How Foundations Invest Money Is Just as Important as How They Make Grants
When my wife, Marty, and I started our foundation in 2006, we found plenty of people willing to advise us on what do with the 5 percent of assets that federal law requires us to distribute every year.
“What about the other 95 percent?” I would ask.
Responses boiled down to: “Invest it. How you do that is outside of our philanthropic purview.”
Philanthropic foundations owe more than required payouts to our communities. For all of the energy that foundations spend making thoughtful grants and solving social problems, we have a responsibility to make sure that the investments we make aren’t contributing to those problems—and we have an opportunity to put more philanthropic capital to work for social good.
For the Cordes Foundation, impact investing has allowed us to put both investment and grant capital toward our philanthropic goals. While we are in good company—other impact investors include the Rockefeller Foundation, the W.K. Kellogg Foundation, the Bill & Melinda Gates Foundation (in small amounts) as well as other family foundations like the KL Felicitas Foundation—there are hundreds of billions of dollars of foundation investment dollars that could be actively working to deal with social problems but are not.
Among the most common barriers are: operational structures that separate investing from grant making; a perception of impact investments as risky or, worse, contrary to philanthropic missions because there is an element of profit; and a gap between interest and action that is just now starting to close as it becomes easier to find and participate in a range of compelling opportunities.
Change is hard, particularly at established foundations with legacies to protect, the founders’ visions to preserve, and decades of history doing things a certain way. That’s why to date, more impact-investing activity comes from foundations whose entrepreneurial creators are alive and in their first generation of giving. Just as we’ve learned a lot about philanthropy from foundation peers who have been granting money for far longer than we have, my hope is that our experience in this area of impact investing is useful to foundations open to exploring ways to achieve greater results with existing assets.
In 2008, just a few years after we had started our foundation, approximately 20 percent of our assets were in impact investments. During the financial meltdown, we watched those impact investments hold steady and even outperform other funds. To be sure, many foundations perceive a risk because impact investments are so new for foundations, but they’re no riskier than other investments.
Of course, a foundation might decide to accept more risk based on the possible social payoff, in line with its own philanthropic strategy; but impact investments have their own spectrum, just like other investments, so a foundation can decide just how much risk it wants to take. Some investments will succeed, others will not, but it is simply inaccurate to write off all impact investments as “risky.”
Grant makers who are considering impact investing now have more information and resources from groups like ImpactAssets and the Global Impact Investment Network.
Research reports, measurement tools, and detailed information these groups and others provide from top impact-investment funds and fund managers will help build the comfort level of foundation decision makers.
Let me add to their insights some of what I am seeing:
- Some impact investors are looking for market-rate (or better than market-rate) returns. Philanthropists can play an important role in catalyzing the impact-investing movement by accepting, in some cases, lower financial returns in exchange for what the groups they support can achieve in accomplishing their missions. This can be a particularly important support for social entrepreneurs in early stages and can get important efforts off the ground.
- Donors don’t necessarily need to touch their foundation endowments if they are nervous about risk. Some donors make low-interest loans to nonprofits and undertake other program-related investments for that purpose, but their impact is limited if they come out of the money that would otherwise go to grants.
- One promising trend is impact investing through donor-advised funds. We have a personal donor-advised fund at the ImpactAssets Giving Fund, where 100 percent of our fund assets are in impact investments. ImpactAssets, Tides, and RSF Social Finance offer donor-advised funds with a selection of impact investments. What I particularly like about the ImpactAssets Giving Fund is the ability to diversify among private debt and equity-impact funds and invest directly in social enterprises. These can be great choices for philanthropists who do not have their own foundations or as a way for foundations to take their first steps in the field of impact investing. Donor-advised funds can serve as a straightforward way to embrace impact investments within a contained and well-understood financial vehicle.
Just as in other areas of philanthropy, we all do better when we learn from one another. The more we know about the benefits and challenges of impact investing, the better equipped we are to increase the amount of philanthropic money to fund social good.
Foundations have an opportunity to serve not only as impact investors but also as leaders in developing the structures and processes required to support investment in social enterprises. To make headway on the greatest social and environmental challenges, we need more private capital at work for social good.
Foundations can expect to transform society only if they decide that their investments must be put to work as wisely as their grants.
Ron Cordes is chairman of the Cordes Foundation, co-chairman of AssetMark, and co-founding board member of ImpactAssets.
Original post in Chronicle of Philanthropy