Editor's Note: This article was originally published on March 13, 2018.
I’ve long been a fan of more impact investing by foundations. It’s always struck me as nuts that these institutions use only their pinkies to advance their missions, keeping the vast majority of endowment capital—the “other 95 percent”—off to the side, invested in whatever the bean counters say will yield the best returns.
Foundation leaders never tire of stressing how paltry their grantmaking budgets are relative to society's problems, and they’re exactly right. So it’s been exciting to watch more of these leaders break the glass to get at the real money.
This week, it’s the Nathan Cummings Foundation making a move. And it’s going all in, pledging to “align 100 percent of our nearly half-billion dollar endowment with our mission.” NCF is the largest foundation to take this step, and it follows most directly in the footsteps of the F.B. Heron Foundation, which made the shift to 100 percent alignment under the leadership of Clara Miller. In contrast, the other major foundations engaged in impact investing—an increasingly long list—have mostly committed only small portions of their endowments to this approach.
It’s not surprising to see Nathan Cummings make such a bold move. This progressive foundation has long been innovative about leveraging its investments. Under a past president, Lance Lindblom, it became a leader in shareholder advocacy to push corporations to change their ways. It says that it’s filed “nearly 200 shareholder proposals” related to “environmental, social, and governance issues.”
Still, even as I’m inclined to cheer NCF’s big move, I have a few questions about impact investing by foundations. Here they are.
Which Foundations Should Embrace Impact Investing?
I totally get why the leadership of Nathan Cummings would want to get their hands on more capital. It’s hard to envision big gains on the two issues it’s tackling—inequality and climate change—without large-scale private investments in areas like renewable energy and community development. And there are clear investment options for any foundation working these beats. Heron's portfolio offers a compelling picture of what it looks like when a foundation in the economic equity space fully harnesses its assets to mission. Take a look here.
But here’s the thing: My sense is that many foundations, maybe even most, aren’t tackling issues where investing endowment capital can readily move the needle. Beyond economic and energy issues, we've reported on impact investing in such diverse areas as charter schools, education technology, higher education, medical research, and various global health and development challenges. But there are plenty of other issues where it’s hard to see an obvious role for capital investments. For example, should a place like the Andrew Mellon Foundation, a leading funder of arts, higher education, and the humanities, be thinking about impact investing?
It’s not surprising that a survey of foundation CEOs in 2016 found that only 30 percent of them saw impact investing as a practice that has “a lot of promise.” Maybe these folks are overly cautious small-thinkers. Or maybe they just don’t get how impact investing has anything to do with their own foundation's goals. Right now, it often sounds as if all foundations should be jumping on this bandwagon. But that’s almost certainly not the case. And it’d be good to see more clarity about which institutions should be paying attention, here.
Where Is Foundation Capital Actually Needed?
The bigger nagging doubt that some express about impact investing is whether precious foundation endowments should be put at risk when there’s so much other private capital sloshing around—with more of it being directed toward social ends.
Larry Kramer, the president of the Hewlett Foundation, has made the argument that foundation wealth isn’t really needed to take on problems like climate change because investors are already on the case. I won’t repeat his points, which you can read here. One reason his argument resonated with me is because I keep an eye on the broader world of impact investing and know that there's a lot going on right now. Just take a look at the “Deal Flow” section of Impact Alpha, a website covering impact investing, and you’ll get a sense of how much new money is chasing social returns.
Many of the billionaires who are interested in solving the world’s problems believe that market-based solutions are likely to be most effective, and are putting significant capital behind such approaches. Mark Zuckerberg is a good example. He’s made tens of millions of dollars in impact investments, including in ed tech companies. Bill Gates is another. He’s organized a squad of fellow billionaires to invest in new energy technologies. Michael Dell thinks the same way. So does Pierre Omidyar. And the list could go on. Meanwhile, as we’ve reported, some major financial institutions, like JP Morgan Chase, are putting new capital into community economic development and affordable housing.
Foundations hold only around $800 billion in their endowments. But there are trillions and trillions in private capital markets, while the 400 richest Americans alone have a net worth of $3 trillion. With so much new impact investing action by deep-pocketed financial institutions and billionaires, there’s an argument that legacy foundations—holding a quite small and unique stash of cash—might want to take a “wait and see” approach. Larry Kramer has suggested that philanthropy’s role right now should be to study and organize this area. Maybe that’s not such bad advice.
Can Foundations Do Such Investing Well?
