What would our world be like if charitable law required foundations to invest all of their assets in ways consistent with their charitable missions?
Most likely, our world would be a much better place.
Charitable foundations exist for one overarching purpose: to benefit the public. To encourage this result, they are highly tax-advantaged. Donations are usually tax-deductible and assets grow tax-free. In spite of this tax advantage, most foundations are required to grant only 5 percent of their assets for a "public benefit." What about the other 95 percent?
HARNESSING FINANCIAL POWER FOR SOCIAL GOOD
The Foundation Center reports that in 2012, the combined assets of U.S. family, corporate and community foundations was $715 billion. Today, that number is presumably much larger. (Many billions more sit in donor-advised funds.) There is significant power in these assets.
Typically, they are invested in traditional portfolios with the goal of generating the best financial return to help the assets grow. Often, however, those portfolios are not aligned with the mission of the foundation. In fact, they are sometimes in direct opposition.
Thus, a foundation with the mission of preserving the environment or preventing climate change may be investing in companies that actually produce the opposite result. A foundation supporting access to healthy food and local, organic and sustainable agriculture might be investing in agribusiness and fast food companies. A foundation supporting research to fight lung disease may be invested in tobacco companies or one dedicated to preventing diabetes may be invested in soda manufacturers. A foundation granting to empower women may be invested in companies that employ woman in dangerous sweatshops in developing nations to produce their products. And so on.
INVESTING YOUR MONEY WHERE YOUR MISSION IS
For decades, many foundations have been engaged in socially responsible investing, where negative screens prevent certain types of investments that are contrary to the foundation's mission.
In recent years, a growing number of foundations have taken this approach a step further, exploring proactive program-related investments and mission-related investments. PRIs and MRIs employ positive investment screens that intentionally advance their missions.
PRIs are below-market-rate investments that are made with a targeted program objective and can count against the 5 percent grant-payout requirement. Their primary objective is to accomplish program goals.
MRIs, by comparison, are market-rate investments that support the mission of the foundation by generating a positive social or environmental impact. Although they do not count against the 5 percent grant-payout objective, MRIs produce both financial and social returns _ a double bottom-line.
Revisiting the foundation examples above, such foundations could invest a portion of their endowments in alternative energy solutions, clean technology, organic foods and farming, medical research on disease prevention and cures, and women's education, health and employment.
DEMONSTRATING HOW IT'S DONE
The Heron Foundation in New York has gone "all in" on MRIs, declaring that every asset at its disposal "is now a mission-critical resource." The foundation recently reached its goal of investing 100 percent of its $300 million endowment toward achieving its mission, the first private foundation in the U.S. to publically achieve that goal.
Impact investing foundations like Heron recognize that every enterprise has impacts on the environment and society in the course of its business. Claire Miller, director and president of the foundation, says: "In a very real sense, all foundations are already doing 'impact investing.' They just don't know if their impact is positive or negative."
Billions of dollars in tax revenues are forfeited by the public so that foundations can use that money to benefit society. By marrying money and mission, foundations (and donor-advised funds) will have significantly more resources available to achieve those goals. The world's problems should be addressed using the full engine of philanthropically committed assets _ not just the fumes.
