Gates Foundation Should Invest Its Money Where Its Heart Is

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 own Bill & Melinda Gates Foundation, which does a world of good with its programs, is missing a significant opportunity by not aligning the foundation's investment commitments with its larger social goals.

If the 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 its 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 seem to undermine the good work it does with its programs: Exxon/Mobil, in which the foundation has $293 million, has been the prime global funder of institutes and individuals who deny global warming; mortgage company Ameriquest has been sued repeatedly for predatory lending; Tenet Healthcare has paid more than $1.5 billion in settlements for fraud, kickbacks and patient-care lapses.

Earlier this year, Gates Foundation CEO Patty Stonesifer defended the foundation's hands-off approach (except for avoiding tobacco companies) by saying, "It would be naive to think that changing the foundation's investment practices could stop the human suffering blamed on the practices of companies in which it invests billions of dollars."

But the current approach is an opportunity lost to make a broader impact with its $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.

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 also directly investing close to $1 billion in renewable technologies and in increasing the energy efficiency of the $12.2 billion of buildings and houses in its portfolio and that of its sister fund, CalSTRS (California State Teachers' Retirement System).

Throughout this, they've still earned excellent returns: 12.89 percent over the past five years for CalPERS, and 13.1 percent for CalSTRS. And, according to studies by consulting group Wilshire Associates and University of California, Davis, finance professor Brad Barber, their stands on corporate governance have actually added market value to corporations whose policies they worked to shift.

Their approach has been so successful that the retirement systems of New York, Pennsylvania, Connecticut, Vermont, Minnesota and Oregon are now following suit by developing their own environmental-investment programs.

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.

They'd do well to talk with leaders of other institutions that have followed similar paths. The socially responsible Domini 400 Social Index, for instance, has outperformed the S&P 500 on an annual risk-adjusted basis since its 1990 inception. 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 approaches.

We'll never live in a world where our every choice matches our values. Sometimes you lose potential earnings by not investing in tobacco - or at least until the lawsuits roll in.

But imagine if the Gates Foundation disinvested from Exxon/Mobil and similarly problematic corporations and shifted the money into renewable-energy stocks or program-related investments - or joined public campaigns to change key corporate policies.

Imagine if it shifted even a portion of its investments to provide resources for the kind of world it works to create through its grant-making.