There is a paradigm shift is underway in philanthropy and its effects are rippling through both the non-profit and for-profit economies; in many cases drawing the two closer together.
Traditional philanthropy operated with a simple game plan. Make grants seeking the highest possible social impact (quadrant Z) and continue to maximize investment returns (quadrant A) so that you can give generously in future years. New philanthropy has begun to connect both the investment and charitable goals. New philanthropy seeks a healthy financial return while pursing a positive social impact across the entire portfolio.
More Integrated Investing Philosophy
Foundations are typically charged to give away what has historically been a bit less than the income from their portfolio by making charitable grants. While the staff work passionately to ensure funds are distributed most effectively, the investment portfolio that makes all of this possible have traditionally been tasked with maximizing profit extraction without little concern for the social impact of these investments.
Functionally, this traditional approach can create glaring tensions between the investment portfolio and a foundation’s mission. Foundations focused on caring for the environment can end up holding investments in companies with a terrible track record of pollution control or foundations seeking to promote human welfare can hold stock in companies that profit from poor health choices.
But something new has been occurring.
Foundations are now regularly making commitments to begin aligning 10% to 25% of their portfolio with the fundamental values of their foundation. Lester Salamon of John Hopkins University calls the foundations who have fully embraced this new paradigm “Philanthropic Banks” because they seek to leverage their portfolio assets to achieve their philanthropic goals. No foundation better emulates this new paradigm than the Heron Foundation from New York City. Beginning in 1997, the Heron Foundation began seeking portfolio investments that achieved both a financial and social return. Today, the foundation is seeking to achieve 100% integration. “We are trying to build an operating model that helps ensure that every dollar, staff member, and resource at our disposal is dedicated to helping people help themselves out of poverty.”
It may not shock anyone that the Ben & Jerry’s Foundation committed to divest their portfolio from the top 200 fossil fuel producers but many were surprised to hear that the Rockefeller Brothers Fund, funded by assets earned by the co-founder of America’s largest oil company (Standard Oil), signed the same DivestInvest Pledge which also commits to take these divested assets and reinvest in renewable energy and energy efficiency.
More Entrepreneurial Tools
As foundations have sought to integrate their mission and their investment activity, a new investing tool kit is emerging and these new tools are collectively known as “impact investments”. In a survey conducted by the Center for Effective Philanthropy, 47% of Private Foundation CEOs said they either currently make or they plan to engage in impact investing in the future.
- Mission Related Loans
Many foundations are carefully selecting to loan their capital to mission-aligned efforts that are seeking capital. Some of this fixed income lending is to community banks focused on serving financially insecure neighborhoods while other loans could be to municipalities or other non-profits who are performing a desired service. The Mary Reynolds Babcock Foundation made a $5 million fixed income investment in Community Capital Management to support affordable housing and small businesses development in the Southeast. Since it’s 2005 investment, the foundation reports a return of 4.2% (benchmark: +4.8% Barclays Capital Aggregate Index).
- Loan Guarantees
The Bill and Melinda Gates Foundation now issues loan guarantees which put the assets and reputation of America’s largest foundation behind what the market would typically assume is a risky loan. These loan guarantees helped a leading charter school management company borrow money at very favorable terms and expand their services.
- Mission-Related Private Equity Investments
Tony O. Elumelu began the foundation bearing his name to “give back to the African continent and the people who enabled my success.” To meet this goal, Tony created an entrepreneurship program that offers both training and seed capital investment in startup businesses. Tony shares, “I also believe ‘charity’ as conventionally defined is not the best solution for our continent. Instead, we need a ‘new philanthropy’ that focuses on building the capacity of the private sector to create jobs and wealth – and that this leads to sustainable development.” Profits in his foundation that are realized from successful startup business will be reinvested in new crop of African entrepreneurs.
Other private equity opportunities offering a double bottom line include investments in sustainable agriculture and aquaculture, alternative energy and affordable housing.
- Social Impact Bonds
If non-profit Roca, Inc. efforts to keep Boston and Springfield, MA men on probation out of prison are successful, a number of institutional investors stand to benefit. Social impact bonds or “Pay for Success” (PFS) initiatives offer an innovative tool for public, private and philanthropic partnerships to achieve some desired outcome. In this case, if incarcerations are reduced by a target of 40% when compared to a similar group of men who are not in the program, the Commonwealth of Massachusetts will pay back Goldman Sachs its initial investment plus 5% annual interest, and junior lenders (including the Kresge Foundation) will be paid back their base plus 2%.
As this paradigm shift penetrates the everyday business practices of the philanthropic world, it is helping both the non-profit and the for-profit sectors to relate more effectively to each other. While traditional philanthropy separated the non-profit world from the real economy, New Philanthropy suggests that both are partners and have much to learn from each other.
I see the same pattern working itself out in personal finances as well. As investors begin to engage with a more values-integrated investing approach, the walls separating charitable donations and investing activities begins to crumble. This evolution often causes many generous donors to begin seeking more measurable outcomes from their charitable investments. And it causes investors to consider the broader impact of an investment portfolio. Whether you are giving money away or buying a Fortune 500 stock, you are making an investment in the world our children will inherit. All investments are impact investments.
‘Might as well be intentional about it.