The overwhelming majority of foundations, big and small, manage their endowments by pursuing financial returns above all else. Yet few of their leaders have been willing to debate critics who say that investments should seek to do good and to do well. One prominent exception: Larry Kramer, president of the William and Flora Hewlett Foundation.
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.
In public speeches and essays, and in an email interview with the Chronicle, Kramer has steadfastly maintained that impact investing isn’t all it’s cracked up to be. Especially for the biggest foundations, he argues, impact investing could do more harm than good.
What’s been the reaction? “I have often had the experience of feeling like someone who just entered a church and told the congregants that their God does not exist,” Kramer says.
(The Hewlett Foundation is a financial supporter of the Chronicle of Philanthropy.)
Not for Big Endowments
A legal scholar and former dean of Stanford Law School, Kramer says impact investing requires “a lot more thought, so people do it where it makes sense instead of just plunging ahead based on arguments that are imprecise or inaccurate.”
Kramer does not oppose all impact investing. As an example, for endowments that generally deliver no better than ordinary market returns, he says, managers might as well invest in funds that do good — by promoting clean energy or affordable housing — or in public companies with strong records of environmental and social performance. Such strategies are fine as long as they don’t sacrifice returns.
But large foundations like Hewlett should probably avoid the approach, he says. Such institutions are uniquely able to earn above-market returns, he argues, because the size of their endowments gives them access to the best asset managers. By investing primarily for impact, “We will earn less than we otherwise would, which means we will have fewer funds for our regular grant making,” Kramer says.
Strong Performance
Hewlett’s endowment performance, as it happens, has been exemplary. Its $9.9 billion endowment has returned 9.8 percent annually over the past five years, according to publicly available data compiled by Foundation Financial Research. Kramer says the actual performance has been even better.
Whether Hewlett can sustain that performance is, of course, an open question. Most foundations don’t do nearly so well. But Kramer is surely right when he says that investment choices “that reduce returns can have very outsized effects, especially over time.”
Kramer’s most pointed critique of impact investing is that it is unnecessary. “We know there is no shortage of capital,” he says. Those impact investments that promise to deliver market returns “will attract the capital they need with or without investors for whom social impact is an additional consideration.”
“So we decrease our grant-making power while adding no additional social impact,” he says.
Won’t Change Capital Markets
Kramer is even more dismissive of the claim that impact investing can help to reshape the capital markets. Ford’s chief executive, Darren Walker, for example, has said that impact investing “offers us an opportunity to help capital markets become accelerators of justice.”
Not likely, says Kramer. On a panel at the Mission Investors Exchange conference, with Walker and Dana Bezerra, president of the Heron Foundation, Kramer said: “If 100 percent of [all foundation assets] were invested in impact investing, it’s not going to change the market economy. ... Public companies don’t care whether Heron owns them or not.”
Even impact investments that accept below-market returns may not be needed, Kramer suggests. Such investments, often in the form of low-interest loans or loan guarantees, can be catalytic by helping a for-profit social enterprise get enough traction to attract private capital. But, Kramer notes, new and emerging philanthropists are plowing large sums into nonprofits and companies that aim to solve social problems. The Omidyar Network, for example, has put nearly a half-billion dollars into impact investments.
“There is considerably more money looking for concessionary [below market] impact investments than there are such investments,” Kramer says.
That may be so. But economic theory tells us even when there’s a surplus of capital for market-rate or concessionary investments, providing additional dollars will reduce the cost of capital for those businesses or nonprofits favored by impact investors.
To his credit, Kramer says he’s willing to listen to all the arguments. “I like to debate philanthropic tactics. I learn when I do. I even change my mind,” he says. “And if evidence shows otherwise, I may yet change my mind about impact investing. But I haven’t been persuaded yet.”
Nor, judging by their actions, have most other foundation presidents.
