Impact investing has generated a loud buzz in recent years. More grant makers than ever are placing bets on investments that promise both financial and social returns—though most are putting only small amounts into the deals.
But the F.B. Heron Foundation is going all in.
As part of the foundation’s effort to rethink its approach to fighting poverty, the New York grant maker set an ambitious goal: to fully invest its $274-million endowment in the next five years to advance its mission.
“We want to take a more activist posture,” says Clara Miller, the foundation’s president. “We want to know whether the investments we’re making are having a negative impact or a positive impact on the world.”
The foundation has reorganized its staff to break down the traditional divide between employees who focus on grants and those who focus on investments. Now a single group, the capital deployment team, vets potential grants and investments to propose to the board.
“We’re making financial investments in organizations,” says Ms. Miller. “Some of them are nonprofit, and some of them are for-profit. Our overriding interest is in jobs and systemic change in the economy.”
The bold plan has the foundation world taking notice.
“Everybody’s paying attention,” says Tony Berkley, director of mission-driven investing at the W.K. Kellogg Foundation. “They’ll be closely watched, and many of us will be cheering for them.”
High Returns Needed
But what Heron’s trying to do won’t be easy, and few foundations are likely to follow its lead right now, says Mr. Berkley. He estimates that for Heron to continue operating as a private foundation, its endowment must earn at least 8 to 10 percent a year to cover the 5-percent grants payout, the cost of investing, and inflation.
“This may not sound like a lot,” he says. “But in certain economic climates, like those that we lived through in 2008, 2009, and 2010, a 10-percent return would have been a very difficult bar to achieve.”
Ms. Miller thinks that estimate is a little high. She says the foundation is planning carefully and building sophisticated financial models to help it balance the focus on impact, investment returns, payout requirements, and liquidity.
And she’s clear that Heron has no plans to close shop.
“We expect to be able to continue the foundation as long as poverty is a problem that needs to be solved,” says Ms. Miller. “And we don’t expect it to go away overnight sadly.”
Some Still Cautious
Interest in impact investing is strong among foundations, but how much is actually happening remains unclear.
More than a third of 211 foundations that award $5-million or more in grants reported that they have made impact investments and 23 percent said they were considering it, according to research by the Center for Effective Philanthropy, which will be published in the fall. The center plans to conduct further research to determine how much money grant makers are committing.
Thinking by foundations about how they can use all the resources they have to accomplish their missions is a positive development, says Phil Buchanan, the center’s president. But he worries that impact investing’s most ardent proponents seem to argue that philanthropy can meet all its objectives and make a profit.
Mr. Buchanan says it’s important for foundations to remember that not every problem has a market solution: “If you care about improving life outcomes for foster kids, you’re going to be making grants, not program-related investments.”
Betting on Job Creation
The Heron Foundation was founded by an anonymous donor in 1992 to help people move up from poverty and build wealth in poor neighborhoods. In the mid-1990s, the foundation’s board and staff began to experiment with ways to invest its endowment to advance the charitable mission. Heron even helped create a stock index fund made up of public companies with strong records as employers, investors, and philanthropists in low-income communities.
When Ms. Miller took the helm two years ago, employees and board members took a fresh look at the foundation’s mission, and they were disturbed by what they saw.
Poverty rates stood at their highest levels in decades, income inequality was growing, and in some cases, the anti-poverty approaches Heron supported, such as homeownership as a way to build family wealth, had worked against the people the foundation was trying to serve.
“We didn’t need McKinsey in the room to tell us that we weren’t doing so well,” says Ms. Miller.
Foundation officials concluded that wealth-building strategies like borrowing money to buy a home or pay for education had made sense in a post-World War II economy when opportunities were expanding. But over time, the economy had changed and steady employment at a living wage was no longer widely available for low-skilled workers. In this new environment, they decided, a good job and reliable income was the key to moving out of poverty.
The Heron Foundation determined that it would have to change as well and throw all of the foundation’s resources into job creation.
More Investments
With the foundation’s new focus on job creation, Heron can look at a much wider array of impact investments, says Kate Starr, the foundation’s vice president of capital deployment.
For example, the foundation recently invested $1-million in Ecologic Brands, a company that produces eco-friendly packaging in Manteca, Calif., a small city in a region with higher than average unemployment.
Heron was impressed by both the company’s potential for growth and how the company’s founder, Julie Corbett, approached employment, says Ms. Starr: “She was really thinking through how she could train and help improve the skills and livelihood of the people who would come to work for her in that factory.“
Heron is also applying an investment mind-set to its grant making, says Ms. Miller. Instead of making continuing grants for operating expenses, as it did in the past, the foundation is now making larger, one-time awards to help expand nonprofits that are focused on jobs or economic change.
“We’re providing money in a way that will ensure their health as opposed to imagining that you can make a grant for a small program and not really understand what the health of the whole enterprise is,” she says.
Heron recently approved a $1.5-million grant to the Paraprofessional Healthcare Institute, a nonprofit in New York that seeks to improve the lives of home health aides through advocacy, training, and consulting.
A grant to support the growth of the organization, rather than a specific program, was a new idea for many of the institute’s employees and took some explaining, says Jodi Sturgeon, the organization’s president.
“We use the analogy that in the for-profit world, you invest in Apple as a company,” she says. “You don’t invest in the iPad.”
Seeking Collaboration
Achieving Heron’s goal of moving its entire endowment into investments that advance the foundation’s mission will be a challenge, says Ms. Miller. Because identifying promising deals often takes more time and effort than conventional investing, collaborating with other foundations will be critical to help Heron keep its investing costs in check, she says.
But at the same time, says Ms. Miller, what it learns in the process will help impact investing move forward as a field.
She compares it to winning a baseball game: “You build a portfolio with bunts and base hits and two baggers and the occasional grand-slam home run. You can’t just wait around for everything to be perfect.”
One Grant Maker’s Revolutionary Approach
The F.B. Heron Foundation plans to pour all of its assets into effort to help people get jobs. Here’s what it is doing:
- Uniting Investments and Grants: A single group of employees evaluates all potential grants and endowment investments, eliminating the traditional divide between the two areas.
- Helping Charities Grow: Instead of making grants for specific programs, Heron invests in helping nonprofits like the Paraprofessional Healthcare Institute, which trains home health aides, expand.
- Measuring the Bottom Line: A key criterion for investments—like Heron’s stake in Ecologic Brands, which makes environmentally friendly packaging—is how many jobs it will create.
