Clara Miller, President of the Heron Foundation, has an unflattering view of her peers, describing the traditional charitable foundation model as “a hedge fund with a small giving programme welded onto the side” in new book Impact.
Her comments reflect the growing view that it is a self-defeating contradiction for foundations to give out grants to tackle social and environmental problems, and then largely invest their endowments, which fund the grants, conventionally – meaning fossil fuels, arms and tobacco are often in the portfolio mix.
“The irony might not be lost on you: your investments are helping to create the problems that you are trying to solve with your grants,” writes Impact’s author Sir Ronald Cohen.
This debate isn’t new. Sir Ronald and others interviewed for this feature have been arguing for years that foundations have a moral responsibility to invest their endowments in line with their social mission. And that call is getting louder as the effects of Covid-19 begin to bite.
“More impact to be had in the assets invested”
New York-based Heron Foundation is an early mover. It was founded in the 1990s, when an US economic boom caused the rapid growth of its charitable endowment. Managing large investment assets meant board members found little time to focus on grantmaking. The imbalance caused the board to step back and evaluate the effectiveness of the foundation.
It decided “without changes there would be little to distinguish the foundation from a conventional investment manager” and started on the journey of developing a mission-related investment strategy.
The process was not easy: it started in 1996 and by 2012, just 40% of its assets were aligned with its mission. It struggled to find managers to further this, but by 2016 felt comfortable it was 100% aligned with its $300m endowment – a 20-year-journey.
The Heron Foundation remains an outlier in the foundation world, though, with its pioneering model taken up by a minority who usually dedicate only a small amount of their endowment to mission alignment.
The organisation Toniic is trying to change this through T100 – a network of asset owners committed to aligning 100% of their assets with their values. Melody Jenson, Programme Manager of T100, describes the contradiction identified by the Heron Foundation in the 1990s as “hidden in plain sight”.
“One foundation [involved in T100] realised that 7% of its assets are granted, while 93% are invested,” she says. “A lot more money is invested than granted. There is arguably more impact to be had in the assets invested.”
Sir Ronald says charitable foundations should do more to measure their impact, telling RI they have lagged many pension funds and asset managers when it comes to investing their money to achieve their mission.
“Foundations should really be leading ESG and impact investing, not lagging behind, because they have a social or environmental mission to achieve,” he says. “The difficulty is that their investment teams have been used to optimising risk-return, rather than risk-return-impact, and they find it difficult to shift their mindset to this new way of investing.”
“This is why the Ford Foundation recruited a new investment officer to oversee its billion-dollar impact allocation,” he points out.
In 2017, the Ford Foundation announced it would commit $1bn of its $12bn endowment to mission-related investments over 10 years. At the time, it was the largest-ever commitment by a private foundation, and followed a US Treasury announcement that foundations could consider their mission as part of fiduciary duty.
“Dead donor foundations”
At large US foundations like Ford, the highest-paid people are the senior investment staff, says Marc Gunther, a freelance journalist who has written extensively on US philanthropy and foundations. “So Darren Walker is very famous as president of the Ford Foundation. But he’s only the fourth or fifth-highest paid person there,” he says.
But Gunther feels that, while foundation trustees place tremendous value on investment expertise, “it’s a scandal that the current system largely fails to reflect the values of the foundation, and also maximise the returns of the endowment in some cases”.
Jed Emerson, a Senior Fellow with Toniic, says: “There has been a shift from what I call ‘dead donor foundations’ – professionally managed by people who want to be philanthropists, who like that role and the idea of managing philanthropy strategically – to people who have actually created their own wealth and have a different mindset. They are not managing it because they have an academic interest in an issue or a strategy; it’s their life’s money, and impact investing in large part came out of new wealth where people want to draw as short a line as possible from the deployment of their capital to the creation of community and ecosystem-level impact.
“Their mindset is very different from people who were hired to keep a pot of money in perpetuity and not ever do anything that they think would jeopardise it.”
