Our investments determine the future we’re heading towards. Photo: NASA

Money is power: returns and reputation

The assets managed by charities total around 100 billion Swiss francs. Charities use the returns to meet their charitable objectives, but what about the assets themselves?

Having non-profit status places an obli­ga­tion on chari­ties. ‘It goes without saying that chari­ties should handle money carefully and profes­sio­nally,’ says Tizian Fritz. ‘Howe­ver, this is about more than just finan­cial indi­ca­tors. Parti­cu­larly in light of the tax exemp­tion that corre­sponds to addi­tio­nal income from assets, it is neither reasonable nor logi­cal to ignore a charity’s objec­ti­ves when desig­ning its invest­ment stra­te­gies,’ he says. He has co-autho­red a new study looking at the conse­quen­ces of alig­ning a charity’s invest­ment acti­vi­ties with its objec­ti­ves, entit­led: ‘Beyond Soci­ally Respon­si­ble Inves­t­ing: Effects of Mission-Driven Port­fo­lio Selec­tion’. The Swiss Foun­da­tion Code is formu­la­ted in simi­lar terms: ‘Asset manage­ment should support the foun­da­tion purpose or at least may not contra­dict it’. The Code is a guide for chari­ties that fund third-party projects, and it takes a holi­stic view of chari­ties, inclu­ding their invest­ments. ‘A chari­ta­ble foun­da­tion must bear in mind when mana­ging its assets that it must not parti­ci­pate in any acti­vi­ties that would have a nega­tive social impact. By contrast, it should examine with which invest­ments it can create sustainable impact – with which the over­all impact of the foun­da­tion is increased.’
Previous studies carried out by the Center for Phil­an­thropy Studies (CEPS) showed that around half the orga­ni­sa­ti­ons surveyed took the charity’s objec­ti­ves into account as part of asset management.

Making meaningful investments

Michael Spal­ding, Head of Clients Rela­ti­ons, Member of the Execu­tive Commit­tee of Ethos
Tizian Fritz, Co-Author, Byond Soci­ally Respon­si­ble Inves­t­ing CEPS 2019

Michael Spal­ding, Head of Client Rela­ti­ons and member of Ethos’ execu­tive manage­ment, also agrees that an invest­ment stra­tegy should be aligned with the charity’s purpose. This charity promo­tes sustainable invest­ment that safe­guards the inte­rests of society as a whole in the long term. Most of the assets they manage come from pension funds, with only a small amount origi­na­ting from chari­ties. ‘It begs the ques­tion as to whether chari­ties should merely invest their assets – or whether they should invest them meaningfully. And if that’s the case, what does “meaningfully” mean?’ he asks. Even though it’s a given that every inves­tor needs to ask them­sel­ves this ques­tion, Michael Spal­ding is aware that chari­ties have a special respon­si­bi­lity. The board of trus­tees needs to embrace the topic, discus­sing a range of stra­te­gic issues, such as what, along­side gene­ra­ting returns, they want to do with the inves­ted funds, and what they want to avoid. For Michael Spal­ding, this is the ques­tion every trus­tee should ask them­sel­ves: ‘Do I want to have a posi­tive impact on the econo­mic envi­ron­ment in which I’m inves­t­ing? Do I want to make the most of my rights and oppor­tu­ni­ties as an active, respon­si­ble inves­tor in the form of my voting rights and my involvement?’

