What should the first steps be?
May trustees of charities engage in mission-based investing?
Are different legal standards applied to different types of institutions?
What types of institutions have adopted social investment policies?
Table 1: Examples of Institutional Social Investment Policies

Like it or not, the days when portfolio decisions could be made in a complete moral and social vacuum are numbered.

-- Financial Times editorial (1990)^*

Mission-based investing can be a difficult concept for board members and staff alike. It may require a change in views on how an institution's purpose might be accomplished, and it introduces new criteria to the investment decision-making process.

Proponents of a mission-based investment policy will improve their position by preparing for the board's deliberations. Social investing has an undeserved reputation for a lack of discipline, for the substitution of "emotion" for "facts." Therefore, a careful presentation of the financial and policy arguments is essential.

Proponents of a mission-based investment policy should take the time to prepare their fellow board members, key staff, and financial services providers. A few principles should guide this education effort.

This approach gives proponents a chance to hear objections and respond before positions become fixed, while creating an atmosphere of trust around the concept of a mission-based policy.

What should the first steps be?

If the institution lacks a mission statement, the first step should be to develop a simple one. A mission statement is a brief (less than a page), sometimes inspirational, summary of why an institution exists and what its objectives are.

Step 1: Preparation. Be ready to answer the basic questions.

Step 2: Legality Check. Not every institution may use all of mission-based investing's techniques to further its mission. The sections that follow offer some general guidance in this area; counsel will have to provide answers specific to the institution.^*

Step 3: Preliminary Discussions. Before launching a campaign, one should know how the land lies. Discussions with members of the board and staff will guide tactical decisions.

Internal board politics will define "success." In an initial effort for a mission-based investment policy, a major triumph may be convincing the board to designate an ad hoc committee to study the question.

May trustees of charities engage in mission-based investing?

This question ultimately is one for counsel.^* The answer will depend on a number of factors, including:

Are different legal standards applied to different types of institutions?

Yes. Where trusts or charities are concerned, the law usually allows mission-based investing. The answer may be different for some types of pension funds.

In general, if a trust instrument (a document creating a trust) or a governing document (e.g., articles of incorporation) covers whether the trustees may adopt non-financial guidelines, then it determines the question. If a trust instrument is silent on the subject, trustees may take into account non-financial considerations when either:

This mission-based interpretation of a board's power to adopt non-financial criteria is a narrow one. For trusts generally, the legal treatises^* appear to support a broad interpretation of the trustees' powers to adopt non-financial screens. Nonetheless, keeping the focus on mission makes sense: it not only justifies a policy to regulators and stakeholders but also increases the chances of adoption by the board. Counsel should advise on whether a particular policy will advance the trust's mission.

Entities subject to the Uniform Management of Institutional Funds Act (UMIFA) or its equivalent -- a class that includes the vast majority of charities -- seem to have at least as broad authority for adopting mission-based guidelines as charitable trusts. The standard applied is the business judgment rule. The business judgment rule shields a board or management from liability on a transaction if:

In any event, the more closely the risk-reward profile of the screened investments resembles that of conventional investments, the less subject to challenge they may be.

Restatement (Third) of Trusts' 227 cmt. c (1990)

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What types of institutions have adopted social investment policies?

Institutions of many types have adopted social investment policies^*. The scale and scope of these policies varies widely. Table 1 contains a representative list of the types of social investment policies adopted by institutions and examples of those institutions.

Table 1. Examples of Institutional Social Investment Policies

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