Fixing responsible investment’s democratic deficit

Responsible investment is typically approached as a matter of what, or what not, to invest in – be it best-in-class fund managers, sustainable businesses, exclusion lists, or goals for shareholder engagement. It’s less likely to involve shifts in how foundations’ endowments are stewarded and by whom. 

In their grant-making, however, foundations are increasingly prioritising questions of who and how, as much as what, including through participatory approaches intended to shift power over funding strategies. It’s time for a parallel evolution in how foundations understand responsible investment, not only to ensure that all of our assets are accountable to our mission, staff, and grant partners, but ultimately to transcend the “capitalist logic of profit maximization and privatization that undergird the very problems we seek to remedy.” (Centre for Economic Democracy, ‘Social Movement Investing’).

In so doing, we must ensure that our efforts are connected to wider struggles to democratise finance. Otherwise, they will amount to ‘Potemkin villages’, behind whose facades trillions of dollars in pension and sovereign wealth continue to monetise, extract, and privatise social and ecological wealth.

Structural siloes prioritise the profit motive

Strategies of separation operate at each stage of the investment chain, often shrouded in technocratic justifications, such as specialisation, while serving to shield financial actors, and ultimately capital, from democratic oversight and direction.

Within foundations – which, as owners of capital, are considered to sit at the top of the chain – investments tend to be siloed from grant-making. Investment Committees, generally comprising trustees and advisors selected for their financial know-how, typically shape investment strategy with no input from or accountability to staff and grantees, and often very little from the wider trustee board either. In some cases, strategy is effectively outsourced to external investment managers and consultants. Success is measured according to how well an institution’s investments have fared in quantitative terms compared to peers or the broader market. 

A 2022 report by the Grant Givers’ Movement, ‘Ethics in Philanthropy’, found that “65% of respondents said they were very interested or extremely interested to learn more about investments but gaining access to these spaces was challenging. One respondent stated “It [investment] is purposefully kept extremely exclusive – I have tried for several years to be included even as an observer in the meetings, with a specialist interested in responsible investment, and so far have had no success.”” 

The 2020 ‘ESG Olympics’ process run by Friends Provident Foundation, alongside The Blagrave Trust and Joffe Charitable Trust, is perhaps the exception which proves the rule. A number of aspects of this tender process were held publicly, including a fund manager selection event to which grantees, other foundations, and indeed journalists, were invited to attend and contribute.

When it comes to the fund management firms which manage money on behalf of foundations, it’s not uncommon for clients – especially those that are smaller in size – to be kept at arm’s length from the individuals who make investment decisions, ensuring that difficult conversations about ethics can be deflected at the door. 

Where fund management firms undertake engagement with companies to address social and ecological impacts, their analysis relies heavily on investor-oriented, and generated, research. This includes primers, on topics such as climate change or human rights, written by investment banks’ research departments, or sustainability rankings produced by subsidiaries of major financial data providers. Shareholder engagement strategies are rarely informed by, let alone undertaken alongside, movement actors and frontline communities who are closest to the issues.

Finally, company boards of directors are insulated from accountability to any stakeholders other than investors. ShareAction’s 2021 ‘Future of the AGM’ report noted that only those in possession of a company’s shares are able to attend Annual General Meetings, the sole opportunity to ask questions of board members and address investors. In 2020, 80% of FTSE 350 companies held their AGMs behind closed doors, with no provisions made for participants to attend virtually or otherwise during pandemic lockdowns. ShareAction’s report calls for stakeholders to have access and participation rights in AGMs: “for companies to truly understand their impact, and for investors to hold them accountable, they need to hear from a wide range of people. It is the workers of a company, their suppliers or those impacted by a company’s activities who tell the real story of its impact beyond the bottom line. No other forum exists for companies, stakeholders and investors to come together and engage in a dialogue.”

The cumulative effect of these sealed echo chambers is that much of the activity which occurs under the banner of responsible investment is anti-democratic and geared towards preserving and accumulating capital. It means that investors engaging with companies on human rights violations, for example, appraise and address them through the lens of financial materiality rather than restoration. 

