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Responsible investment: Gates Foundation and the California Model
by Paul Rogat Loeb
August 27, 2007

Given the magnitude of the global crises we face, we'd hope the key nonprofits trying to address them would use every appropriate tool to maximize their impact.

Yet, Seattle's Bill & Melinda Gates Foundation, which does much good with its programs (particularly its global immunization efforts), is missing a significant opportunity by not aligning the foundation's investment commitments with its larger social goals. Its choices offer a lesson for other foundations, for pension funds, college and university endowments, and all other nonprofit institutions that control financial capital.

If Gates Foundation wanted to consider a different approach, it might learn from institutions like California's massive CalPERS (California Public Employees' Retirement System) pension fund, which has combined first-rate financial returns with investments that put its dollars in service of socially responsible values.

At present, the Gates Foundation invests solely around trying to maximize returns, arguing that the more it makes, the more worthy projects it can fund. That means it has steered its dollars toward a number of companies that contradict the best of its values. Exxon/Mobil, for instance, has been the prime funder of think tanks and individuals denying global warming. The Foundation invested in mortgage companies, like Ameriquest, that have been accused in lawsuits or by government officials of making it easier for thousands of people to lose their homes, even as it also supported nonprofits that helped victims of predatory lending. It put money into Tenet Healthcare, which has paid over $1.5 billion in settlements for fraud, kickbacks, and patient-care lapses. The only category of corporations the Foundation excluded was tobacco companies, and Gates Foundation CEO Patty Stonesifer defended their approach by saying it would be naļve to suggest that an individual stockholder can stop the human suffering blamed on the practices of companies in which it invests. "Changes in our investment practices would have little or no impact on these issues."

But the current approach is an opportunity lost to make a broader impact with the Foundation's $66 billion of capital (counting the pledged contributions from Warren Buffett). And the financial returns for trying to do the right thing don't have to be lower. To take the example of the $248 billion CalPERS fund, it has more than three times the assets of the Gates Foundation, while facing the legal and fiduciary strictures of being a public pension system. Yet, it has managed to shift its investments toward companies that take account of social and environmental impacts for a broader bottom line, while shifting away from those they find problematic.

In addition, CalPERS has engaged in proactive shareholder advocacy, using the leverage of its holdings to change corporate policies. It helped win better drug access for AIDS patients in poor countries. It improved working conditions for Asian suppliers to corporations where it's invested. It has publicly joined shareholder campaigns to require that Exxon/Mobil shift major resources toward alternative energy and to force the resignation of the director of Exxon's public-issues committee — "due to the company's inaction on the business risks from climate change."

CalPERS is now investing close to a billion dollars in renewable technologies and in increasing the energy efficiency of the $12.2 billion of buildings and houses in its portfolio and that of it sister fund CalSTRS. And its still earned excellent returns consistent with its legal responsibility to the California taxpayers: 12.89% over the past five years for CalPERS and 13.1% for CalSTRS. According to studies by the consulting group Wilshire Associates and by UC Davis Finance Professor Brad Barber, the retirement system's proactive stands on corporate governance have actually added market value to corporations whose policies they successfully worked to shift.

The Gates Foundation would do well to solicit the perspectives of former California state Treasurer Phil Angelides and former Controller Steve Westly, who spearheaded the most far-reaching CalPERS initiatives. It would also do well to talk with leaders of other institutions that have followed similar paths. Of course nothing’s guaranteed. Sometimes you do lose money by not investing in tobacco stocks or the equivalent—at least until the lawsuits hit. But there’s no shortage of examples to suggest that you can get at least comparable returns by doing right. The Domini 400 Social Index, for instance, has outperformed the S&P 500 on an annual risk-adjusted basis since its 1990 inception, 12.10% to 11.45%. Educational Foundation of America has used very aggressive social screens and shareholder activism to secure a 9.88% average return over the past 10 years, vs. 8.32% for the S&P 500. A United Nations report entitled Show Me the Money: Linking Environmental, Social and Governance Issues to Company Value does an excellent job of exploring the relationship between more ethical business practices and corporate success in a variety of economic sectors.

We’ll never live in a world where our every choice matches our values, but if the Foundation can shift all or part of their $66 billion portfolio from companies acting destructively to ones whose actions benefit the communities they affect, or lobby for shifts in corporate priorities in those where they're a stockholder, it can make a major difference.

Imagine, for example, if the Foundation disinvested from Exxon and shifted the money into renewable energy equities, mutual funds or program-related investments, along the lines of the new alternative energy fund that major Silicon Valley venture capital firm Kleiner Perkins created last year. Exxon, as mentioned, has been the prime source of financial support for practically every major denier of global warming worldwide. Its given massive amounts of money to environmentally destructive candidates. It just appealed its $2.5 billion file for the Exxon Valdez spill to the Supreme Court, delaying payment still further for the now 18-year-old spill No other corporation comes close in terms of having helped shape America’s denial of global warming. I’m hoping that the relatively new global Exxon boycott will have a significant impact on their bottom line, but whether or not it does, it would make a major statement for the Foundation to publicly sell their shares or join the corporate campaigns, like Expose Exxon, that are pressuring them to shift.

It's never easy to juggle the trade-offs between return on investment and the purposes your investments serve, but the Gates Foundation would hardly be the first major economic institution to address them. The retirement systems of New York, Pennsylvania, Connecticut, Vermont, Minnesota, and Oregon are now following California’s lead in launching environmental investment programs. Rockefeller Brothers Fund just went through a major reevaluation toward more aggressive social screens and shareholder advocacy. Last year, 32 pension funds from six continents representing $2 trillion in combined assets agreed to place analysis of environmental, social and governance issues at the core of their investment programs.

True, some dismiss all social investment screens as liberal indulgences. But they're primarily market fundamentalists who object to the introduction of any values into economic life except for the maximization of short-term profits. Or they hold the socially responsible funds and the companies in which they invest up to such an impossibly pure perfect standard that unless their actions bring instant utopia they’re never deemed adequate or sufficient. In the process, they ignore clear successes, like the investor pressure that forced significant corporate disinvestment from apartheid-era South Africa, the shareholder campaigns that helped convince Home Depot to stop selling old growth lumber, and the previously mentioned successes of CalPERS.

Like other nonprofits controlling major amounts of resources, Gates Foundation doesn't have to make and all-or-nothing choice. It could split the Foundation’s portfolio and revisit the impact of this shift down the line. But it would do well to seriously talk with those who've pioneered the link between proactive investment and returns sufficient to fund a retirement system or the giving of a major foundation. Imagine if it shifted even a portion of its investments to provide resources for the best of the kind of world it works to create through its grant-making.

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Paul Rogat Loeb is the author of The Impossible Will Take a Little While: A Citizen's Guide to Hope in a Time of Fear, named the #3 political book of 2004 by the History Channel and the American Book Association. His previous books include Soul of a Citizen: Living With Conviction in a Cynical Time. See www.paulloeb.org To receive his monthly articles email sympa@lists.onenw.org with the subject line: subscribe paulloeb-articles

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