Family foundations often operate on a different bandwidth than their nonfamily counterparts, owing to their size, resources, and priorities. For example, their environmental, social, and governance (ESG) efforts may have a more local focus than a multi-stakeholder or globally oriented organization. They may also devote more attention to grooming the next generation for continued impact growth.
Mission and impact investing among these foundations has doubled since 2015, according to the National Center for Family Philanthropy’s report Trends 2020: Results of the Second National Benchmark Survey of Family Foundations. The influence of that growth resonates beyond the foundations themselves, as it may lead to greater opportunity across the entire spectrum of impact investing.
Focusing on the Next Generation
Wealthy families often have complex reasons to engage in both philanthropy and impact. They may be driven at least in part by a deep-rooted desire to raise their children and grandchildren in a tradition of stewardship, encouraging responsibility and initiative in how they use their wealth.
To that end, some family foundations create special mechanisms for engaging the next generation. They might form special boards of younger members who direct a certain number of grants, or they may include young adults in grantmaking and investment decisions.
The numbers in Trends 2020 bear this out—the boards of more than half of family foundations host multiple generations. Ten percent count three or more generations serving on their boards. While conflict over new directions in issues, values, and methods may arise, including younger generations can inject boards with energy, idealism, and innovative ideas.
Because family foundations generally have smaller staffs and endowments, they may lack the resources of bigger groups. This distinction can also affect efforts to adopt a mission-aligned impact investment strategy; such a change typically requires a team with relevant professional experience.
However, their smaller size allows these foundations to be more agile and make swifter decisions. This can make it easier to deploy a larger share of their holdings into impact investing from family investment funds, since they do not have to go through as many layers of approval as a multi-stakeholder foundation.
Approaching Different Investments
Family foundations may take unique approaches to their investments and the financial institutions they work with. Comparatively few family foundations use program-related investments, which are mission-driven investments similar to charitable grants; this is in part because many lack the staff to find and vet opportunities.
On the other hand, family foundations with strong ties to their community may be better positioned to tap community development financial institutions (CDFIs) compared with other foundations. Working with CDFIs allows family foundations to take advantage of investments such as a Certificate of Deposit Account Registry Service, which provides an FDIC guarantee on CDs more than $250,000. Because CDFIs can use the money to make loans in disadvantaged communities, this option provides a low-risk path to impact.
While many family foundations are modest in size, they do not think small. Riding the growth of ESG investing, their efforts may point the way for investors to make an even larger impact.