Even where investors appear to accept responsibility for more than the financial performance of their individual portfolios, Professor Daniela Gabor (in ‘The Wall Street Consensus’) argues that their involvement in policy and regulatory responses to social and ecological crises serves to “re-orient the institutional mechanisms of the state towards protecting the political order of financial capitalism against climate justice movements and Green New Deal initiatives.” For example, “investors strive to become the epistemic guardians of green taxonomies. By controlling the grammar of green finance, they can apply the ‘green’ or ‘sustainable’ label to asset classes that have a negative environmental impact, a greenwashing exercise that effectively waters down climate regulations in order to protect profits.” Indeed, at the end of March 2023, the European Commission is reported to be considering gutting its flagship sustainable finance framework following complaints by asset managers that its requirements are too stringent. 

Solidarity economies model alternatives 

Thankfully, at the edges and interstices of the financial system, parallel practices are being cultivated which “democratize, decentralize and diversify economic activity” towards “a visionary economy for life” (Movement Generation Justice and Ecology Project, ‘Banks and Tanks to Cooperation and Caring: A Strategic Framework for Just Transition’).

‘Letting Go’, Meg Massey and Ben Wrobel’s 2021 book on philanthropy and impact investing, profiles a number of these, including Boston Ujima Project’s “democratic investment fund”, controlled by working class communities of colour, and Thousand Currents’s Buen Vivir Fund, governed by a members’ assembly made up of grassroots lenders from South America, South Asia and Sub-Saharan Africa. 

In the UK, a group of foundations has recently started a learning journey, organised by the Joseph Rowntree Foundation, to engage with “community and ecological wealth building in the solidarity economy.” Barking and Dagenham Giving has already established a community-directed endowment to invest and allocate funds raised through the Borough’s levy on private infrastructure developments. 

While Lankelly Chase and other funders may only be starting to catch up with this field, Dr. Stacey Sutton reminds us that “The solidarity economy movement is not a new movement. It has historical roots in Latin America. In the United States, it builds off the legacy of the Black liberation movement.” 

A systemic approach is needed

As more foundations “democratize, decentralize and diversify” their investment models, it is essential to ensure that we are contributing to movements working to transform the wider economic and financial system. Philanthropic capital is not much more than a rounding error relative to the money which is currently controlled by banks, pension funds, insurers, and sovereign wealth funds. But it has the freedom and moral responsibility to act as a disruptor and catalyst of change. 

This is unlikely to come about solely through prefigurative, prototype investment vehicles funded  with philanthropic capital, but will require a “sustained effort to build counter institutions and more effective forms of democratic governance” across economies (Fred Block, ‘Democratizing Finance’). The status quo described above is not an accident, but a successful system for the dispossession of wealth from working class communities, including those of colour, for example through ‘redlining’ practices. There is a reason why investors tend not to ally with social movements and frontline communities: their interests are rarely “win-win”. 

Alongside participatory capital stewardship strategies for their endowments, movement-aligned funders will therefore need to close the loop back to their grant-making and ensure that it is directed towards disrupting the power of anti-democratic financial institutions and the structural features of our economy which keep them in place. For example, UK think-tank Common Wealth is currently developing alternative proposals to individualised pension provision in order to address the role that the huge, unequal, growth of pension savings has played in bolstering the power of asset managers and expanding financialisation in order to meet the growing demand for returns. Positive Money, meanwhile, campaigns against the “democratic deficit” at the heart of the monetary system, including reimagining the role of private banks and public financial authorities.

Repoliticising responsible investment

Given the long history of solidarity economics, and the increasing adoption of participatory approaches within grant-making, it’s past time for foundations to democratise our investment practices. 

Trustees’ legal duty to ensure that endowments are stewarded in accordance with charitable missions means that philanthropic capital can be uniquely catalytic in reconfiguring our unjust and unsustainable financial system. 

While participatory prototypes can play a powerful role in prefiguring democratic investment practices, they will lack credibility if they are only allocated small carve-outs from foundations’ endowments. Furthermore, democratising these relatively immaterial pools of capital will not by itself be sufficient to reverse the destructive social and ecological dynamics of our dominant economic system. Funders must ensure that their investment and grant strategies pull together, alongside wider social movements, to shift power in the economic and financial system.