Just as the Covid crisis exploded last year, we called on philanthropy to increase giving and do it quickly to mitigate the worst of the social and economic harm unfolding before our eyes. We knew there was a real risk that grant makers might reflexively pull back to preserve endowments as markets began to tumble, as many had done in the financial downturn of 2008. Encouragingly, in the immediate days, weeks, and months that followed, foundations across the United States made commitments to maintain or increase levels of giving.
Preliminary research suggests philanthropy’s immediate response was unprecedented, with nearly $11 billion flowing to U.S. groups to address the compounding effects of Covid-19 at the community, state, and national levels. Additionally, almost 800 foundations pledged to reduce grant restrictions, increase the dollars they awarded, and limit reporting requirements in recognition of the difficult circumstances grantees faced. A survey of the 500 largest foundations revealed that nearly 70 percent created Covid-19 relief funds. What’s more, some of the biggest foundations came up with new and innovative ways to increase their giving without draining their endowments by issuing social bonds.
However, fewer than a third of foundations pledged to increase the share of assets they distributed to meet Covid needs. In some cases, those that gave more did so by diverting money from other causes.
That means that even as some foundations made admirable and sweeping commitments to do more, nonprofits struggled, businesses closed, and families lost loved ones. The Covid economy exposed and intensified already stark economic and racial injustices, both in the United States and globally. It made it clear that our social systems are strained beyond capacity, with people of color suffering the brunt of the pain. Now, tens of millions of people around the world remain displaced from the work force. Women and other marginalized people are the ones whose livelihoods and careers have suffered the most harm.
While Congress has passed historic stimulus legislation aimed at curbing the worst of the damage and helping Americans recover, we fear it is likely that many foundations will consider returning to the minimum distribution of assets required by law rather than meet urgent needs and press for the systemic change that is both possible and necessary.
Foundations must resist that urge and instead re-examine their balance sheets.
Endowments Flourish
While the early stages of the pandemic might have justified fears that the market’s decline would harm endowments, we now know that foundation assets didn’t drop; they boomed. The profound disconnect between capital and labor markets produced massive growth in endowments while spiking unemployment rates. Amid so much pain and hardship among everyday Americans, philanthropy — like the rest of the wealthiest Americans — actually ended up better off financially.
The fantastic returns that most foundations earned in 2020 should easily put foundations in a position to give more in 2021 and beyond. Consider these calculations:
Based on indexed returns for a standard, balanced portfolio, a traditionally invested endowment likely grew 13 to 15 percent last year. The returns were even better for a mission-aligned socially responsible portfolio, which probably grew by 19 to 21 percent.
That means that if foundations stuck to the legally required minimum distribution rate of 5 percent of assets, their endowment coffers are getting fatter.
At a time when wealth inequality is greater than it has been at any point over the last 100 years, it is simply unjustifiable to give priority to endowment growth over dealing with the critical needs of the communities that foundations exist to serve.
Seizing the Momentum
The opportunity for impact is enormous. We are living in an extraordinary political moment in which nonpartisan nonprofits and organizations that work to build movements have a once-in-a-generation opportunity to realize progressive, systemic change. Philanthropy must use its dollars to ensure nonprofits have the capacity and resources to expand their advocacy work and ensure racial, economic, climate, and gender justice in time.
That’s why we are asking foundations to put their excess, and increasingly excessive, returns directly back into grant making in 2021 and beyond.
Calculating excess returns is simply end-of-year growth minus spending. That means if it distributed 5 percent last year and made 10 percent in year-end investment earnings adjusted for inflation, it has the capacity to double its 2021 grant making without losing any ground on its endowment levels before the Covid catastrophe erupted.
For those who need longer-term data, five-year benchmarked returns are 13 percent, with inflation at 1.9 percent, offering an average net of 10 percent. Even better would be if foundations were willing to commit to aiding in the long-term recovery process by committing to distribute 10 percent for the next three years. That approach would preserve enough capital to enable foundations to continue to exist in perpetuity.
If foundations whose endowments grew at least 10 percent last year would join forces to commit to such a three-year plan, that would serve as a massive philanthropic stimulus to the economy, saving much-needed government funds to deploy elsewhere.
In fact, research shows a 10 percent blanket distribution rate by foundations would provide more than $200 billion to good causes over three years at zero cost to taxpayers, injecting critical funds to nonprofit organizations doing the hard work of recovery and protecting the jobs of the more than 12 million Americans who work for them.
Foundations that began 2020 with an endowment valued at $100 million (or billion) can double or triple payout immediately, serve society’s clear and present needs, and still have the same value at year end or at year three.
Fending Off Regulation
Committing to give more in 2021 as the world recovers would do more than serve society well. It would offer a key signal to critics and skeptics that philanthropy is putting its money where its mouth is.
To put it bluntly, philanthropy faces a pivotal decision-making moment. Grant makers can voluntarily choose to step up and do more to address inequality, racial and economic injustices, and environmental destruction or fight to maintain a corrupt status quo. Giving more — and doing more — to meet this moment is the right choice.
But it is also the pragmatic choice for foundations that don’t want to invite greater government regulation. If foundations and donor-advised funds choose to expand their endowments by massive percentages year-on-year while paying out the bare minimum during multiple global economic, public-health, climate, and societal crises, philanthropy will face new and increased scrutiny. Activists campaigning to #EatTheRich and #BanBillionaires will soon turn their focus on sharply regulating or restructuring the historically unaccountable philanthropic world, and they will be right to do so.
The urgency of the current moment has not dissipated with the change of administration in Washington. The challenges of the past year have given us the momentum to still defend truth against misinformation, end assaults on democracy worldwide, turn back the tide of climate change, and rebuild dwindling trust in institutions and expertise. But the urgency to make change could wane as vaccine distribution allows the economy and American lives to return to near normal in coming months.
A Moral Obligation
The positive strides that grant makers took last year are merely the long overdue minimum required to make a difference.
Foundations must be more transparent about their giving and allow themselves to be held accountable, including by the people they serve. Unconscionable disparities in vaccination rates alone should be a vivid and present reminder that philanthropy has an urgent practical and moral obligation to address systemic injustices.
It’s essential that we do all we can to aid nonprofits as they advocate for change. Falling back to old ways of operating would be a devastating mistake after a year in which so many people have suffered losses: Students have fallen back in school, small family-run businesses have been shuttered, and too many lives have been shattered by hate crimes and racially motivated violence.
As foundation trustees and leaders assess their balance sheets and think about what is next for their spending and their missions, they must pledge to do all they can to fight for a world that is far better than the one that existed before Covid inflicted so much pain.