Having an impact

When a charity wants to use its invest­ments to exert a parti­cu­lar effect, this is dubbed ‘impact invest­ment’. In addi­tion to posi­tive returns, this form of inves­t­ing aims to have a posi­tive impact on the envi­ron­ment and society. Direct invest­ments, gene­rally via unlis­ted finan­cial instru­ments, play a measura­ble role in reali­sing the charity’s objec­ti­ves. This means inves­t­ing in compa­nies and insti­tu­ti­ons that are not traded on the stock exch­ange. As a result, impact invest­ment is nest­led between tradi­tio­nal returns-driven inves­t­ing and phil­an­thro­pic giving, making this invest­ment stra­tegy perfect for chari­ties. The approach of ‘mission inves­t­ing’ goes even further than ‘impact inves­t­ing’. ‘The concept of mission inves­t­ing invol­ves drawing on the charity’s purpose itself as the key guide­line to see how risks and returns from finan­cial invest­ments should be asses­sed on a quali­ta­tive level,’ Fritz says. This enables chari­ties to reach their goals more effec­tively, and can be achie­ved using two factors: firstly, the charity can exclude certain equi­ties to avoid conflicts with its objec­ti­ves, ther­eby ensu­ring that its invest­ments are not funding some­thing that preju­di­ces its aims. Secondly, it can use posi­tive selec­tion crite­ria to boost the effect it has, by inves­t­ing directly in compa­nies or projects that are aligned with its objec­ti­ves. This enables it to gene­rate a measura­ble impact, but this second factor does not need to be applied across its entire port­fo­lio. On this subject, Tizian Fritz says: ‘As long as the charity’s purpose serves as a guide­line for struc­tu­ring the invest­ment process, this can be viewed as “mission inves­t­ing” even if just part of its assets are inves­ted in line with this purpose.’

Mission-driven inves­t­ing  

A mission-driven invest­ment stra­tegy can have a nega­tive effect on returns, as shown by the study carried out by Tizian Fritz and Georg von Schnur­bein. They demons­tra­ted that chari­ties inves­t­ing in the social and health­care sectors, or in envi­ron­men­tal conser­va­tion projects, had below-par finan­cial returns in the past. Howe­ver, Fritz notes that rest­ric­ting evalua­tions to this aspect does not tell the whole story. ‘The perfor­mance of finan­cial invest­ments in the context of chari­ta­ble orga­ni­sa­ti­ons should not (and in fact, cannot) be asses­sed solely on the basis of their finan­cial returns. Igno­ring the orga­ni­sa­ti­ons’ objec­ti­ves when asses­sing the success and risks of invest­ments makes little sense from a busi­ness perspec­tive, and it is not justi­fied, either.’ He suggests that exclu­ding invest­ments in certain compa­nies redu­ces mate­rial risks, as making invest­ments in an enter­prise that is coun­ter to the objec­tive of the charity comes with considera­ble repu­ta­tion risks. These risks run the gamut from a loss of trust through to a short­fall in dona­ti­ons or govern­ment contracts. All things conside­red, the posi­tive aspect wins out. Chari­ties that take their objec­ti­ves into account in their invest­ment stra­tegy can prove that they are fulfil­ling their purpose more effec­tively. Tizian Fritz: ‘The selec­tion does not merely reduce conflic­ting goals that are speci­fic to that charity. Instead, the port­fo­lio beco­mes more sustainable over­all thanks to the three stan­dard indi­ca­tors of envi­ron­men­tal, social and governance.’ 

Lukas von Orelli, Direc­tor Velux Foun­da­tion, Presi­dent of SwissFoundations

The Velux Stif­tung, mana­ging around 220 million Swiss francs, has opted for impact invest­ment. It invests ten percent of its assets in climate-rela­ted impact invest­ments, while aiming to phase out all its invest­ments in fossil fuels by 2023. Further­more, it does not invest in contro­ver­sial weapons or tobacco. ‘When we invest in assets traded on the stock exch­ange, we carry out an ESG scree­ning,’ explains Lukas von Orelli. ESG stands for ‘envi­ron­men­tal, social and gover­nance’. ‘For private equity, or invest­ments traded off the stock exch­ange, we only make the invest­ment if an analog­ous ESG prin­ci­ple is applied.’ Lukas von Orelli is the direc­tor of the Velux Stif­tung and presi­dent of Swiss­Foun­da­ti­ons, the umbrella asso­cia­tion for chari­ta­ble orga­ni­sa­ti­ons that use their money to support third-party projects. Swiss­Foun­da­ti­ons has just published its 2019 Bench­mark Report, which focu­ses on the issue of gover­nance. ‘The parti­ci­pa­ting chari­ties are in a good posi­tion in terms of gover­nance,’ says Lukas von Orelli, the presi­dent of Swiss­Foun­da­ti­ons. He explains that there is room for impro­ve­ment in terms of asses­sing the trans­pa­rency and intro­duc­tion of invest­ment regulations. 

