To support investors in extending or adapting existing policies, programs or practices to the system-level, TIIP developed seven hypothetical scenarios. These scenarios illustrate the nature of these transitions through such things as the re-thinking of purpose, the expansion of their risk management techniques, and the use of tools designed explicitly for system-level influence.
To illustrate these transitions, we chose three different systemic challenges:
- Climate change
- Income inequality
- Availability of sustainability data
Each scenario focuses on an investor from a different silo of the investment world:
- Diversified financials
- Family offices
- Private equity
Each scenario describes the investor and their current status relative to conventional or sustainable investment; the catalytic moment that prompts a decision to change; the challenges in moving forward specific to their institution; their preparation for overcoming those obstacles; the actions they take to do so; and long-term management considerations necessary once that transition to system-level investment has been made.
The purpose of these scenarios is to illustrate seven of the fundamental types of transitions that will arise no matter the type of system challenge or investor. The scenarios assume investors starting from an initial minimal commitment to ESG integration and then portray obstacles that typically stand in the way of a transition to integration of an explicitly systemic approach and steps typically useful in that transition. They are stories about turning points in the journey to fulfilling the full promise of investment: to benefit society as well as the individual. Our hope is that these scenarios help investors today as they address the twists and turns on the road to realizing that potential.
How a Foundation Transitions to the System-level
Case Overview: $10 Billion Foundation Aligns Grantmaking and Investment Policies to Tackle Income Inequality
A foundation breaks down the silos between grantmaking and investment to mutually benefit efforts aimed at reducing income inequality.
- The $10 billion GHI foundation made a shift to align their investment and grant giving operations. This follows a broader trend among foundations to coordinate programs, targeting systemic leverage points and collaboration with civil society and governmental agencies.
- The GHI Board decided to amplify its systemic influence in the area of income inequality by asking its investment team to coordinate its policies with grant-giving on this issue. When initially proposed to the investment team, the idea was met with stiff resistance.
- The investment team agreed to conduct a study of best practices among foundations, which resulted in three recommendations:
- Increased attention to labor and employee relations in security selection;
- Amending proxy voting policies to take a stronger position on excessive CEO compensation; and
- Participation in the growing calls by investors for increased transparency on corporate tax policies.
- This work by the investment team also influenced GHI’s grant-giving team, which decided to align their grantmaking with the investment staff’s new initiative by supporting public policy organizations focused on workers in the gig economy and on tax justice.
The $10 billion GHI foundation’s primary missions are poverty alleviation, local economic development, and environmental justice, to which virtually all its grants are devoted. In the past five years, it has recognized income inequality as an exacerbating factor in each area and sought to address this challenge to accelerate progress toward its goals. Until recently, the foundation’s grant-giving and investment operations have functioned separately. That has now changed. This shift was influenced by a trend in the philanthropic world toward systemoriented approaches to grant-giving.
Instead of single grants by one foundation to address an individual issue, coordinated programs among foundations have emerged, targeting systemic leverage points and collaboration with civil society and governmental agencies. The goal is to embed system-level change that can prevent undesirable outcomes, rather than fixing negative outcomes after they take place.
Cognizant of this development, the GHI Board decided to amplify its systemic influence in the area of income inequality by asking its investment team to coordinate its policies with grantgiving on this issue. When initially proposed to the investment team, the idea was met with stiff resistance. Nevertheless, the team agreed to conduct a study of best practice among foundations in similar situations. Twelve months later, the Board was pleasantly surprised with the staff’s report. Although the report found little in the way of such coordinated efforts in the foundation world at the time, it did find that the global rise in income inequality was increasing the risks of political instability and hence of difficult-to-contend-with investment uncertainties.
Their report made three recommendations. The first was increased attention to labor and employee relations in security selection. Academic research showed a statistically significant positive contribution from the inclusion of this factor. Second, it recommended amending proxy voting policies to take a stronger position on excessive CEO compensation. Staff viewed this stance as unlikely to influence portfolio returns one way or the other, but as having a symbolic importance in changing cultural norms. Finally, after extensive debate, the staff decided to recommend participation in the growing calls by investors for increased transparency on corporate tax policies. Arguments that tax avoidance stood to benefit their returns were more than counterbalanced by concerns that any such short-term benefits would eventually be undermined by the long-term risks of weakening governments’ resiliency because of loss of revenues.
The report prompted an additional unexpected result: GHI’s grant-giving team decided to align its efforts with the investment staff’s new initiative by supporting public policy organizations focused on workers in the gig economy and on tax justice.
The Board’s five-year implementation plan for this coordinated initiative included the hiring of a developmental evaluator to guide it throughout the process and to help in the measurement of its impact, effectiveness, and progress at in attaining system-level change.
Steve Lydenberg, Robert Dannhauser, and William Burckart, “Graduating from ESG to Systems: Scenarios for Investors,” Money Management Institute and The Investment Integration Project, October 2020.