Impact Investing: Foundations Need to Innovate
By Angela Barbash, Principal
As individual main street investors, we don’t tend to get the opportunity to direct millions of dollars toward the causes and impact we care about most. That doesn’t mean that we can’t participate in the world that does direct those millions (billions, actually) by investing in the organizations that have that much power and capacity — namely, foundations.
Several foundations have created investment offerings for those of us with smaller dollar amounts. They then turn around and invest those dollars, along with their own dollars, into impact driven investments. One such foundation that follows this practice is the RSF Foundation. Other foundations are comprised of either family money or money that was ‘endowed’ to them to steward on behalf of wealthy families.
Regardless of where the money comes from and who they steward it for, foundations have an incredible opportunity to direct positive change in the world. At this year’s BALLE Conference, attendees had the opportunity to hear from Dana Pancrazi, who is the Vice President of Capital Markets for the F.B. Heron Foundation. Dana discussed the radical decision that the Heron Foundation made in the last few years to move 100% of their investment activity to impact investments that were aligned with their grant-making mission.
Define That Term! What does ‘Impact Investing’ mean?
Investments that are made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. (GIIN)
This is a radical move, because despite the fact that foundations are mission-driven grant-making organizations who donate tons of capital to good causes all over the world, their investment portfolios often hold positions that are diametrically opposed to their causes and mission. I know, hard to believe, right? Why would an organization donate to non-profits that clean up the oceans after an oil spill hold BP in their portfolio? That can’t be, you must be thinking. Think again. It is often the case.
Case in point: According to a study published in May by The Center for Effective Philanthropy, only 41% of respondents (of a total of 230 foundation CEOs) said their organization is engaged in impact investing. Of those foundations who do engage in impact investing, only an average of 2% of their endowment dollars and 0.5% of their program/grant budget is invested toward impact.
Many of the investors we have worked with over the years are investing a higher percentage of their portfolio toward impact investments than these very large mission-driven organizations. What’s at the heart of this disparity? When asked why their foundation invests little or none of its funds toward impact-driven endeavors, CEOs cited 3 top reasons:
- The foundation does not believe impact investing will help it achieve its goals. Specifically, that the foundation believes it will have a greater impact by investing by traditional means and granting the returns for impact.
- The foundation does not have the right expertise, skills, or staff to engage in impact investing. Specifically, they do not know enough about for-profit companies who care about making the impact they also want to make.
- The foundation prioritizes or exclusively focuses on achieving a financial return in its investing practices. Specifically, they do not believe they can invest for impact and not have a reduced return on investment.
While these challenges and perceptions are great and must be tackled, there is evidence that the trend toward aligning mission with investments is gaining steam. Examples include the Rockefeller Brothers Fund announcing last Fall that they have decided to divest all of their $860 million of fossil fuels (!) and at least two Southern Michigan community foundations who we know are exploring the possibility of making program related impact investments in the community alongside their grant-making activities (sorry, can’t name names yet).
We anticipate that in five years, especially as more foundations seek out the talent of impact-driven investment professionals like us to either join their staff or to provide outsourced services, the discussion will be around which non-financial impact metrics are most suitable to track rather than whether there is even merit in engaging in impact investing in the first place.
This article appeared in issue 1.2 of Revaluation, a quarterly publication for Conscious Investors. Join our community here
