Is It Prudent to Be Responsible? The Legal Rules for Charities That Engage in Socially Responsible Investing and Mission Investing

Gary, Susan N. | January 1, 2011

Fiduciaries who invest assets held by a charity must act as prudent investors. This Article examines the legal rules that apply to these fiduciaries, examining the duty of loyalty and the duty of prudent administration for trustees of charitable trusts and directors of nonprofit corporations. The Article focuses on the duty to act as a prudent investor and the question of whether a charitable fiduciary can consider the charity’s mission or purpose when making investment decisions. Recent developments in the laws that regulate investing by fiduciaries provide guidance, and the Article concludes that these rules permit consideration of a charity’s mission as one of many factors a prudent investor considers. The Article briefly examines the history of socially responsible investing, reviews the development of mission investing, and discusses three types of socially responsible investing: screens, proxy voting, and community investing. Recent data show improvements in the returns of screened funds and increased interest by charities in mission investing. Fiduciaries must exercise care and judgment in making investment decisions, but mission investing can meet the legal standards that apply to fiduciaries as long as the fiduciaries act with prudence.