But some so-called “dead donor foundations” are taking the leap, such as the 71-year-old Nathan Cumming Foundation, which commited 100% of its half-a-billion endowment to mission-aligned investments in 2018.
“Two years into our journey, we still have a lot to learn, but everything we have done so far tells us that such a ‘total enterprise’ approach to impact is not only possible – it is urgently necessary given the enormity of the challenges we seek to address, such as the climate crisis and growing racial and economic inequality,” says Bob Bancroft, Vice President of Finance at the foundation.
The McKnight Foundation has also made a modest commitment to impact investment, as has the MacArthur Foundation, Kellogg Foundation, the Kresge Foundation and others in the US. Outside the US, organisations like the McConnell Foundation in Canada are seen as leaders.
Not everyone agrees with the trend though. Larry Kramer, President of the Hewlett Foundation said in an interview last year that “strategic grant-making can have greater impact than making low-return impact investments that may over time risk eroding the value of the endowment”.
“The vast majority of foundations are sticking with a century-old bifurcated model of philanthropy: money is given away on one side of the house, invested on the other, and never the twain shall meet,” says Gunther.
“Just talking about investment is a journey for a foundation”
In the UK, Friends Provident Foundation stands out as an outlier, being the first charitable foundation in the country to hire a dedicated person for responsible investment.
In contrast to the US, charitable foundations in the UK typically outsource investment management, says CEO Danielle Walker Palmour. “They often have 60 investment managers and one member of staff in-house, so 90% of assets are being managed by one person with the support of trustees. So just talking about investment is a journey for a foundation, let alone talking about responsible or impact investment.”
Walker Palmour says financial advisors, who UK charity trustees are very reliant on, can lack good investment knowledge in the area of responsible and impact investment.
Nevertheless, Friends Provident Foundation has committed to allocate up to 10% of its £30m endowment to social impact investment.
The Guy’s and St. Thomas’ Charity, one of the UK’s oldest and largest health charity foundations, has allocated 5% initially of its £50m endowment to health-related impact investing, most recently backing the Worldwide Health Innovation Fund run by Baillie Gifford.
Anita Bhatia, its Investment Director, says the move was inspired by its trustees feeling a contradiction in using the proceeds from its investments for charitable purposes to improve health, and not thinking about that when actually making investments.
This is a similar story for global research organisation the World Resources Institute (WRI), whose trustees started to think seriously about aligning its $40m in endowment investments with sustainability in 2013. Giulia Christianson, Head of Sustainable Investing at WRI, tells RI that its journey has included changing its investment policy to include ESG integration across its portfolio, shifting to an outsourced chief investment officer model, and a 15% commitment to impact investment around sustainable development challenges such as renewable energy, health and education.
WRI is also preparing to publish a Climate Change Investment Statement outlining a more rigorous approach to climate change for its endowment.
Walker Palmour, who sits on an Association of Charitable Foundation Taskforce on Investment in the UK, says one of its recommendations in a recent report was for charitable foundations to disclose their endowments’ top ten holdings.
She found that the initiative, which involves around 100 foundations, exposed diverging views on responsible investment behaviours.
“They have to get their heads around it. Foundations are very slow beasts, always nervous about losing money,” she says, reflecting on a debate about coordinating voting shares and letter writing to companies: “We got into a little bit of a tussle and sorted it out with some agreeing to take shareholder action and others not necessarily signing up.”
Walker Palmour points out that foundations ultimately manage private money with little scrutiny, although many receive tax incentives (in the US, that tax incentive requires foundations to give 5% to good causes each year – a figure that some are campaigning to have doubled in light of COVID-19).
Toniics’s Emerson says because of the tax benefit, charitable foundations have a responsibility not to manage assets just on a traditional ‘financial returns’ basis – “because we, as citizens, have already paid for this to happen”, adding: “The idea that foundations get the financial benefit of the tax write off, but then get to manage assets simply for financial performance over time just doesn’t make sense.”