Socially Responsible Endowment Investments Policy for Earlham College and the Earlham Foundation

I . Preamble

This policy states the investing principles for the Earlham College and Earlham School of Religion endowment as those principles apply to socially responsible investing. In brief, Earlham reaffirms the values and testimonies of the Religious Society of Friends by declining to invest in certain companies. In addition, Earlham hopes that this practical expression of values acting in conjunction with others of a similar mind may promote the common good as well as engage Earlham students for whom a fundamental part of an Earlham education is “the pursuit of truth, wherever that truth leads.” However, it is imperative to be honest about the reason for struggling mightily with developing and implementing a policy on socially responsible investing. Such investing does not always offer clear-cut choices between good and evil, and there is little, if any, empirical evidence that such a policy will alter the course of action of the entities in which Earlham invests or does not invest. This policy, and the procedures described, are intended to focus on enduring principles rather than to encourage political engagement on short term issues.

II. Our Vision

As an educational institution, Earlham should consider the impact of its financial investments upon the broader society. Because Earlham College was founded by Quaker yearly meetings, and, by design, Quakers still comprise a majority of the members of the Board of Trustees, it is fitting that Earlham’s investing principles and actions should reflect the values of the Religious Society of Friends.

These values include the belief that the life and dignity of every person should be respected.  Growing out of this belief are the Quaker testimonies concerning peace, equality, integrity, simplicity and goodwill between people and between nations.

Earlham hopes that, through the operation of its investment program and acting in concert with other like-minded investors, Earlham can give witness to the above values.1 Contributions toward these objectives can perhaps be accomplished either (1) by means of investing or not investing in the securities of particular corporations or government or (2) through action as a share- or bond-holder, again acting in concert with others, within the corporate structure.2 Admittedly, the majority of investments that Earlham and other buyers make in the equity3 and fixed income4 markets represent a transfer of funds between the buyer and the seller and have no direct impact — financial or otherwise — upon the corporation whose securities are being traded.

Management of an educational endowment must, of course, give high and sustained attention to the responsibility to produce maximum return in order to serve Earlham's educational mission.5 By delegation from the Earlham College Board of Trustees, the Earlham Foundation serves as the Investment Committee of the College Board to assist the Board in fulfilling its fiduciary responsibility to safeguard endowment assets, including quasi-endowment funds, and to achieve favorable returns on those investments to help defray current operating expenses and to assume the long-term financial health of the College and ESR through prudent investment practices and policies. The Earlham Board of Trustees is charged with the ultimate responsibility for the adoption and interpretation of socially responsible investment policies. The Earlham Foundation is expected to adhere to such policies in managing the endowment but must consider their impact, overall or with respect to specific investments, on its charge to be a prudent and financially responsible overseer of the investment of endowment funds in making investment decisions. Both the Board of Trustees and the Foundation look to the SRIAC for guidance in meeting these responsibilities. The Directors of the Earlham Foundation have the responsibility for selecting managers with whom investments are made and for determining actions taken as to each such investment. To assist the directors and investment managers in carrying out these responsibilities in light of the societal concerns mentioned above, the boards of Earlham College and the Foundation have established the Socially Responsible Investment Advisory Committee ("SRIAC").

III. Elaboration of Our Vision

The long-term integrity of Earlham will be enhanced by an investment program that secures a maximum return while being attentive to Earlham values and interests. Investment management entails close and sustained attention to providing maximum return currently and for the future. At the same time, investment choices are not made in a vacuum without consideration of the impact that the investments may have, both positive and negative, for Earlham and its mission within the world. Investment choices must be made with an awareness of both considerations (i.e., maximum return and reflection of values/interests) in an effort to maximize the benefits of both for the long-term integrity of the institution.

There will be situations with heightened degrees of tension in balancing these considerations. By providing guidance through clear expressions of Earlham's mission and its values, this policy is intended to provide some insights to Earlham in how to balance that tension. There will be some situations that raise sufficient concerns to dictate that Earlham should not invest in a specific activity or company or investment option. In many instances, however, the decision will not be as clearly defined. This balancing of considerations may lead Earlham to allow an investment manager to proceed with an investment that conflicts to some degree with certain values because the conflict is perceived to be minimal or there is a credible ability to address Earlham's concerns as an investor. This balancing may also lead Earlham to proceed with an investment that produces a less-favorable return but provides a greater assurance of other positive benefits in support of Earlham's values.

