Foundations are still hesitant to invest their endowments in ways that further their charitable goals, leaders say, despite recent encouragement from federal regulators and increased interest on Wall Street in “social investments.”
The main reason: They still fear it’s a big risk, even though proponents of so-called mission investing argue that financial returns will increase over the long haul because the right investments promote a healthier, sustainable, more just society.
“Philanthropy of every shape and size has to cut away from the safe and secure moorings of conventional charitable grant-making practice to navigate into waters that carry higher aspiration, but also higher uncertainly, complexity, and risk,” Rip Rapson, president of the Kresge Foundation told a crowd of foundation leaders that gathered in Baltimore Tuesday.
Kresge outlined a plan in September to dedicate $50 million from its endowment by 2020 to social investments, and the foundation plans to make an additional $300 million in investments from its program budget.
In doing so, Kresge had to overcome a “tussle” over what mission investing means, Mr. Rapson said.
Often, investments from a foundation’s endowment that conform to industry-accepted criteria on environmental and social investing are considered mission investments even if they aren’t related to the grant maker’s mission.
At Kresge, an investment is considered a mission investment if it meets the foundation’s return targets and is “tightly aligned” with the grant maker’s program strategies, Mr. Rapson said.
Growing Interest
The conference, in Baltimore, hosted by Mission Investors Exchange, drew more than 500 people from dozens of organizations, a far cry from the five foundations that sent representatives to its first meeting 10 years ago.
While there is greater interest in the subject, foundations have yet to deploy much capital. Foundation investment officers are under enormous pressure to generate the best returns on endowment investments. They need to ensure a grant maker’s longevity, and impact investments are often market laggards.
Only 2 percent of endowments are dedicated to mission investments, according to a 2015 survey of 73 foundation chiefs.
That may change, foundation leaders say, as a result of new federal guidance on the issue.
The Internal Revenue Service issued new rules in September on foundation investments that seemed to mollify financial managers’ fear they would be penalized for making social investments. Before the guidance, many foundation leaders worried that investments with a low rate of return would be considered “jeopardizing investments” that could result in a tax penalty.
The IRS guidance removed doubt about the tax treatment of the investments, said Darren Walker, president of the Ford Foundation. “We’ve taken the wall down,” he said, “but I’ve not seen the cavalry moving forward.”
Mr. Walker appears to be clicking his spurs.
Since November, he has publicly pushed for the foundation to dedicate some of its assets to investments that dovetail with the foundation’s focus on reducing inequality. The grant maker’s board is expected to take up the matter this year, and while the foundation expects to make a carve out for mission investments, the details have yet to be worked out.
With more than $12 billion in assets, Ford is the nation’s second largest grant maker. Ford began making investments out of its program budget in 1968 and has made a total of more than $550 million in private-equity financing and long-term loans in areas like housing. But it has not shifted the heft of its endowment to market placements that put a priority on social rather than monetary gains.
“We have to change our endowment policy,” Mr. Walker told the crowd of foundation money managers and program experts on Tuesday. “We were leaders in 1968, and we’ve completely lost our leadership and lost our edge in this. I’d like to at least be relevant.”
No Trade-Offs
While mission investments can support the charitable work of a foundation, they do not necessarily generate market-rate returns.
Ford’s money managers have resisted mission investments not because they are “mean and nasty,” Mr. Walker said, but because it is their fiduciary duty to ensure that Ford’s endowment generates maximum returns.
Some foundation leaders suggest that mission investments are the safest financial bets.
“We don’t believe there is a trade-off” between generating investment and social results, said Ian Magee, vice president for finance and operations at the F.B. Heron Foundation. “In order for an investment to be sustainable for the long term, it has to be positive for society.”
Heron is considered a mission-investing trailblazer. The New York grant maker began making mission investments from its endowment in 2000, and by 2011 it had placed 40 percent of its corpus in investments designed to benefit the foundation’s charitable goal of bringing people out of poverty, Mr. Magee said. In December, the foundation merged its program and investing staffs and said its entire corpus of about $300 million would go toward investments that support its mission.
“Technically, we’re a midsized foundation,” said Mr. Magee. “For all practical purposes, we’re a small business.”
As foundations have struggled with how to invest their endowments, Wall Street financiers have taken notice.
In 2014, Goldman Sachs created a $140 million impact-investing pool, called the GS Social Impact Fund.
BlackRock, the investment management giant, followed in February 2015 when it created a separate unit called BlackRock Impact, which makes investments designed to achieve environmental, social, or governance goals. The investment house moved to make social investing more accessible to mainstream investors in October when it created BlackRock Impact U.S. Equity Fund, a mutual fund that makes such investments.
See a response to this article from the CEO and chairman of Mission Investors Exchange.
