Today’s political chaos is uniting voices that have operated in separate spheres and providing space for long-held ideas to come to the forefront. Last fall, the Business Roundtable ended its three decades of silence and called for companies to work toward “an economy that serves all Americans,” dispensing with the longstanding point of view that shareholder value is the only standard of success. Corporate America is stepping into the void of political leadership to take stances on economic and social issues of the day, as customers, employees, and activist demand answers from the business they support. Meanwhile, advocates are using the election to bring issues of white supremacy, wealth redistribution, and reparations to the forefront of our political debates.
Whether all this will lead to large-scale change is impossible to forecast, but it’s clear that Americans at large — and especially black, indigenous, and other people of color — are clamoring for any sign of progress to ease the pain of inequality. A hotter planet, increased gun violence, America’s crippled democracy, and an ever-precarious economy are stretching our households and communities to the breaking point.
That’s why it’s imperative that foundations unite their assets to advance goals for social change. More and more, chief financial officers and investment officials are joining forces with those who make grants to advance the cause of economic justice. But we need far more action because the money that asset managers control — already tax-advantaged, uniquely flexible, and approaching 1 trillion dollars in value — can transform our society.
U.S. philanthropic endowments represent $890 billion of global philanthropy’s $1.5 trillion of assets, according to Harvard Kennedy School’s 2018 Global Philanthropy Report. Yet for the vast majority of foundations, a mere 5 percent of those assets is dedicated to supporting people and ideas that strengthen our society.
The other 95 percent of those assets is being left off the table when it comes to advancing social change. Chief financial officers can change that equation to ensure that those funds are managed with the highest level of impact and fiduciary responsibility. This is not just about divesting from extractive and exploitative industries, though that’s a good start. It’s not just about carving out endowment dollars to match a foundation’s investment to its mission, though that’s an excellent commitment. It’s about what might become possible when a foundation activates its whole portfolio of financial assets toward the mission.
As we look back over the last two decades, we find plenty of evidence — including measures of financial performance and program impact — that demonstrate the success in divesting endowment dollars from extractive industries and investing them in environmentally and socially conscious work. Here’s how financial officers can get started — and how they can build up to actions that lead to transformative change.
Step 1: Get Out of the Bad
As foundation staff and boards learn more about the negative impact their investment portfolio is having on their mission, the first step is to divest their assets from the most extractive industries — such as those that make money from fossil fuel, private prisons, and payday lending, among others. Foundations at this stage seek to find ways to achieve strong-enough returns to keep grant making stable while putting more of their money into companies that score high on environmental, social, and governance ratings. Foundations may also screen the banks and investment advisers they hire to ensure that they share the values grant makers seek to advance. Some foundations remain invested in “bad” companies, but may become active shareholders to push proposals that will change business practices.
Foundation financial officials who take this first step are benefiting from decades of investment experience by those who jumped in before such assets had proven to be good performers. However, total foundation assets invested in companies and funds with high ratings for social behavior represent just 1 percent of total foundation endowments. We have room to grow.
Step 2: Invest in the Better
Foundations that are ready to do more move their money into assets that are in line with their values and meet conventional expectations about the level of financial risk and return a foundation can tolerate. Among the safe bets that have positive environmental and social impact: companies that provide solar energy, electric-vehicle charging stations, and affordable housing. At times, these investments may also include creating better working conditions for employees or providing access to clean-energy solutions to low-income families, but for the most part, the focus remains on mitigating financial risk and maintaining the same level of return as more traditional investments. Conventional investment advisers often push back, saying these products are higher risk than traditional assets. But that’s not true. Even banks, which are financially conservative, now invest in many of these types of products.
The Nathan Cummings Foundation, Russell Family Foundation, and F.B. Heron Foundation are often lauded for the steps they have taken to prove this kind of investing works. They were willing to make bold commitments that put their investments in line with their missions and took early steps to explore the types of investments that now are of interest to mainstream capital providers.
Step 3: Move Money to Advance the Foundation’s Mission
To make a real difference, more and more foundations are now putting their assets into loans and other investments that directly advance their programs. Grant makers move to this stage when they commit to making environmental and social impact their prime concern, with financial return playing a supporting role.
Much of the focus is on program- and mission-related investments, which can be low-interest loans or equity positions in start-ups that advance such mission goals as fighting climate change or advancing economic mobility. The idea behind these investments is to make a big impact on society and to end up with essentially the same amount of capital as the foundation had at the start. By providing early-risk capital to projects that can produce a big difference, foundations can have a catalytic effect: Mainstream financial institutions may be willing to provide follow-on financing because philanthropy has agreed to take the riskiest position. These kinds of investments are growing in popularity and hold enormous potential.
The Chorus Foundation, Libra Foundation, Surdna Foundation, and others are exploring how to use their endowments to invest in different types of capital, including low-interest loans, guarantees, and equity positions. What stands out about these foundations is that they use their assets to invest in companies and nonprofits led by people most affected by social and environmental problems.
Step 4: Activate the Foundation’s Whole Portfolio of Assets
There’s one more step to take, but to do so, foundations may have let go of some of their most closely held beliefs about philanthropy, markets, and the role of finance in supporting social change.
At most foundations today, program officers measure the environmental and social impact of grant dollars while those who manage the endowment track the financial performance of investment dollars. These activities generally occur in silos with distinct incentive structures, governance bodies, performance targets, and contract consultants. These two sides of the foundation house may know little about each other’s work, and even the language they use itself may be a barrier to shared goals and understanding.
We’d like to offer a different vision. Remember those old stereo equalizers? You could adjust the bass or treble from the neutral or halfway position by sliding each frequency to plus or minus, say, 10. Now imagine that every dollar that goes out the door of your foundation — be it equity, debt, or grant capital — gets slid to its appropriate social, environmental, and financial “frequency.” A grant to clean up hazardous waste in an impoverished neighborhood, for example, might be given a +10 on the environmental and social sliders and a -10 on the financial lever. A fossil-fuel investment might be given a +10 on the financial slider and a -10 on the other two.
Of course, the metaphor is more interesting to consider for more complex trade-offs between capital allocations that land somewhere in the middle.
Measuring integrated risk and return means looking at a whole portfolio of investments and grant making to evaluate how the entire pool of assets is working on behalf of its mission. This investment approach was pioneered by Joel Solomon and Carol Newell through the Endswell Foundation and Renewal Partners in Vancouver, Canada, where they dedicated 100 percent of their assets — all grants and all investment dollars — to supporting the development of a sustainable economy. Another example is the Incourage Foundation, a community foundation in Wisconsin that has committed to moving all its investing activity to within its region, including choosing public equities that are based in Wisconsin.
This is a truly radical approach to transform how foundations allocate capital. We don’t offer it lightly. Both of us have spent time working in finance and understand the need for thoughtful transition. Barriers to transition shouldn’t stop foundations from changing their ways; they should serve as an invitation to make this approach more rigorous. Chief financial and investment officers can use their influence and power to build a broader, more inclusive decision-making process for how foundation resources are allocated — across all asset classes.
To overcome barriers, experiment. It’s only by testing new approaches to investing that foundations will get comfortable with changing expectations for risk and return. There are already many impact-focused investment products on the market, including community-development financial institutions, impact funds, and other innovative approaches that have been designed to advance foundations’ missions.
Philanthropy has at its disposal the most flexible capital in the marketplace that was created specifically to advance society. It is the responsibility of foundations to experiment, fail, adapt, and learn in support of the communities they wish to serve. Investment officials have the power to use their assets to help build a just economy and to challenge traditional notions of finance that have accelerated inequality. No matter where you start, now is the time to act.
