Foreign Aid & Civil Society

Gates Foundation Asset Investments: To Review or Not

The Guardian reported earlier that the Gates Foundation will review its asset investments to address concerns that the companies it supports cause the very problems it is trying to fight.

The announcement comes after a major investigation by the Los Angeles Times discovered that some of the billions spent by the Gates Foundation on improving health in the developing world came from its investments in companies that caused illness and disease through pollution and exploitation.

Subsequent to the original LA Times report (here and here), however, the Gates Foundation modified its official investment philosophy statement to clarify that no review was to occur. The change was picked up by this disappointed post by Jeff Reifman, suggesting that Bill Gates was not a big fan of Socially Responsible Investing. Most bloggers had welcomed the original review, so predictably the change generated howls of protest. The Financial Times reported:

Penny Shepherd, chief executive of the UK Social Investment Forum, said: “This is a rather out-dated perspective. The evidence is that you can invest responsibly without damaging your financial returns.”

Blended Value Investing & SRI

The ethical investment strategy proposed originally is bettern known as blended-value investing (see WEF’s authoritative crash course). Traditionally, the asset management of philanthropy foundations has occurred in a vacuum, directed by asset managers that know little of a foundation’s social mission. The result is the kind of contradiction the Gates Foundation has discovered – that its asset investments create the very problems its project finance hopes to eradicate. The idea behind blended value investing, as propagated by Jed Emerson, is to see the entire portfolio – both project finance and assets under management – through a single lens, to find common cause between the two.

Blended value investing is a good idea and at the very least brings to the surface the dilemma most social service organizations face – executing a Utopian mission within a flawed social system. It is, however, also the manifestation of a wider movement known as Socially Responsible Investing (SRI).

Over the past few years SRI has attracted significant attention and substantial assets. According to the Social Investment Forum, assets under management in the US that use ethical screening totaled about $2 trillion, or 11% of all professionally managed assets. Given the substantial assets of the Gates Foundation – US$ 34 billion and growing – this announcement will be very welcome news to SRI proponents. It would, at the very least, provide much needed legitimacy to what was originally a lobbying tool for NGOs.

Beyond that, however, the Gates Foundation is right in treading carefully, because it is unclear who SRI would benefit, and whether it is ethical itself.

The Ethics of SRI

SRI works by affecting the flow of large investments, applying ethics to corporate action. Multinational companies have, no doubt, immense influence over their supply chains. Sometimes, they are also cited for egregious and unethical practices, particularly when they work in developing countries with weak legislation.

The way to correct for these problems, however, is through government legislation and oversight – which is how it works in the developed world. SRI, by contrast, allows fragmented special interest groups to lobby across borders, instead of giving sovereign governments control.

Another problem surfaces when we ask the question, ‘whose ethics’. SRI allows a nebulous ‘civil society’ to define the ethical agenda, so we apply western ethics, social and environmental practices to countries that may otherwise choose to have very different standards. Effectively, it weakens the institutions and disenfranchises the people of those countries where corporate action comes under the scanner. An NGO in Washington, DC and an asset manager in London decide what is to happen to a child working in Bangladesh.

Interestingly, since SRI works by subsuming the authority of government it can only be effective in countries where institutions are extremely weak. By its very dynamics, SRI cannot work as a lobbying tool in the developed world and is less effective in large developing economies such as India and China. In these countries the NGO is limited in its ability to impact the domestic agenda while conversely corporates wield much more political lobbying power. SRI can, therefore, impact Nike’s labor practices in Bangladesh, but not gun related violence or healthcare reform in the USA.

The Practical Dilemma

There are other practical considerations to look at as well. For corporates, there is the short-term contradiction between addressing social concerns and maximizing profits. For the philanthropy foundation, however, there is another issue.

Most foundations depend on using the returns generated from the corpus (the assets under management) to fund their projects. Maximize the returns and you expand the amount that can be disbursed to projects. So, if the Gates Foundation chooses to skip some investments in companies with questionable ethical practices, it does so at the risk of reducing its returns, and therefore its project financing.

The Gates Approach: A Commendable Middle Path

The LA Times report brings into specific perspective a much wider contradiction that underlies the entire international development system. Governments invest in defence contractors and pharmaceutical companies that sell arms and expensive drugs in Africa and Asia. A portion of those ‘investments’ in profitable, if questionable practices, then provide ‘project finance’ to international organizations such as the UN, WFP, and UNDP.

Most institutions, thankfully, are not faced with such obvious dilemmas. Nor can they hope to change that system by themselves – which limits the practicability of SRI to effect a paradigm shift. The Gates Foundation must only consider where the dividing line is between its investments and mission. And that is probably the point of its investment philosophy – to identify the point where finance and social returns contradict each other the least.

The Gates Foundation should be commended for its investment philosophy, as it stands. The statement recognizes the foundation’s expertise and limitations. It also recognizes the complex environment it functions in, sorting the irrelevant and merely important from the essential. Most of all, it hopefully reflects an understanding that working on social issues is bound to create contradictions the solutions to which – such as SRI – are imperfect at best. Addressing those concerns is a massive undertaking, and a battle that needs fighting, but perhaps not by the Gates Foundation or perhaps not now.

© 2007 The Discomfort Zone.