Given the size of the investable assets, limited staff time, as well as the purpose of achieving increased return and decreased volatility, the Earlham Foundation and the Board of Trustees have determined it prudent to invest in some commingled vehicles6 and limited partnerships.7 Although the rules and guidelines of these vehicles do not normally allow for expressions of social concern, investment in these vehicles may provide increased financial support for Earlham's educational mission. Some funds and/or partnerships may operate under guidance consistent with the principles in this policy and those investment vehicles should be given significant consideration.

Within the broader context outlined above, Earlham's socially responsible investment commitment draws on the testimonies of the Religious Society of Friends:

A. Based on Quaker Testimonies: Avoidance of some investments

1. Peace: Screens8 related to Instruments of War9

Because Quakers believe that warmaking is contrary to the desired order for which Friends have historically worked and witnessed, certain war-related companies are defined as outside the range of those companies in which Earlham desires to invest and derive profit.

2. Screens related to Simplicity

Because Earlham believes that certain behaviors are contrary to the desired order for which Friends have historically worked and witnessed, certain industries are defined to be outside the range of those in which Earlham desires to invest and derive profit. For these reasons, Earlham does not normally invest in securities of companies involved with tobacco, alcohol, and/or gambling.10

B. Criteria related to Improving Human Society

1. Criteria related to Integrity, Equality, Justice and Respect for Persons

Because Earlham believes that certain behaviors are contrary to the desired order for which Friends have historically worked and witnessed, the behavior of certain companies is deemed to be outside the range of those companies in which Earlham desires to invest and derive profit. For these reasons, Earlham seeks to minimize investing in the securities of companies whose overall behavior results in irresponsible use of the natural environment and/or denigrates the dignity of individuals.

2. Investments that recognize and support positive corporate and societal behavior

Earlham recognizes that it is sometimes possible to promote good behavior and positive social values towards the improvement of human society. Such opportunities should be considered whenthere is a likelihood of advancing institutional values without unduly sacrificing financial returns.

IV. Investment Procedures and Manager Guidelines

With the following guidelines, this policy identifies some of the ways in which the Board of Directors of the Earlham Foundation and their investment managers may balance the potential tension between Earlham's vision for socially responsible investment and the goals for managing the endowment to benefit the undergraduate college and the seminary financially.

Earlham's procedures apply only to investments in which Earlham's assets are invested separately11 and over which Earlham can exercise control of the investment guidelines. With commingled funds12 and limited partnerships,13 Earlham cannot exercise control of the investment guidelines because the investment manager or general partner is required to treat all investors and partners under the same set of investment policies. When searching for managers offering commingled funds or limited partnerships, the Earlham Foundation will strive to include managers or partnerships whose commingled funds or partnerships are invested under socially responsible guidelines as similar as possible to Earlham's policy.

The following guidelines will be used by the SRIAC to provide our investment managers who oversee the separately managed investments with a list of excluded securities that may not be included in our investments. Our managers are then free to invest in all other companies. If an equity or fixed income manager has invested in a corporation involved in an activity of which we do not approve, then we try to persuade the corporation to change its behavior through action by the SRIAC. Based on this, our socially responsible investment commitment currently takes two different forms:

V. Guidelines governing Earlham’s separately managed investments:

A. Based on Quaker Testimonies: Avoidance of some investments

1. Peace: Screens related to Instruments of War

Equity and fixed income managers cannot invest in the securities of companies, identified by the SRIAC, whose earnings or sales14 derive predominately from the production, distribution or sale of instruments of war and armaments. [Predominately is defined as greater than 31 percent.15] Companies that are among the top 50 defense contractors shall be scrutinized with particular care. [We do not consider the sale of off-the-shelf consumer or business products or services to be instruments of war.16]

2. Screens related to Simplicity17

Equity and fixed income managers cannot invest in the securities of companies, identified by the SRIAC, whose earnings or sales18 derive primarily from the production, distribution or sale of tobacco, alcohol, or gambling. (Primarily is defined as greater than 40 percent.19)

B. Criteria related to Improving Human Society

1. Criteria related to Integrity, Equality, Justice and Respect for Persons

Equity and fixed income managers cannot invest in the securities of companies, identified by the SRIAC, whose persistent and widespread behavior results in any of the following: [1] irresponsible use of the natural environment; [2] denigration of the dignity of individuals such as unfair labor practices and/or discrimination; [3] violations of local, state, and national regulations, laws, and statutes and/or [4] active involvement with governments in the violation of human rights. Identification of this behavior is delegated in the first instance to the Socially Responsible Investment Advisory Committee which is described below.