Distri­bu­tion of investments

The Bench­mark Report provi­des facts and figu­res about how chari­ties support­ing exter­nal projects manage their money. As the 2019 report shows, shares make up around 40 percent of the port­fo­lio held by a charity of this nature. There is little varia­tion in this figure. ‘Over the past few years, it increased to 46 percent, at most,’ says Lukas von Orelli. The report covers 34 Swiss chari­ties that fund exter­nal projects. They have diffe­rent amounts of assets at their dispo­sal, but as a whole, they encom­pass a total of around 12.7 billion Swiss francs. Their holdings of liquid assets and bonds make up a some­what smal­ler percen­tage than their share­hol­dings, with the remai­ning 20 percent or so being inves­ted in real estate and alter­na­tive invest­ments such as commo­di­ties or hedge funds. Small chari­ties have the highest propor­tion of bonds and liquid assets, and the lowest propor­tion of shares, while medium-sized chari­ties hold almost half their wealth in shares. Compared to pension funds, the chari­ties inves­ti­ga­ted here hold slightly more in the way of shares and alter­na­tive invest­ments. This does boost their chan­ces of better returns, but it comes with increased risk, too. The low inte­rest rate envi­ron­ment, in parti­cu­lar, pres­ents chal­lenges for inves­tors: how can they conti­nue to gene­rate returns? The Velux Stif­tung respon­ded to this ques­tion by adjus­ting its invest­ment stra­tegy. ‘Firstly, we actually took more risks,’ explains Lukas von Orelli. Secondly, howe­ver, the charity is also syste­ma­ti­cally expan­ding its holdings of non-liquid invest­ments (private equity, real estate, private debt, infra­struc­ture and timber). 

Nega­tive inte­rest rates

The nega­tive inte­rest rate envi­ron­ment makes gene­ra­ting returns a chall­enge, but hardly any chari­ties seem to be in trou­ble as a result of it. The Fede­ral Super­vi­sory Autho­rity for Foun­da­ti­ons (ESA) says that it has not noted an increase in chari­ties that have got into diffi­cul­ties owing to the situa­tion on the finan­cial markets. If a charity can only use their returns to meet their objec­ti­ves, this is nevert­hel­ess a chall­enge. Instead of deploy­ing a riskier invest­ment stra­tegy, in these situa­tions, the ESA recom­mends that the board of trus­tees apply to change their statu­tes so they can work with their assets, too. ‘The ESA considers this prefera­ble to a riskier stra­tegy,’ says an ESA spokesper­son, poin­ting out that ‘the board of trus­tees cannot put a charity’s assets at risk through negli­gent beha­viour. If they misuse their powers, they will be liable for any losses.’ Previously, the ESA had advi­sed chari­ties to adhere to the guide­lines issued for pension funds, but this is no longer the case: chari­ties are free to decide how they invest their money. That said, boards of trus­tees are respon­si­ble for chari­ties’ assets, and, by exten­sion, the risks asso­cia­ted with the invest­ment strategy.

Educa­tion or envi­ron­men­tal tech­no­lo­gies: targe­ted inves­t­ing helps chari­ties take great stri­des towards meeting their goals.

Small chari­ties

Eighty-five percent of chari­ties in Switz­er­land have an endow­ment capi­tal of less than five million Swiss francs. If a small charity only opera­tes using the reve­nue it makes from that capi­tal, its finan­cial scope is corre­spon­din­gly modest. The small amounts at play lead to forms of colla­bo­ra­tion being sought out, with umbrella foun­da­ti­ons being one option. They offer active plat­forms to enable foun­ders to set up sub-foun­da­ti­ons, with an objec­tive of their own choo­sing, under this umbrella. ‘Phil­an­thro­pists may opt for a sub-foun­da­tion if setting up a charity is too much for them and simply making a dona­tion is not enough,’ says Fran­çois Geinoz. The presi­dent of proFonds, Fran­çois Geinoz has been the mana­ging direc­tor of the Limmat Stif­tung since 1990. Even when it was foun­ded back in 1972, its statu­tes contai­ned all the key elements of an umbrella foun­da­tion, and the bene­fits of this struc­ture have reve­a­led them­sel­ves as the years have passed. Fran­çois Geinoz: ‘In my view, too many chari­ties are being foun­ded – almost one a day. In many cases, a sub-foun­da­tion or purpose-linked fund would be the better, more effi­ci­ent and chea­per option.’ Umbrella foun­da­ti­ons also offer advan­ta­ges in terms of invest­ments. If desi­red, various sub-foun­da­ti­ons can group toge­ther their assets under the auspi­ces of an umbrella foun­da­tion. This not only helps reduce fees and costs: it also helps them tap into oppor­tu­ni­ties and boost effi­ci­ency when mana­ging their money. In turn, this enables smal­ler chari­ties to parti­ci­pate in invest­ments they would other­wise be unable to access. ‘The Limmat Stif­tung offers various invest­ment port­fo­lios, such as bonds, Swiss equi­ties, global equi­ties, and real estate, and the sub-foun­da­ti­ons’ commit­tees are free to decide how they distri­bute their assets among these portfolios.’

