Mission-aligned investing philosophies, ESG issues, and assets alike have gained a toehold among US foundations. Foundation investments in sustainable assets totaled $97 billion in early 2020, according to The Forum for Sustainable and Responsible Investment. This marked a 43% increase from 2018 levels, although the number of foundations engaging in such extended community impact remained flat for the fourth straight year.
The opportunity is sizable: $97 billion represents slightly more than 10% of the total $890 billion held in endowments, according to Harvard Kennedy School’s Hauser Institute for Civil Society. Perhaps one of the largest potential catalysts is the evolving trend of mission-aligned investing, in which foundations direct a portion of an endowment toward impact investments.
Foundations have historically separated their philanthropic and investment disciplines. Mission-aligned investing efforts such as these allow them to introduce a measure of impact into the side of the organization that has long focused only on financial returns.
“We want to use every asset we have—grants, investments, people, networks—to strategically and urgently advance our mission,” Compton Foundation executive director Ellen Friedman said upon the organization’s adoption of a 100% mission-aligned portfolio. “Using our market power as investors is a critical, if underused, tool in the kit available to all foundations that seek to advance a social and environmental change mission.”
Multiple Routes to Achieving Impact
Formalized as a concept via a group of foundations and investors engaged by the Rockefeller Foundation in 2007, impact investing is rooted in generating positive outcomes alongside financial gains.
Given their extended time frames and mission-driven natures, foundations are a natural fit for impact investing. The COVID-19 pandemic underscored the value of nimble capital to quickly direct toward areas of excessive need, as noted by the Mission Investors Exchange.
CAPTRUST’s 2020 reporting on foundations with endowments ranging between $5 million and $250 million found that 31% of organizations had begun investing with ESG issues in mind. This marks a modest uptick from its 2019 findings.
Although not all foundations have followed this trend, some have jumped in with both feet and committed to investing 100% of their assets toward positive ESG impact. Of 18 such organizations monitored by Toniic, all but 12% of their $1.7 billion worth of assets had been invested in impact-directed vehicles by 2020.
A foundation may also integrate impact investing within its annual grant allocation and endowment. Of the 5% of a foundation’s assets that must be distributed annually per Internal Revenue Service guidelines, a portion may be directed toward program-related investments (PRIs). The National Center for Family Philanthropy explains that PRIs allow a foundation to further its charitable mission. However, they come not in the form of a grant but as a loan, loan guarantee, or equity stake in a program.
The investment may generate a return for the foundation, but advancing the mission is the primary objective. It also cannot act as a tool for political purposes. If the program fulfills its investment promise, the principal returns to the foundation. The organization then has a year to redistribute the funds via a grant or reinvest them in another PRI.
As for the other 95% of the endowment, mission-related investments (MRIs) may help broaden the foundation’s impact. Internal Revenue Service guidance from 2015 clarified that an MRI may ultimately generate competitive returns, particularly since it occasionally involves a commercial enterprise. However, its suitability lies in its mission-first focus.
Impactful Investing in Practice
Some of the best-known examples of impact investment among foundations have been bold commitments to an all-in approach. In 2017, the F.B. Heron Foundation announced that all of its $270 billion endowment was aligned in its fight against poverty—five years after its leadership set the goal.
Although some high-profile foundations have committed a portion of their endowment to ESG issues and impact investing, Toniic found in its survey of foundations committed to 100% impact that small organizations can be much nimbler.
“The data confirms the fact that smaller, entrepreneurial foundations are able to move quicker into deep impact because they are not led by administrators, but by entrepreneurial founders,” said Toniic co-founder Charly Kleissner.
That drive is apparent in organizations such as the Cordes Foundation, which channels 100% of its $10 million in assets into impact investments via a gender lens investment strategy. Its portfolio of private and public investments complements its grants, which target social enterprises that support the economic advancement of women worldwide in industries such as fashion.
The Compton Foundation has also committed 100% of its $33 million endowment to impact investments and ESG issues, seeking to accelerate change while analyzing the entire portfolio through a gender and racial justice lens. Its all-in philanthropy helps ensure that its endowment investments do not undermine the objectives of its grants.
Impact investing initiatives may scale to any size foundation, The Bridgespan Group reports in Beyond the Grant: Foundations as Impact Investors. In addition to a shift in thinking from grantmaker to asset manager, the report recommends that foundations hire outside investment expertise as needed and prioritize investments that clearly align with the organization’s programs and targeted issues.
Overcoming Obstacles and Objections
Achieving a targeted level of impact investments is usually not as simple as exiting a highly liquid fund position and immediately plugging the proceeds into a new investment. Conventional investment advisor and consultant communities also tend to shy away from the uniqueness and complexity of impact investments, which can further limit access.
CAPTRUST’s 2020 Endowment & Foundation Survey found that only 3% of organizations invested in ESG, impact, or mission-aligned strategies or were even aware of such investment decisions without advice from investment advisors or consultants. A quarter feared higher costs, and 35% were wary of relatively poor performance.
Such headwinds also exacerbate one of the fundamental challenges in the investment community: striving for gender and racial equality. According to the Knight Foundation, firms owned by women and minorities oversee just 1.3% of the $69 trillion in professionally managed assets despite performance records that closely track those of traditionally run firms.
Further illuminating the issue among foundations’ investment committees, Philanthropy Northwest and the Giving Practice collaborated on Mindful Fiduciaries at the Wheel. The report was designed to explore the personal, organizational, and systemic challenges blocking diverse and equitable investment decisions. It questioned legacy fiduciary standards in the face of “current economic, societal, and environmental realities.”
The group encouraged adding unconventional committee members, fostering thinking beyond the status quo, heightening accountability for all stakeholders, increasing investment committee engagement both with the organization and its own programs, and collecting deeper data and measurements.
Toniic’s survey of foundations committed to 100% impact found that proactive action is essential to fulfilling impact investing goals and toppling misconceptions regarding risk, liquidity, accessible asset types, and collaboration between grantmaking and investment disciplines. Perhaps most importantly, Toniic concluded that learning along the way is a valid path for any foundation willing to leverage resources to deepen its community impact.