2. Investments that recognize and support positive corporate and societal behavior

Earlham recognizes that it is possible to promote positive social values and behavior that improve human society. Such opportunities should be considered whenever there is a likelihood of advancing institutional values without sacrificing adequate financial returns. Examples might be "community-development investment" whereby investments are made in Wayne County or "economically targeted investment" in which investments are made that promote social values. In addition, we anticipate that our investment managers will frequently invest in the securities of companies with records of desirable corporate behavior before that behavior is widely recognized.

VI. Socially Responsible Investment Advisory Committee — Its Structure

The Socially Responsible Investment Advisory Committee is a committee that is accountable to both the Earlham Board of Trustees and the Earlham Foundation Board of Directors. The SRIAC is charged with the responsibility for proxy voting on corporate governance and social responsibility issues, for monitoring securities held by investment managers in separately managed accounts, for maintaining a list of excluded companies, for engaging corporations in order to change corporate behavior and improve society, and for engaging its constituent communities in education and consultation.

The SRIAC has nine members. The nominations for membership should take into account the desire both for continuity and for diversity on the SRIAC.

  • 3 Trustees/Directors appointed by the Earlham Board of Trustees and the Earlham Foundation Board of Directors with at least one representative from each body.
  • 2 Earlham Students
  • 1 Earlham School of Religion representative. Such representative may be a student, a faculty member or a staff member.
  • 2 Earlham Teaching Faculty
  • 1 Earlham Administrative Faculty. This member will be the chief financial officer of the college.   
  • The investment officer of the college will be an ex-officio member of the SRIAC and will be encouraged to attend all meetings.

The clerk of the committee will be either one of the Trustee/Director representatives or the chief  financial officer of the college, to be determined by the committee. A non-participating recording clerk will attend all meetings and prepare draft minutes of the meetings. All decisions of the SRIAC are made by the members by consensus in accordance with the usual Earlham meeting procedures. Copies of the approved SRIAC meeting minutes will be sent to the Earlham Foundation Board of Directors and to the Earlham Board of Trustees. Similarly, once approved, copies of the meeting minutes of the Earlham Foundation will be sent to the SRIAC. The minutes of the SRIAC will be posted on the Earlham website for Earlham community access.

VII. A Procedure Manual

A Procedure Manual will be developed by the SRIAC. This manual will detail how the SRI policy will be implemented and will be reviewed by the SRIAC at least annually. Matters to be addressed in the manual will include but not be limited to:

  1. Proxy issues to be within the oversight of SRIAC and to be within the oversight of the Foundation Board.
  2. General guidelines and “rules of thumb” that can be used by the chief financial officer of the college or the investment officer of the college in deciding how to vote proxies that are the same or similar to proxy issues previously voted. Issues such as corporate transparency and independence of company officers from boards of directors would be addressed.   
  3. Frequency of updating the security holdings.
  4. Role of the investment staff
  5. Role of the recording clerk

The Procedure Manual will be communicated to the Earlham Trustees, the Foundation Board and the Earlham community. It can be revised by action of the SRIAC and any such revisions will be similarly communicated.    

