Featured: Chronicle of Philanthropy: Foundations Are Cautious on Impact Investing

By Ben Gose

Impact investing is all the rage — on Wall Street. Foundations, it seems, haven’t yet fully bought into the idea.


The term is a marketer’s dream — "impact investing" has caught on in a way that terms like "socially responsible investing" never did. Financial firms, including BlackRock, Morgan Stanley, and AXA, are responding with a slew of new products. 

Bain Capital has hired Deval Patrick, the former governor of Massachusetts, to start a social-impact line of business. