Doing Good and Doing Well

Jonathan Barkat for the Chronicle

A decade or so ago, the Rockefeller Foundation organized the world’s first network of impact investors, sponsored research on the approach, and established such organizations as the Global Impact Investing Network, all in an effort to spread a big idea: that institutions and individuals can and should invest their money in ways intended to generate positive, measurable social and environmental impact along with financial returns.

Good Returns

A decade-long push has urged foundations to devote a bigger slice of their endowments to impact investing. But most big grant makers still aren’t biting.

By most measures, Rockefeller’s five-year, $40 million effort was a success. It popularized the term impact investing and built the backbone of a growth industry. Investing to do well and do good became part of the lexicon. So enthusiastic was Judith Rodin, who was then the foundation’s president, that she and Margot Brandenburg, a Rockefeller colleague, wrote a book called The Power of Impact Investing: Putting Markets to Work for Profit and Global Good. Impact investing needs to grow “if we are to have any hope of solving the increasingly dynamic, complex, and messy challenges of our time,” they wrote.

But when Rodin asked Rockefeller’s Board of Trustees to put a portion of the foundation’s $4 billion endowment into impact investments, she was rebuffed. Then and now, Rockefeller manages its endowment to make money the old-fashioned way — that is, any way it can.

Less Than 1% of Assets

In that, Rockefeller has plenty of company. For all the talk about impact investing in recent years — and, yes, there’s been lots of talk — the vast majority of foundations are sticking with a century-old, bifurcated model of philanthropy: Money is given away on one side of the house, invested on the other, and never the twain shall meet. Endowed foundations typically spend about 5 percent of their capital each year on grants to do good, the minimum required by law. The other 95 percent is invested to maximize financial returns, with no regard for impact on achieving a foundation’s mission.

Of the U.S.’s 15 biggest endowed foundations, whose collective assets amount to about $150 billion, just four — Ford, Kellogg, Kresge, and MacArthur — have devoted part of their endowment to impact investments, a survey by the Chronicle of Philanthropy has found. Relative to the size of their endowments, the amounts of money involved are modest: Kellogg has invested $160 million, Ford has deployed $75 million (but committed far more), Kresge has invested $50 million, and MacArthur $19 million.

Do the math: The bottom line is that less than three-tenths of 1 percent of the endowments of those 15 big foundations are invested in ways designed to align with mission.

This is a missed opportunity, say critics who want foundations to use their endowments to support their missions and benefit society. U.S. foundations hold $890 billion in assets and make annual grants totaling $63 billion, according to the Foundation Center.

“What flows to mission are the crumbs that are left over, and not the core assets,” says Jed Emerson, a consultant, author, and longtime advocate of impact investing. “You can’t grant your way out of poverty or solve the climate problem with grants alone.”

Unleashing the power of endowments is “the next great challenge for philanthropy,” says Darren Walker, president of the Ford Foundation. In 2017, Ford announced a $1 billion, 10-year commitment to what it calls mission-related investing.

“We have to ask, what are we doing with the other 95 percent?” says Walker. “It is not right, it is not sustainable, and it is bad for our country in the long term.”

New and Unproven

Here, a word or two about terminology is in order. What we’re calling impact investing goes by many names at foundations: mission-related investing (Ford), mission-driven investing (Kellogg), mission-aligned investing (Rockefeller Brothers Fund), social investing (Kresge), or simply impact investing (F.B. Heron, Russell Family Foundation). Those grant makers have chosen to invest their endowments to do good in the world, and that’s what this article is about. They are driven by the belief that impact investments can deliver direct, measurable results — jobs or housing units created, tons of carbon emissions averted — in the short run and that, over time, they can also help reshape the capital markets to do less harm and create more benefit for society.

BROOKS KRAFT, CORBIS, GETTY IMAGES

These claims — that foundations can drive change with their endowments — are relatively new and, some say, unproven. A few pioneers, led by F.B. Heron, began redirecting their endowments in line with their missions in the late 1990s and early 2000s. In 2008, Kellogg became the first $1 billion foundation to begin impact investing, carving out $100 million to support businesses working for social change. Several years later, a fossil-fuel divestment campaign, which was birthed at the Wallace Global Fund, brought pressure on grant makers to examine the makeup of their investment portfolios. And in 2014, the Rockefeller Brothers Fund made headlines by pledging to divest from fossil fuels, while launching an ambitious impact-investing program. Lately, Heron and the Mary Reynolds Babcock Foundation have gone further, investing all of their endowments in businesses that are in sync with their mission or reflect their values. The Nathan Cummings Foundation and the Russell Family Foundation have promised to do so as well. “Philanthropy should use all of our resources to make an impact,” says Sharon Alpert, president of Nathan Cummings.

Foundations that have tried impact investing have generally committed more dollars over time. The McKnight Foundation, with assets of $2.3 billion, last fall named Elizabeth McGeveran, who had been head of impact investing, the director of all of its investments. Putting her in charge of the entire portfolio will “help us intentionally and opportunistically tilt more of our investments towards greater impact,” says Kate Wolford, McKnight’s president.

Loans to Charities

What this article is not about are program-related investments, which have been around for half a century. They’re uncontroversial: Most provide loans at below-market rates to charities that develop affordable housing, create jobs, operate schools, or provide social services.

“There is an endless need, almost, for long-term, patient, low-cost capital,” says Kimberlee Cornett, director of social investment at the Kresge Foundation, which has committed $300 million to PRIs. In practice, PRIs look much like impact investments, but they are not expected to generate market-matching returns.

BIOLITE

Like grants and operating expenses, they count toward the legal requirement that private foundations spend at least 5 percent of their assets for charitable purposes. They are run out of the program side of foundations, not the investment office.

This isn’t to say that PRIs can’t have deep impact; they can. MacArthur has set aside $500 million from its endowment to support PRIs in such program areas as affordable housing and climate change. The foundation invested $1 million back in 1999 to help start SJF Ventures, a venture-capital firm that has since then deployed $260 million into about 60 startups in industries like clean energy, reuse and recycling, food, and health. The Bill & Melinda Gates Foundation used a PRI to support the Global Health Investment Fund, which made a $7.5 million investment in EuBiologics, a South Korean startup that makes cholera vaccines; the investment returned a profit and made lower-cost cholera prevention more widely available. The David and Lucile Packard Foundation also has a long history with PRIs, having invested more than $500 million in projects ranging from fresh-water preservation to the provision of oral contraceptives to poor women.

Key Obstacles

Why, though, given their favorable experience with PRIs, do big foundations like Gates, MacArthur, Packard, and Rockefeller continue to invest their endowments in ways that are disconnected from their programs, missions, or values?

Several big foundations — Bloomberg, Gates, MacArthur, and Rockefeller, among them — declined to be interviewed about why they have so far not engaged in impact investing. Larry Kramer, head of the Hewlett Foundation and one of the few foundation leaders willing to speak, said large philanthropies, by investing wisely, can deliver market-beating returns. (The Hewlett Foundation is a financial supporter of the Chronicle of Philanthropy.) Impact investing, he argues, ultimately comes at the expense of grant making, which remains a foundation’s more powerful tool for driving change.

Other knowledgeable insiders say these obstacles stand in the way of impact investing:

Impact investing is unproven. Dozens of fund managers specialize in impact investing, but few have long-term track records managing substantial sums. “This space is really new, and these managers are new,” says Cynthia Muller, director of mission investments at Kellogg.

In particular, doubts remain about whether impact-investment managers can match the returns of conventional managers. Foundations that have chosen to try to live forever worry they won’t make enough money from their investments to preserve their endowment and fulfill the requirement that they give away 5 percent of their assets every year.

Antony Bugg-Levine is the author, with Jed Emerson, of Impact Investing: Transforming How We Make Money While Making a Difference. “There are lots of questions around, Are we willing to accept lower returns?” says Bugg-Levine, who led the impact-investing program at Rockefeller from 2007 to 2011. “It is hard to make money. It is hard to make a difference. It’s harder to do both together. Distrust anyone who says this is easy.”

John Goldstein is co-founder of Imprint Capital, an impact-investment boutique that has advised 11 of America’s 25 biggest foundations. He says: “There are triumphalists who say you can make money and save the world at the same time and others who say there are ineradicable conflicts between impact investing and financial returns. The answer is much more nuanced and subtle and complicated.” Imprint was acquired by Goldman Sachs in 2015, a sign that the big Wall Street firms see a business opportunity in impact investing.

GETTY IMAGES/ISTOCKPHOTO

Seeking to bring rigor to the debate over returns, the Wharton Social Impact Initiative surveyed 53 impact-investing private-equity funds and found that those funds seeking market-rate returns had been able to “achieve their targeted returns while also preserving portfolio companies’ missions.” Morgan Stanley’s Institute for Sustainable Investing found that mutual funds that invest in stocks with a sustainability focus had equal or higher median returns with equal or lower volatility than traditional mutual funds. A 2015 study that looked at 2,200 empirical studies found that more than 90 percent concluded that taking environmental or social impact into account had a neutral or positive impact on corporate financial performance.

