April 12, 2017
The following post is the latest installment in a year-long series here on PhilanTopic that addresses major themes related to the center’s work: the use of data to understand and address important issues and challenges; the benefits of foundation transparency for donors, nonprofits/NGOs, and the broader public; the role of storytelling in conveying the critical work of philanthropy; and what it means, and looks like, to be an effective, high-functioning foundation, nonprofit, or changemaker. As always, we welcome your thoughts and feedback.
One hundred percent of foundations and philanthropists have set up their portfolios for "impact." But in the words of Heron Foundation CEO Clara Miller, "they just don't know if their impact is positive or negative."
The assumption has been that foundations and philanthropists would be among the earliest adopters of investment strategies that align their portfolios, their values, and the social change they are trying to achieve. Sadly, this has not been the case.
According to the Global Impact Investing Network's 2016 Annual Impact Investor Survey, foundations in 2016 accounted for only 4 percent of an estimated $77.4 billion in impact investment assets under management. At the same time, there is much in the report to be excited about, starting with the finding that survey respondents indicated a high level of satisfaction with the performance of their impact investment portfolios. In fact, "[e]ighty-nine percent (89%) reported financial performance in line with or better than their expectations, and 99% reported impact performance in line with or better than expectations."
There are many foundation leaders who are well aware of the potential of impact investing to drive social and environmental change. Liesel Pritzker Simmons, principal of Blue Haven Initiative, captures the sentiment of a growing number of philanthropists: "Just your philanthropic dollars are not enough to solve big world problems. We have a responsibility to use everything we have to make an impact."
Often, the reluctance to engage in impact investing on the part of a foundation is not from a lack of interest but rather from a lack of understanding about how to get started and how to engage. If that's the case, there are a number of simple strategies that any foundation executive or board member will want to consider.
A first step can be to join an organization that supports philanthropists' efforts to align their investments with their missions. Confluence Philanthropy and Mission Investors Exchange offer great networking and learning opportunities for foundations that are getting started as well as for funders with more experience. The ImPact, of which Pritzker Simmons is a co-founder, is a resource for high-net-worth families that provides educational services, data-driven insights, and a global community committed to growing the impact investing marketplace.
There are, in addition, a host of Web-based resources that can serve as a starting point. The ImpactAssets 50 provides a free and annually updated list of fifty impacting investing fund managers that can be filtered by geography, impact focus, asset class, and other criteria, while Enable Impact offers accredited investors access to private syndicates and curated deals.
For those interested in examining a sample portfolio, the KL Felicitas Foundation report Evolution of an Impact Portfolio demonstrates that impact investments can compete with, and at times outperform, traditional asset allocation strategies. Moreover, foundations need not look far to find investments aligned with their values. In many cases, their grant recipients would welcome debt capital or simple loan guarantees for capital projects or to launch a revenue-generating project.
Investing in social entrepreneurs offers some of the highest impact, but early-stage investing can be daunting, complex, and legally challenging. Some foundations have outsourced these challenges by creating a "carve-out" donor-advised fund (DAF) to make the investment. In 2016, the Goldhirsh Foundation opened a DAF at ImpactAssets to make an investment in a media company. "Making the investment through our DAF provided our team an opportunity to invest in an organization we believe in," said Goldhirsh Foundation president Tara Roth, "while outsourcing the burden that those types of investments can impose on private foundations."
Converting a private foundation into a donor-advised fund is another option. In addition to making program-related investing easier, conversion to a DAF can reduce the taxes, administrative burdens, and costs associated with the private foundation structure.
Foundations and donor-advised funds are already set up to play a unique role in our society: the allocation of private resources for public good. By systematically incorporating impact investing into their philanthropic mission, foundations and DAFs may be able to double the impact of their work, align and better understand the financial and impact performance of their philanthropic portfolio, and support organizations with both investments and donations. With a little effort, we can all use more of these resources to create the changes we want to see in the world.
Sally Boulter is a senior officer at ImpactAssets, where her responsibilities include client experience and strategic business development. Prior to joining ImpactAssets, Boulter was responsible for individual constituent relationship building and capital raising at the Wilson Center, Calvert Foundation, and the Bonner Group.