The nature of finance: invest­ment beha­viour doesn’t just reso­nate on a finan­cial level.

Some umbrella foun­da­ti­ons were set up follo­wing initia­ti­ves by banks, with Fran­çois Geinoz inclu­ding Credit Suisse’s umbrella foun­da­ti­ons among them, as well as those set up by the Reich­muth or Lombard Odier private banks. Other umbrella foun­da­ti­ons were set up by non-profit advi­sory services or by certain phil­an­thro­pists. There are around 25 of them in Switz­er­land at present. ‘A study of ten major umbrella foun­da­ti­ons lead us to esti­mate that each umbrella foun­da­tion has around 4.5 million Swiss francs in funding available per annum,’ says Fran­çois Geinoz. Andreas Wieser, head of the ‘Berner Dach­stif­tung’ mana­ged by the Graf­fen­ried Group, belie­ves the advan­ta­ges can be found in asset manage­ment: ‘Working toge­ther to manage the assets of the sub-foun­da­ti­ons or funds can gene­rate syner­gies in terms of asset manage­ment. Foun­ders can then enjoy the bene­fits of profes­sio­nal asset manage­ment while sharing (and ther­eby redu­cing) the cost of this. As a result, they have more money to use for their objec­ti­ves.’ The Graf­fen­ried Group’s Centre of Excel­lence for Chari­ties has been mana­ging the Berner Dach­stif­tung since it was foun­ded. It has been around for 50 years, and star­ted life under its offi­cial name of ‘Fontes Stif­tung’. As part of its deve­lo­p­ment, it was turned into an umbrella foun­da­tion under the brand ‘Berner Dach­stif­tung.’ ‘The umbrella foun­da­tion orga­ni­ses profes­sio­nal leader­ship, asset manage­ment, book­kee­ping, audi­ting, reports for the super­vi­sory autho­ri­ties, and so on, for all its sub-foun­da­ti­ons and funds,’ says Andreas Wieser. ‘In addi­tion, it is possi­ble for sub-foun­da­ti­ons and funds to be tax-exempt if the umbrella foun­da­tion is tax-exempt and the purpo­ses of the umbrella foun­da­tion are aligned with those of the sub-foundations.’ 

Exer­cis­ing responsibility 

Andreas Wieser, Head of Berner Dach­stif­tung, Von Graf­fen­ried Gruppe
Fran­çois Geinoz, Mana­ging Direc­tor Limmat­stif­tung, Presi­dent of proFonds

