by Arthur Drache
Most investment fund managers have a single goal…to produce the best return on the funds under their control. Most also are subject to guidelines set by clients. These guidelines are usually associated with the quality of companies which are being considered, their size and the market within which they operate. But many other pools of investment funds do operate under other constraints. For example, we are familiar with a major aboriginal fund which won’t invest in companies which are involved in oil exploration or oil shipping in the arctic.
Other funds tell managers to avoid companies which manufacture of distribute tobacco products, arms, or which deal with certain counties. Many want to avoid companies involved in doubtful environmental practices while other would refuse to invest in companies which exploit labour in foreign countries. Other like the aboriginal fund referred to have guidelines which are linked specifically to the interests of the beneficiaries and which might not offend other investors.
More and more often these days charities and non-profits willingly subject themselves to constraints based on perceived ethical grounds.
In mid-April, for example, the University of Ottawa’s board of governors has adopted a plan that will see the school reduce the carbon footprint of its investment portfolio by 30 per cent by 2030. The university says it will also create a clean innovations fund and transfer $10-million from its long-term portfolio to provide seed capital for investing in clean technologies.
The Ottawa school is one of several across the country that have been weighing whether to dump their holdings in fossil fuel companies. But the decisions are not always the same.
Concordia University in Montreal became what is believed to be the first Canadian university to adopt a partial divestment policy in December 2014, although that measure only applied to a $5-million fund – a fraction of the school’s $130-million endowment.
The University of Calgary, McGill University in Montreal and Dalhousie University in Halifax have all decided against divestment, as did the University of British Columbia, which instead promised to create a low-carbon investment fund.
On March 30, the University of Toronto rejected recommendations to sell off its fossil fuel investments, but said it would consider environmental, social and governance factors in making investment decisions.
University president Meric Gertler said not investing in fossil fuels would have limited impact because such firms only account for one-quarter of Canada’s greenhouse gas emissions.
Whatever the decision and the rationale for that decision, the fact of the matter is that political and environmental concerns are becoming the subject of board discussion.
And when the decision relate to other topics, the decisions can lead to serious trouble.
Adam Aptowitzer in the April, 2016 issue of the Canadian Not-for-Profit News [1] pointed out that in light of the Commons resolution condemning BDS (Boycott, Divestment and Sanctions) again the State of Israel, adopting investment policies based on BDS might be considered to be against public policy and thus grounds for revocation of charitable status.
And there is another issue which arose at the time of the apartheid regime in South Africa. Many British charities divested themselves of South African shares. Subsequently some trustees were sued by members of the charity for being in breach of their duties to invest prudently because South African shares were “profitable”.
Far be it from us to suggest that Boards should ignore ethical questions in pursuit of profits. But those boards should also be aware of their common law duties including prudent investing, and other issues which may flow from investment decisions
Over the past few years, many so-called ethical investment funds have sprung up, each with its own particular set of criteria. These have tended to be mutual funds which appeal to a broad range of investors. But at the same time there is a growing interest amongst charities and non-profits which invest directly in setting ethical guidelines which are consistent with their own mandate. The problem which many find however, is that given the fact that so many attractive companies are conglomerates, its is often difficult to determine whether some aspect of the company’s otherwise acceptable business does in fact contravene the fund’s investment guidelines.
So how do the investment committees of private funds determine whether companies do in fact meet their ethical constraints?
Internet searches will identify organizations which will help a charity pick appropriate investments tailored to the concerns of the Board. One such organization is Sustainalytics. We hasten to add we have no involvement, direct or indirect, with this company but it was one of the first we identified by an internet search.
[1] Page 27 of Canadian Not-for-Profit News, Vol. 24, No.4