. They bought this, originally, as an attempt to invest ethically in property. It is mixed operation of beef and wool and various combinations of biodiversity and agro forestry plantings which act as a carbon sink. They are already building into their farming practices ways to lessen the impact of climate change. In less than ten years, they have planted over a million trees, although they realise that individual actions are not enough to slow down climate change, given the time-line available. Mark is also a director of the Poola Foundation, which disburses funds to environmental projects, in particular. Poola’s current responsibility is to distribute the funds of the late Tom Kantor, Eve’s brother. $10-million from this fund has been used to establish The Climate Institute. The impetus for this was simple: a belief that the extreme urgency of the situation requires decisive commitment and action from government and industry on a grand scale. He is the chairperson of the Climate Institute. As part of a range of ethical investments Mark developed and is a partner of the “60L Green Building” commercial office building in Carlton, Melbourne which they built on Environmental Sustainable Development Guidelines, which won the Premier’s Sustainable Business Award for 2003. About Angus Graham, Director, Head of Investor Sales, ANZ Investment Bank – www.anz.com Angus joined ANZ in October 2005 and is Director, Head of Investor Sales, at ANZ Investment Bank. Angus commenced his career in financial markets in the mid 1980's with McIntosh Futures dealing on the bond options desk. Since then Angus has held a range of roles including time spent on secondment with the Cotton Trading Corp. to establish their treasury across trading, hedging and clearing operations and time with CBA establishing and heading up the Fixed Income Desk for non-institutional clients, particularly dealing with a broad range of NFP, religious & government clients. It was this client base that reinforced his belief for the need for an "ethical" and "sustainable" product offering. Angus served four yours as a Director of the Melbourne Football Club, and seven years as a Director of the Leukaemia Foundation of Australia, four as Deputy Chairman. He currently sits as a Director of the Ethical Investment Assoc and Bayley House, as well as the Finance Committee of the Down Syndrome Association of Vic. About John McLeod, Director, Goldman Sachs JBWere Philanthropic Services - www.gsjbw.com/?p=PhilanthropicServices_P John joined Goldman Sachs JBWere Philanthropic Services in 2002 after 16 years in resource equity markets at JBWere. His primary responsibilities include researching and analysing trends in the philanthropic sector; interpreting the findings to provide valuable insights for clients; and forging relationships between clients with a philanthropic interest and the not-for-profit sector. He has completed the newly established Swinburne University postgraduate course in Philanthropy and Social Investment. Following his initial studies in Engineering (Mining) and Commerce, John worked for a range of resources companies in a variety of roles including Development Miner, Project Engineer, Planning Manager and Senior Mining Engineer. After retiring as a Principal of Goldman Sachs JBWere in 2003, John was able to devote more time to both his family’s interests in private philanthropy and in a broader education role through Philanthropic Services. About Michael O’Brien, International Portfolio Manager, Australian Ethical Investment – www.austethical.com.au Michael has been researching international ethical investments for over six years and currently serves as an International Portfolio Manager with Australian Ethical Investment, a boutique investment fund based in Canberra. Prior to working in the ethical investment industry, Michael worked in management consultancy, funds management, and investment banking in both New York and Australia with major global investment banks. Michael has a Bachelor of Economics & Commerce (Hons) from the University of Melbourne. He also holds a Masters Degree in Business Administration from Columbia University, New York.