VIII. SRIAC Activities

  1. Proxy voting. The Socially Responsible Investment Advisory Committee monitors the voting of corporate proxies, which Earlham generally votes directly.20 The SRIAC meets as a full committee in the spring to decide general guidelines for voting on anti-cipated proxy issues and to determine the delegation, if any, to a subcommittee. The actions will be in a manner consistent with the long-term interests, objectives, and philosophy of the Earlham Investment Policy Statement. If proxy voting is waived by the SRIAC to investment manager by joint action of the SRIAC and Earlham Foundation, then each manager shall keep detailed records of said voting of proxies and related actions and will comply with all regulatory obligations related hereto.
  2. Monitoring separately managed investments. The Earlham Board of Trustees and the Earlham Foundation have delegated the identification of excluded companies and the monitoring of the separately invested equity and fixed income portfolios with respect to the criteria related to the Peace, the Simplicity, and the Integrity, Equality, Justice and Respect for Persons Testimonies to the Socially Responsible Investment Advisory Committee. If a company appears to be an inappropriate investment based upon the foregoing criteria (or if the SRIAC feels that a previously excluded company should be eligible for investments), then the SRIAC will add that company to (or delete the company from) the list of excluded companies and notify the Earlham Foundation. If the Earlham Foundation concurs in that judgment, then it will notify their investment managers. If either an investment manager or the Earlham Foundation disagrees with that judgment, then they will notify the SRIAC in writing, stating the reasons for the disagreement. The final arbiter of disagreements between the SRIAC and the Earlham Foundation will be the Earlham Board of Trustees.
  3. Shareholder advocacy. In cases in which there are concerns about issues of corporate social responsibility, then the SRIAC, acting on its own behalf or in concert with other socially responsible investors, may engage corporations to change that behavior. An example of such engagement is the sponsoring of shareholder resolutions. The SRIAC may participate with organizations such as the Interfaith Center for Corporate Responsibility (ICCR) or Friends Fiduciary Corporation. The SRIAC shall notify the Earlham Board of Trustees and the Earlham Foundation of its intent to act with a specific company on a given issue. Either the Earlham Board of Trustees or the Earlham Foundation may refuse to approve such action. The refusal and the rationale shall be provided in writing to the other two bodies. If efforts to reconcile differences of opinion among the three bodies are not successful, the Trustees will again be the final arbiter.
  4. Community Education and Consultation. The SRIAC should engage the faculty, staff and students of Earlham College and Earlham School of Religion so that individual members of the Earlham community can become more knowledgeable about the Earlham endowment and so that individuals can address members of the SRIAC with their concerns about policy matters and/or individual companies. Community members may wish to contact either individual committee members or the SRIAC as a body to communicate concerns about the implementation of this policy. Minutes of the meetings of the SRIAC will be posted publicly on the Earlham website in Community Documents along with copies of current policy statements. This policy of Earlham College and the Earlham Foundation concerning socially responsible investments will be posted on the Earlham website.
  5. Measuring our effectiveness in living up to the “Preamble” and “Vision” of our Socially Responsible Investment Policy. The SRIAC should give consideration to using a set of metrics to measure our effectiveness. Such systems as STARS (https://stars.aashe.org/) or Sustainable Endowment Institute should be studied and considered.
  6. The SRIAC will in January each year submit to the Trustees and the Foundation a summary of SRIAC actions taken during the prior year.

IX. Policy Review

This policy should be reviewed every four years by the Earlham Board of Trustees with input from the SRIAC and the Earlham Foundation Board of Directors. This policy was reviewed and initially approved in June 2007. The policy was reviewed and revised in February 2012.

This policy may be amended by joint agreement among the Socially Responsible Investment Advisory Committee, the Earlham Board of Trustees, and the Earlham Foundation Board of Directors or by sole action of the Earlham College Board of Trustees. The amendment process may be initiated by any of the three bodies.


 

1 This suggestion comes from Wilmer Cooper's A Living Faith: An Historical Study of Quaker Beliefs (1990) and attempts to reflect the Quaker concern for witnessing to the proper order of things as described by this statement: "Our testimonies are clearly rooted in our religious faith and experience and are not just rational projections" (pp. 101-102). Thus, witness to convictions serves as a complement to the articulated concern for improving the world. The former explains why we excludecertain companies — such as weapons manufacturers — from our investments.

2 The Journal of Deferred Compensation notes that certain mechanisms are much more effective than excluding companies inproducing change: "The prerogatives of ownership [such as proxy voting, shareholder advocacy, and community development investing], rather than the tool of divestment, are most likely to raise the bar of corporate responsibility for all companies" (Gay and Klaassen, "Retirement Investment, Fiduciary Obligations, and Socially Responsible Investing" p. 36, Summer 2005).

3 Equities are shares of stock in publicly traded corporations.

4 Fixed income investments are bonds issued by corporations, governments or governmental agencies.

5 There is an ongoing and unresolved discussion about the impact of any investment restrictions upon financial returns. Economists and investment managers generally agree that imposing restrictions of any kind upon the set of investment opportunities will reduce investment returns over very long time periods. Nevertheless, over shorter time periods a constrained portfolio may outperform the unconstrained portfolio. The actual investment returns since socially screened mutual fund investments were first introduced in 1971 are ambiguous in confirming or denying the hypothesis of differential returns. The evidence does confirm the cyclicality of under- and over-performance.