Last year, after Ford announced that it was putting aside $1 billion of its endowment for impact investing, I joked that CEO Darren Walker could end up as an adjunct professor at NYU if the returns proved disastrous. Seriously, though: That’s a lot of money, and Ford’s staff better know what the heck it’s doing when moving it out the door.
In theory, it doesn’t seem like it should be that hard for foundations to do impact investing well. MacArthur, which has been a pioneer in this field, is a good example of an institution that’s developed a strong competency here. A while back, we interviewed Debra Schwartz, who leads this part of the foundation’s work, and is very impressive, leading a team of financial experts.
Among other things, Schwartz told us that she’s mindful of exactly the question of when and where foundation capital is needed to make a difference. "We're focused on capital gaps,” she said. “We look at situations where, but for our capital, all the resources might not come together to get the job done. We can have a multiplying and unlocking effect." Schwartz outlines her views about the role of “catalytic capital” in this inspiring article.
MacArthur’s track record of doing impact investing well is reassuring. But it’s also true that the foundation has proceed slowly and cautiously, making a total of $500 million in such investments over a period of many years, a fraction of what it's given out in grants. There’s more room for things to go wrong if foundations start to go faster, up the financial ante, and move into riskier areas. It’s one thing for foundations to make low-interest loans for affordable housing or to invest in economic development funds that get steady returns by loaning to small businesses. But other areas, like clean energy or education technology, are much more risky.
Venture capital firms have large staffs of experts to make the right bets. Most of those bets still fail, but that doesn’t matter, since losses are baked into the business plan. The hits offset the misses, and investors keep giving VCs more cash. Can legacy foundations develop the right expertise and business model to avoid losses? There’s a lot of work that's been done, or is underway right now, on this exact question, looking at foundation best practices to do impact investing well.
But you’ve got to wonder whether this will ever be a natural strength of foundations that, by and large, are staffed by nonprofit lifers—not MBA types.
Will Fewer Resources Be Available for Traditional Grantmaking?
Another big concern with impact investing is that it will divert foundations from their traditional mission of supporting nonprofits. Foundations are unique allies to civil society. If this role is diluted, it’s hard to see who would fill the breach. Skeptics wonder why we’d want foundations putting their scarce capital at risk to join a growing army of well-heeled private social investors—as opposed to staying laser-focused on their indispensable historic role.
It’s a fair question. And it raises two others: First, to what degree will more foundation impact investing translate into fewer resources for traditional grantmaking? And, second, should we even care? If we’re keen to see progress on certain goals—e.g., more affordable housing or better student outcomes—why should it matter if foundation resources flow to nonprofit or for-profit actors?
Regarding the first question, I’d love to see some number crunching on how a shift of endowment capital to impact investing could affect grantmaking budgets. If the Ford Foundation, for example, eventually ends up with 30 percent of its portfolio in mission-based investments that get 4 to 5 percent returns as opposed to higher returns in the stock market, what will that mean for its grantmaking budgets over the long term, as these returns are compounded? Are we talking about a modest hit to cumulative grantmaking power over decades? Or a really big one?
I have no idea, but I suspect that the finance teams at places like Ford, McKnight, and now NCF, have gamed out different scenarios. It'd be nice if such analyses were shared with the rest of us. Or maybe there are some white papers floating around that spell out the numbers. (Email me if you know of anything.)
This math matters to nonprofits. So far, there’s been no significant pushback from traditional grantees as more foundations move into impact investing. But if hard data emerges that shows that these organizations may be net losers from this shift, watch out.
As for the second question about whether we should care about how foundations achieve their goals, that’s a bigger issue. There are a growing number of do-gooders, many on the younger side, who profess agnosticism on the means of achieving social ends. Others are overtly dismissive of nonprofit models that they say are unsuited to scaling for maximum impact.
Call me a dinosaur, but I think it does matter how social goals are achieved, and see value in strong civil society organizations—beyond the instrumentalist questions of their impact and efficiency. A democratic nation needs powerful institutions that exist outside the market, beyond the reach of bottom-line pressures.
The good news is that quite a bit of impact investing these days is aimed at scaling nonprofit institutions that need more capital to increase their reach. The flow of money into community financial development institutions and public-private housing partnerships are prime examples. So there’s not necessarily an either-or-choice here.
Still, there’s no denying that impact investing raises some larger philosophical questions about what foundations are for—and what the value is of the nonprofit sector writ large.
Clearly, the debate about impact investing is just getting under way.