Los Angeles Times Uncovers Gates Foundation's Unethical Investments; Foundation Starts Adjusting Portfolio

CSRwire reports of contradictions between the mission and investment policies of the gigantic Bill and Melinda Gates Foundation, the world's largest charitable foundation that manages a $35 billion endowment (the number excludes Warren Buffett's $31 billion pledge from 2005.)

According to its website, the mission of the Bill and Melinda Gates Foundation is to bring innovations in health and learning to the global community.

However, in a scathing investigative report, the LA Times discovered that 41% of the assets of the Gates Foundation were invested in companies whose actions are at odds with the basic objectives of the Foundation. Companies in which the Foundation held stakes included

• Mortgage companies that were accused in lawsuits or by government officials of making it easier for thousands of people to lose their homes, while the Foundation donated money to help victims of predatory lending

• A healthcare firm that has agreed to pay more than $1.5 billion to settle lawsuits accusing it of medical lapses and fraud going back a decade, while one of the Foundation's primary goals is to improve public health

• Chocolate companies said by the U.S. government to be profiting from the slave labor of children, while the Foundation funds educational and healthcare programs in developing nations.

According to an article in South African newspaper Mail&Guardian, there were additional issues related to oil drilling and drug sales in Africa, which is one of the Gates Foundation's major aid targets. Bill Gates has expressly stated that one of his main philantropic goals is reducing the prevalence of HIV in Africa. Mail&Guardian reports that the "foundation is funding studies into a microbicide which could help protect women and their future children from HIV. But the foundation invests in pharmaceutical companies which have lobbied hard to prevent affordable copies of their Aids drugs being manufactured by generics companies in India."

The Gates Foundation also holds large stakes in energy firms BP and Royal Dutch Shell that , according to the M&G article, "jointly own the Sapref refinery, outside [the second largest South African city of] Durban, which is blamed for 24 significant spills, pipeline ruptures and explosions since 1998. With the Mondi paper mill (owned by Anglo American, in which the foundation has a $39-million investment), it is held responsible for significant air pollution by toxic fumes. Two studies have found high levels of breathing problems and asthma in local children, largely attributed to sulphur dioxide and other pollutants."

The response from Bill and Melinda Gates was swift and promising; although the Foundation does not acknowledge a link to the LA Times report, Bill and Melinda Gates are said to have begun overseeing a complete review of the Foundation's investment policy.

This brings up an interesting issue and challenge in philantropic foundations in general.

Until now, M&G writes, "the [Gates] foundation's financing and philanthropic arms have been totally separate. Its policy has been simply to raise as much money as possible for its scientifically focused philanthropic works, with an emphasis on finding vaccines and other medical breakthroughs that could substantially improve the health of the world's poorest people."

This approach is probably much more common than we realize, simply because socially responsible investment (SRI) strategies are less common than mainstream management strategies that do not account for CSR issues.

The short-term gains of such an investment policy are obvious, if SRI does not rival the existing investment strategy. Yet over the long haul, investing in irresponsible corporations to get profits with which to help the victims of those irresponsible acts seems analogous to turning up the heat in your apartment while keeping the windows open.

One can empathize with the portfolio managers who have to make these decisions. Circumventing CSR landmines while trying to beat the market and maintain a robust investment portfolio is probably more challenging than many of us can appreciate, especially when we are talking about an enormous fund whose size is going to double. Many of the world's largest and most profitable listed companies, where a "regular" investment manager would channel her or his funds, aren't exactly free from CSR issues. The problem seems endemic, and when push comes to shove, this begs the question, where does a portfolio manager draw the line?

How do you keep a foundation well financed so it can keep giving, while not supporting firms that act irresponsibly?

It remains to be seen how the Gates Foundation does this; they are certainly being closely monitored, as per last week.