Foundations committed to impact investing say their returns haven’t suffered, while conceding that their portfolios haven’t been tested in a variety of markets.

Stephen Heintz, president of the Rockefeller Brothers Fund, says that its impact investments have outperformed their benchmarks since 2014. Rockefeller Brothers has invested nearly one-third of its $1.2 billion endowment for impact. About $279 million has been allocated to funds that select public companies based on their environmental and social performance, and $152 million is invested in funds that back companies working in areas like renewable energy and financial services for poor people around the world.

“The early data is encouraging, but it’s very early,” Heintz says. “It certainly does not dissuade us from continuing down this path.”

Foundation cultures stand in the way. Foundation trustees, investment committees, and chief investment officers are often drawn from Wall Street, where they have built successful careers in financial services and have little reason to focus on the social or environmental impact of their investments. They tend to resist pressures to engage in impact investing, insiders say.

Charly Kleissner, a Silicon Valley entrepreneur who has been doing impact investing at the KL Felicitas Foundation since the early 2000s, says big foundations suffer from a “lack of leadership and fear of the old trustees. They’re managed by people who have a fear of losing money, not by those who want to make a positive contribution.”

The divestment movement persuaded some foundations to rethink their portfolio, but it turned others against the idea.

“The chief investment officers of large foundations are very smart, very successful,” say Imprint Capital’s John Goldstein. Too often, he says, critics wag their finger at them and tell them they don’t know how to do their job. “That very quickly turns what could be a conversation into a cul-de-sac,” he says.

Many foundations use hired investment advisers to make most of the key decisions, and many of them are wedded to old ways. “The big foundations, in particular, are captive to their advisers. Their advisers want to keep their business,” says Clara Miller, former president of Heron. “They’re not change agents in any way, shape, or form.” The Rockefeller Brothers Fund, for example, ended its ties to its investment adviser because it believed the company limited the foundation’s ability to pursue its mission-oriented goals.

Interestingly, some foundations that have embraced impact investing were encouraged to do so by younger trustees who were open to experimentation. The McKnight Foundation began its work on impact investing as “the baby boomers were handing over control of the foundation to the Gen Xers,” says McGeveran.

Says Darren Walker: “Many of us are too conservative and too unwilling to innovate. That’s a shame because we constrain our impact.”

It’s hard to measure impact. The most pointed question that critics ask about impact investing is, How do we know it has impact? It’s a simple question with no simple answer.

Sometimes cause and effect are straightforward. Ford’s first impact investments in housing are a case in point. “It’s pretty simple in affordable housing: How many units have you preserved or constructed?” says Roy Swan, who leads Ford’s mission investments team. The effect of Ford’s investments in financial services for the poor will be harder to measure. “We are really trying not to be too prescriptive,” Swan says. “We will learn as we go, and we will share as we learn.”

How, though, can Kellogg measure its investment in Revolution Foods, a startup company that provides children with healthy meals at school? The company’s mission closely matched the foundation’s desire to promote healthy kids and improve food systems. “Kellogg helped build the fair-food movement,” says Sterling Speirn, the foundation’s former president.

REVOLUTION FOODS

But neither Kellogg nor Revolution Foods can credibly measure the social or environmental impact of serving healthier lunches to school kids. Nor can they answer the thorny question of what would have happened had Kellogg never made the investment. It’s likely, but not certain, that another investor would have stepped in, particularly because the investment was expected to deliver market-rate returns. Kellogg may feel better about itself for supporting Revolution Foods, but it can’t know whether it made a difference.

Teasing out the effect of impact investing on public companies is even more difficult. Heron, McKnight, and Rockefeller Brothers all invest in funds that buy the stocks of public companies that are identified as “better” in some way — better for the environment, for their workers, for women. In theory, they are rewarding leading companies, whose stock price will rise and creating incentives for laggards to improve their social and environmental performance.

Bob Goldstein, chief executive of Sonen Capital, an investment advisory firm that specializes in impact investing, says foundations have good reason to invest in more sustainable companies, even if the impact can’t be quantified.

“You’re supporting companies that are aligned with your values and mission,” Goldstein says. “Can you measure, dollar for dollar, what your dollars are doing? That’s difficult. That doesn’t mean you are not having an impact.”