Historically, private foundations have operated along two parallel tracks: the charitable side of the organization handles grantmaking and other philanthropic efforts, while the investment team works to fund the outreach and sustain the foundation’s financial health.
However, amid the rise of impact investing over the past decade, a number of foundations have integrated the two disciplines through mission-aligned investing. This approach can help further the impact of private foundations dedicated through both their grantmaking and their endowments.
Syncing Missions and Portfolios
Internal Revenue Service guidelines require that private foundations distribute 5% of their assets every year. Traditionally, the balance has been invested almost exclusively to sustain future outlays. As a result, as much as 95% of a foundation’s endowment could be “invested in conventional ways without regard to the social purpose mission [for which] the foundation was created,” Luther Ragin, Jr., explained in a 2012 interview. Such a disconnect could lead to counterintuitive effects. For example, a foundation whose mission promotes social justice could find its endowment invested in a mutual fund that invests in private prisons.
A past president and CEO of the Global Impact Investing Network, Ragin previously worked as the chief investment officer of the F.B. Heron Foundation, which adopted an initial mission-aligned investing approach in 1997. Fifteen years later, it declared that it was seeking to invest 100% of its assets in ways that furthered its mission of “helping people and communities help themselves.”
As of today, awareness and implementation of mission-aligned investing is rising among foundation leaders, directors, and founders who understand that impact does not begin and end with annual distributions. Helping further the cause is the broad expansion of socially responsible investing strategies, which seek to support broader environmental and societal goals while targeting competitive risk-adjusted returns.
Numerous Paths to Mission Alignment
Adopting a mission-aligned investing approach is not as simple as selling a few holdings and acquiring some others that meet impact-related requirements. With billions of dollars tied up in endowments, investment managers must navigate returns, risk factors, tax implications, and other considerations while determining how the foundation’s investment policy statement fits or needs revising.
However, a number of foundations have publicly committed to fully aligning their investment approach and mission. One example is the Patricia Kind Family Foundation, which has directed 100% of its endowment into investments that address eight of the United Nations’ Sustainable Development Goals. “In the face of today’s intractable challenges . . . many philanthropic leaders are awakening to the risk of our collective inaction,” said trustee Laura Kind McKenna. “We must align untapped endowment capital to advance our missions.”
Elsewhere, with a mission tightly focused on alleviating poverty in the South, the Mary Reynolds Babcock Foundation emphasizes values-aligned investing. Those values underscore 100% of the organization’s investment decisions regarding its endowment, encompassing program-related investments, community development financial institutions, and market-rate investments that pass environmental, social, and governance scrutiny.
Additionally, the Sorenson Impact Foundation committed to converting 100% of its portfolio into mission-aligned investments between 2017 and 2020. To steer its efforts, it pursues the themes of improving equity for women and people of color, enhancing clean energy solutions, and creating affordable housing.
As mission-aligned investing gains traction, early adopters see a virtuous cycle building—one that may expand impact, achieve desired financial returns, and stimulate broader interest in impact investing.