Canadian Investment Review

Time to Double-Down on Bad Companies?

Written by Caroline Cakebread on Wednesday, May 10th, 2017 at 1:36 pm

diversion-300x200To divest or not to divest?

It’s been a central question for both plan sponsors and foundations and endowments struggling to reconcile the heavy mantle of their fiduciary duty with the desire to avoid companies whose activities contribute to the long-term challenges of their stakeholders. Here in Canada, for example, the United Church of Canada voted in 2015 to sell off all investments in fossil fuels – or 4.7 percent of its treasury.

Those who choose not to divest often argue that engaging with companies and fostering better practices is the best role long-term investors can play – after all, if you cut off dialogue completely, you miss the opportunity to help turn a company’s strategy around.

A new paper, however, seeks to change the conversation altogether by taking a hedging approach. Brigitte Roth Tran of the Board of Governors of the U.S. Federal Reserve System argues that foundations and endowments should invest in — and double-down on — highly profitable companies whose activities run counter to their charitable missions – in fact, it’s prudent investing to do so.

She calls this approach “mission hedging” and positions it as an important variable that too many investors ignore. The idea is that, if these firms are high performing, then investors can capitalize on that performance by loading up on their stocks, using the proceeds to increase activities in the areas that the endowment aims to combat.

It’s an opportunity worth considering.

As Roth Tran concludes;

“While major divestment movements have the potential to bring about change, my results show that firms that are seen as bad actors may provide good opportunities for hedging foundation-specific risks. Endowment decision-makers need to ask whether divesting, disregarding values in investing, or doubling down on objectionable stocks will yield the best social outcomes given not only their values but also their unique missions and talents and the possible correlations between firm financial returns and foundation spending needs.”

The paper outlines what mission hedging is and how it works – you can download it here.

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