The Ernst Göhner Stif­tung shows how a trus­tee can exer­cise their respon­si­bi­lity. Foun­ded in 1957 by Zurich-based entre­pre­neurs, the charity has now supported more than 30,000 phil­an­thro­pic projects and given out almost 580 million Swiss francs. The Ernst Göhner Stif­tung is a charity that uses its funds to support third-party projects in the fields of culture, envi­ron­ment, society, educa­tion and science. It descri­bes its purpose as being a charity for enter­pri­ses, funding and fami­lies. ‘Accor­ding to the task laid down in the charity’s deed of foun­da­tion, the endow­ment capi­tal of the Ernst Göhner Stif­tung is to be mana­ged in line with busi­ness prin­ci­ples and entre­pre­neu­rial initia­tive, with the funding of asso­cia­ted compa­nies included within this in parti­cu­lar,’ explains Suzanne Schenk, deputy mana­ging direc­tor of the Ernst Göhner Stif­tung. In line with these requi­re­ments, its invest­ment approach is guided by ques­ti­ons of sustaina­bi­lity. Their invest­ment acti­vity encom­pas­ses main­tai­ning work­places and know­ledge in Switz­er­land, given that their invest­ments focus on compa­nies with their head­quar­ters and their primary poten­tial for crea­ting value loca­ted in Switz­er­land. ‘Along­side this, the board of trus­tees will soon be looking at the topic of “impact inves­t­ing”,’ says Suzanne Schenk. ‘In prin­ci­ple, the charity draws a line between its busi­ness acti­vi­ties and its charity work.’ Howe­ver, certain chari­ta­ble projects are carried out with an eye to the charity’s busi­ness acti­vi­ties, such as infra­struc­ture projects for Swiss schools abroad. Above all, this is due to the charity’s former holdings in Panal­pina Welt­trans­port (Holding) AG, now known as DSV Panal­pina A/S, a globally active company whose execu­ti­ves, and their fami­lies, had to rely on these schools during the peri­ods they spent working abroad. In addi­tion, the charity supports an array of projects rela­ting to funding dual voca­tio­nal educa­tion in Switzerland.

Keeping funding stable thanks to diversification 

Aiming for diver­si­fi­ca­tion is also key, ensu­ring that the charity’s endow­ment capi­tal is inves­ted in a broad range of areas. Holdings in compa­nies, real estate and finan­cial tools are all part of this. The charity also has two wholly owned subsi­dia­ries since it repo­si­tio­ned itself a decade ago, and this struc­ture enables assets to be mana­ged profes­sio­nally. ‘Thanks to these compa­nies, the charity does not just have its own three boards of trus­tees at its dispo­sal: it can also call on two addi­tio­nal exter­nal, inde­pen­dent boards of trus­tees with the corre­spon­ding know­ledge and networks. One of our trus­tees presi­des over each of the two subsi­dia­ries,’ says Suzanne Schenk. Income can fluc­tuate despite this broad diver­si­fi­ca­tion. ‘The volume of funding given out is deci­ded by the board of trus­tees to ensure that these fluc­tua­tions don’t have an impact on the charity’s funding work.’ 

Low inte­rest rates: what risks can chari­ties take when investing?

It’s up to the board of trustees

Susanne Schenk, Deputy Mana­ging Direc­tor, Ernst Göhner Foundation

Most chari­ties do not have the opti­ons available to the Ernst Göhner Stif­tung, but the board of trus­tees bears respon­si­bi­lity nevert­hel­ess. In this regard, Michael Spal­ding notes that it is not unusual for trus­tees to see the charity’s funds as a means to achieve the charity’s objec­ti­ves, not belie­ving that the rela­tively small volume at hand could still have a hefty impact via invest­ment or dialo­gue. ‘Trus­tees should be aware that their invest­ments can have an impact and that they can, and should, exer­cise this respon­si­bi­lity,’ he says. The expe­ri­ence Ethos has glea­ned over 20 years confirms that an inves­tor can have a big impact. ‘Every charity that sets respon­si­ble objec­ti­ves for its invest­ments has an impact on society as a result,’ says Michael Spal­ding. When inves­tors come toge­ther to form a group that holds a good chunk of a company’s equity capi­tal, this enables them to make a posi­tive impact. Regard­less of the stra­tegy, Tizian Fritz repeats that the trus­tees should bear respon­si­bi­lity, first and fore­most, as they are most fami­liar with the charity’s purpose and values. ‘To start with, they should trans­late these values into invest­ment crite­ria, either on their own or in dialo­gue with other, simi­lar orga­ni­sa­ti­ons or asso­cia­ti­ons – and defi­ni­tely without input from their asset mana­ger,’ he says. Ideally, the orga­ni­sa­tion would have an invest­ment commit­tee with exper­tise in this field, but its asset mana­ger can provide help with the actual imple­men­ta­tion of the stra­tegy. Howe­ver, Tizian Fritz advi­ses that these crite­ria should always be laid down in the charity’s invest­ment regu­la­ti­ons. Whether mission-based inves­t­ing is under­ta­ken does not depend on the size of the charity: studies previously carried out by CEPS show that it is not the size but rather the level of profes­sio­na­li­sa­tion that deter­mi­nes whether a charity’s objec­ti­ves are taken into account in its investments. 

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