Abstract
In their pursuit of value creation, charitable foundations are mission- rather than profit-driven. Therefore, foundations are also mission-driven investors. We explore the effects of mission-driven portfolio selection based on three model foundations, representing common fields of activity in Switzerland. Employing a moving block bootstrap approach, we simulate time series. Based on these model foundations and under the integration of qualitative company rating data, such as environmental, social, and governance-related characteristics (ESG), we find both negative and no significant financial effects of portfolio screening. However, screening portfolios substantially increases mission-driven portfolio quality. Additionally, screening reduces reputational risks and even leptokurtic return characteristics under special consideration of governance issues. After a joint analysis of financial and qualitative factors for portfolios with equity shares of 25% and 50%, we did find strong enough evidence to encourage foundations to implement negative and positive screening criteria. Additionally, we argue that without the integration of mission-based qualitative criteria, for instance, the involvement in business activities contradicting the foundation’s mission, an adequate evaluation of investment opportunities’ desirability is not feasible.
Highlights
The number of foundations has rapidly increased within the past decades and today foundations have significant amounts of assets to invest
Differences for AC foundations were statistically significant on a 5% level, the magnitude of the differences compared to the unscreened portfolios were rather low and ranged between 2.3% and 0.6%
We assumed that charitable foundations have multi-attribute utility functions
Summary
The number of foundations has rapidly increased within the past decades and today foundations have significant amounts of assets to invest. As other types of nonprofit organizations (NPOs), too, foundations are utility—rather than profit-maximizing organizations [1] They are characterized as being “mission-driven” [2], as their utility is derived from the degree of mission achievement. Foundations fulfill their mission using the returns of their capital. If foundations align their investment decisions with their mission, they must not use their funds for supplying risk capital to companies that show major and structural involvement into controversies related to the mission [3]. A mission-driven portfolio selection goes beyond usual socially responsible investing (SRI)-selection, as the purpose of a foundation may be much more focused. We focus on the specific case of charitable foundations as investors with high moral obligations, in order to analyze financial and qualitative factors for portfolio selection
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