US foundations have long been able to include program-related investments (PRIs) as part of the 5% of their assets they must distribute yearly. Yet when it comes to investing the money in their endowments, they have largely focused on financial growth in order to sustain their grantmaking power. This is despite the fact that they are permitted to make mission-related investments (MRIs), which target market-rate returns.
However, a small but growing number of foundations have started to deploy part or all of their endowment holdings into impact investing, aligning those sizable sums of money with organizational values. This trend could see significant amount of capital move toward projects that generate positive social or environmental change: the roughly 87,000 grantmaking foundations in the US hold about $1 trillion in endowment assets.
“If philanthropy’s past half century was about optimizing the 5%, its next half century will be about beginning to harness the 95% as well, carefully and creatively,” writes Darren Walker, president of the Ford Foundation.
Ford Sends a Signal to the Market
In 2017, the Ford Foundation announced it would commit up to $1 billion from its $12 billion endowment over the next decade to MRIs. Coming from one of the country’s most influential foundations, which makes $550 million to $600 million in grants yearly, the move sent a clear signal to other charitable organizations that impact investing was worth their consideration.
The foundation’s approach involves gradually moving money from existing portfolios to impact investments, allocating capital to established impact funds rather than individual companies. Ford also aims to direct investments to diverse fund managers. Initial areas of focus have included affordable housing in the United States and access to financial services in emerging markets. For particularly risky, high-impact investments, Ford eschews the MRI strategy entirely and uses PRI capital instead.
At first, the foundation focused on private equity investments. This was intended to allow Ford to work with funds that drive impact directly through their portfolio companies. More recently, the plan expanded to include investments in public markets across a period of roughly 18 months. A significant portion of the portfolio is in funds that invest in affordable housing; because these opportunities generate cash flow, some investments have already yielded cash returns.
Ford took an additional step in June 2020. Responding to the financial devastation that nonprofits have experienced due to COVID-19, the foundation announced it would sell $1 billion of taxable social bonds and use the proceeds to provide grants to struggling groups. This will also allow the Ford Foundation to pay out more than 10% of its endowment value in 2020 and 2021. The move makes Ford the first nonprofit foundation to offer a social bond in the US taxable corporate bond market.
The WK Kellogg Foundation Supports Children through Impact
The WK Kellogg Foundation (WKKF), which has $7.8 billion in assets, launched its Mission Driven Investment (MDI) program in 2007. The foundation committed more than $100 million of its endowment to market-rate MRIs, along with over $50 million from its program budget to fund below–market-rate PRIs. WKKF’s portfolio operates across both the foundation’s grantmaking and investment activities, providing more flexibility to take advantage of opportunities that align with the organization’s mission to build lasting, transformational change for children.
For Kellogg, mission-related investments encompass a variety of industries as well as nonprofit and for-profit organizations across asset classes such as real estate, private equity, fixed income, and debt and cash deposits. In addition, the MDI program supports fund managers, entrepreneurs, and social enterprises focused on innovative products and services. The foundation emphasizes investments that can improve the lives of children and address the root causes of racial inequity in their communities, particularly in priority areas including Michigan, Mississippi, New Mexico, and New Orleans.
The current WKKF impact investing portfolio includes holdings such as a $500,000 investment in Acelero Learning, which provides early childhood education and family engagement services focused on closing the achievement gap for thousands of Head Start children and families. The portfolio also has a $250,000 investment in the Latino Community Credit Union, which offers access to loans and financial literacy resources to low-income and unbanked Latinos.
The Heron Foundation Goes All In
For the Heron Foundation, impact investing represents much more than just a slice of its overall portfolio. Almost 15 years ago, the foundation started investing about 40% of its assets in alignment with its mission. Heron committed to going “all in” in 2012—the entire $283 million endowment began shifting to mission-aligned investments that “help people and communities help themselves out of poverty.” Five years later, it completed the transition process.
Grounded in the philosophy that every investment has impact, the foundation analyzes investments through what it calls a “net contribution” lens, or the aggregate effect of an enterprise on its community and the world. That means focusing on a wide variety of asset classes, such as cash, private equity, public equity, and debt. The foundation’s underlying focus on the various ways that specific enterprises have impact through their business and operations also allows it to fund a range of investees, from DBL Investors, an impact investment venture capital fund, to the nonprofit Self Help Enterprises, an organization offering homeownership opportunities in the San Joaquin Valley.
Foundations typically keep their endowment investing staff separate from those responsible for grantmaking. In an unusual move, Heron merged its investing and giving operations into one team as part of its transition to 100% impact investing. As Heron’s president emerita Clara Miller told Forbes, “Everyone works to maximize social and financial missions together to be a positive force.”