A Federal Reserve economist says that endowments and
foundations shouldnt divest shares of companies in
opposition to their charitable goals they should buy
In a paper last week by the Feds Board of
Governors, author Brigitte Roth Tran offered a counterintuitive
approach to mission-driven investing, saying non-profits should
invest in firms whose activities run against their own
objectives, as a mission hedge. A
lung-cancer-fighting foundation could benefit from investing
even more heavily in tobacco than a standard portfolio,
according to Tran, who says doubling down on correlated
companies can align a foundations funding availability
with its spending needs.
The approach is similar to the liability-hedging strategy
widely employed by corporate defined benefit plans, in which
plan sponsors invest in bonds whose durations match the
lifespans of retirees. But it is the exact opposite of the
socially responsible and impact investing strategies endowments
and foundations have increasingly adopted in recent years,
wherein institutions aim to invest only in companies aligned
with their goals.
For example, a foundation fighting obesity might invest in
community exercise facilities while blacklisting sugary drink
makers. But excluding objectionable firms from portfolios can
detract from the goal, according to the paper, even as it helps
investors make political statements or places pressure on share
prices to influence behavior.
Unfortunately, Tran wrote, these
approaches ignore covariance between a firms financial
returns and activities related to the foundations
By skewing investments toward bad firms,
investors can make their mission outcomes more certain, she
said, much as traditional hedging makes financial
outcomes more certain.
There are some exceptions as well as possible repercussions.
Industries with low expected returns, such as coal, may not
offer enough hedging benefits to outweigh inferior stock
returns, so trade-offs of mission hedging should be
evaluated on a case-by-case basis, according to Tran. She also
noted that non-profits could invoke public backlash by
investing in firms working counter to their mission. Still,
mission hedging is unlikely to materially damage
their fundraising efforts as most are already exposed to
objectionable stocks through their investments in broad
indexes, according to the paper.
Endowments may benefit from skewing investment toward
these seemingly reprehensible companies so long as the expected
return from such investments is not so low relative to other
opportunities that no investment in the objectionable firm is
warranted, Tran wrote.