Commentary: Are we squandering opportunity for impact?
The websites of private foundations in the United States highlight transformative work on some of the world’s most intractable problems: Fighting injustice and advancing human rights; reducing inequality and creating economic opportunity; defending a livable climate. Deeply strategic and committed program staff work to deploy grant resources to the most effective organizations on the front lines of these issues. In these challenging times, however, we are all questioning whether we are doing enough.
Are we neglecting an obvious tool for impact? In a world in which economic and financial systems directly shape environmental and social conditions, are our investments helping to advance our mission or are they undercutting it? Are we investing in ways that drive the problems we seek to solve? Are we missing opportunity to direct capital to seed innovation, build communities and achieve deeper societal change? Achieving our goals requires that we have a theory of change not just for our grants but about our endowments.
The good news is that there is renewed attention to the idea of mission-aligned investing, and some of the country’s largest foundations have recently made commitments to deploy assets toward impact. US SIF: The Forum for Sustainable and Responsible Investment, a group in which we are both involved, recently released its Report on U.S. Sustainable, Responsible and Impact Investing Trends, which suggests that philanthropic foundations are only scratching the surface of their potential. Its data indicates that adoption rates are still low and foundations are often only investing with a fraction of their overall assets.
In its 2018 trends report, the US SIF Foundation identified 124 foundations out of 448 in 2018 that applied one or more environmental, social and governance criteria to $68 billion in assets out of their collective total of $238 billion — about 29%. A closer look at the data reveals that just a few dozen foundations are leading the way. Fifty-nine of the foundations surveyed by the US SIF Foundation apply ESG criteria across more than 50% of their endowments. In contrast, another 50 have less than 10% of their endowments managed with ESG or impact criteria. What’s more, most private foundations outside of this subset are on the sidelines entirely.
U.S. philanthropic foundations hold $908 billion in assets, according to the Foundation Center, which means that only about 7.5% of total assets under management apply one or more ESG criteria. Considering that the latest data available on active foundation assets is from 2016, the percentage may be even lower.
If we compare the relative percentages of total assets dedicated to sustainable investing between philanthropic foundations and other institutional investors identified in the US SIF Foundation’s trends report — public pension funds, educational endowments, health-care institutions or family offices, for example — foundations fall somewhere in the middle. However, because of the explicit mandates that most philanthropic foundations must make an impact in some way, foundations really should be leading the charge.
It is not hard and won’t sacrifice returns
Similar to other investors, sustainable and responsible investors seek a competitive financial return on their investments. Numerous studies show that sustainable and responsible investors do not have to sacrifice returns to align their investments with their values, or to avoid companies with poor ESG practices. In fact, a growing body of academic research shows a positive link between ESG and financial performance. In fact, our own foundations have charted paths to mission alignment that have deepened our impact while delivering high financial performance.
One philanthropic organization that has led the way in mission investing is The F.B. Heron Foundation, New York. With a $275 million endowment, it aims to “help people and communities help themselves out of poverty.” In 1996, the foundation began to seriously examine the alignment of its charitable activities and investments, discovering many discrepancies and leading to real investment innovation. In 2012, the Heron Foundation set the ambitious goal of moving its entire endowment into impact investments by 2017 to stay true to its mission. Ahead of schedule in December 2016, the foundation reached its goal and even created its own metric for evaluating the investments in the portfolio.
The Wallace Global Fund’s journey with mission investing began in 2009. The board set ambitious goals to be fossil-fuel free, to invest in climate solutions, to apply human rights principles to all investments and advance women’s empowerment through new financial models. By 2012, the Wallace Global Fund’s investment managers were reviewing ESG criteria across all its investments to ensure that these investments were aligned with the $143 million foundation’s mission. A portion of the investments was reserved for highly transformative investments with concessional rates of return. The portfolio has topped its financial benchmarks each year by substantial margins ever since, including 21.6% returns in 2018. Given the threats to democracy and climate worldwide, the board decided to put those returns right back into grant-making in 2018, doubling our program budgets.
Similarly, the Cordes family believes that all investments have environmental and social impact, so it intentionally seeks to deploy resources in a way that creates a positive impact aligned with the family’s values while generating financial returns commensurate with the associated investment risks. After its founding in 2006, the $9 million Cordes Foundation moved to investing 100% of its assets for impact by 2015. The family office also applies an impact lens to all investments with sectors of interest similar to those of the foundation.
Several organizations, in addition to US SIF, exist to help foundations align their investments with their missions. For example, the 100% Impact Network of Toniic Institute was created to support a membership of foundations and other accredited investors that have committed 100% of their assets to positive social and/or environmental impact. Mission Investors Exchange and Confluence Philanthropy serve philanthropies dedicated to multiplying their impact.
The role of foundations
We are not just any investors. Foundations receive charitable tax status to serve the public good. If our investments are harming the public good, we have mission-level responsibility to assess that impact and to act. Similarly, we have a responsibility — because of our mission — to use our investments as a tool to achieve our goals and build equitable and sustainable markets. Adopting responsible investment strategies gives foundations additional tools to advance our mission, achieve our programmatic goals and generate positive impact without sacrificing returns. An added benefit is the enthusiasm that the board and staff have for engaging on the investments, thereby enhancing fiduciary oversight.
Given the magnitude of the challenges facing us today, we should move with speed and commitment to deploy all of our tools in the fight for a better world, including all of our investments. We encourage and challenge all foundations to design and implement a comprehensive and holistic investment strategy that aligns with mission. If not, collectively we are truly leaving money on the table.
Ron D. Cordes is co-founder of the Cordes Foundation, New York, and Ellen Dorsey is executive director of the Wallace Global Fund, Washington. This content represents the views of the authors. It was submitted and edited under P&I guidelines but is not a product of P&I’s editorial team.