As a general indication of the potential impact of lower investment returns, the illustration below assumes that the unconstrained investments have a total return of 9% and the constrained portfolio of 8%. Note that this illustration does not predict a particular return shortfall, only the implications of what such a shortfall of a particular magnitude might be. A 4.5% spending rate is assumed in calculating the income available for operating budgets. The below example shows how a 1% difference in returns results in only $106,000 in annual income rather than $135,000 after 25 years. A 4.5% spending rate allows the current generation to use the maximum income while allowing the principal to grow for use by future generations.

Portfolio
Value
Year 0
Value
Year 10
Value
Year 25
 
Unconstrained
$1,000,000
$1,553,000
$3,005,000
 ending market value
Annual Income
$45,000
$70,000
$135,000
 
         
Constrained
$1,000,000
$1,411,000
$2,363,000
 ending market value
Annual Income
$45,000
$63,000
$106,000
 

 

6 A commingled fund is an investment pool in which Earlham's investment is commingled with funds from other investors and managed as a single fund by an investment manager. A mutual fund is an example of a commingled fund. All investors, including Earlham, are required to agree in advance to the investment manager's guidelines. Those guidelines may not include socially responsible provisions. Earlham's ability to influence investment guidelines are limited; nevertheless, as explained in text below, Earlham will strive to include managers or partnerships whose commingled funds or partnerships are invested under socially responsible guidelines as similar as possible to Earlham's policy. Approximately 41% of the Earlham endowment was invested in commingled funds as of December 31, 2006.

7 Limited partnerships are formed by general partners who are empowered to make all investment decisions. Earlham invests as a limited partner who legally cannot influence investment decisions. Limited partnerships are formed in order to invest in a variety of different areas including venture capital, merger and buyout firms, natural resources, distressed securities and real estate. Partnerships begin with only a sense of the types of investments in which the general partner intends to invest. Once the partnership has been created then it has a fixed investment period — typically of 15 years — during which the limited partnership may not withdraw funds. Approximately 23% of the Earlham endowment was invested in limited partnerships as of December 31, 2006.

8 A "screen" is the name for the process in which the securities of some companies are "screened out" and cannot be considered for inclusion in any Earlham separately managed account.

9 The committee thought that "instruments of war" offers a clear definition of intent and improves the ability to make decisions rather than a more general term, e.g. "violence."

10 While led by Friends testimonies on simplicity, this policy has focused on these three — of many possible — expressions of that testimony.

11 As of December 31, 2006, 36% of the Earlham endowment was separately invested.

12 See footnote 6 for a discussion of commingled funds.

13 See footnote 7 for a discussion of limited partnerships.

14 We refer to both earnings and sales because situations regularly occur in which a company has a relatively small percentage of sales but derives a disproportionate and substantial amount of earnings from war-related activities.

15 The committee recognizes that because of the complex nature of investing and limitations in staff resources, the implementation of any percentage greater than zero would fall short of ethical purity. Nevertheless, the committee wanted to select a percentage that expresses a commitment to the Peace Testimony and that balances that commitment against the need for increased research and staffing as the percentage is lowered. After a lengthy discussion within the ad hoc committee, the committee deliberately approved this non-standard percentage as recognition that any percentage threshold is inherently arbitrary. Another consideration for this level of percentage was to keep the community focused on the issue of what an acceptable threshold percentage might be. The committee also recognizes that identifying all companies with very low thresholds of investment in war-related activities would be very difficult and staff-intensive.

16 We offer the following examples. If Apple Computer sells sufficient iBook computers and iPods to the Department of Defense, then Apple may be listed as one of the top 50 defense contractors; however, if these are the same computers and iPods offered to the general public, then the SRIAC may decide that Apple should not be an excluded company. Similarly, if Humana provides health services solely to military dependents and is on the list of the top 50 defense contractors, then the SRIAC may decide that Humana should not be an excluded company.

17 See note 10.

18 The committee chose to reference both earnings and sales since situations regularly occur in which a company has a relatively small percentage of sales but derives a disproportionate and substantial amount of earnings from alcohol, gambling and/or tobacco.

19 Again, the committee recognizes that any percentage threshold is arbitrary and adopted 40% as a symbolic threshold since companies with more than 40% of their sales or profits from alcohol, gambling or tobacco are committed in a substantial way to producing those products that we consider to be contrary to the testimony of Friends to simplicity.

20 See note 2.

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Earlham College, an independent, residential college, aspires to provide the highest-quality undergraduate education in the liberal arts, including the sciences, shaped by the distinctive perspectives of the Religious Society of Friends (Quakers).

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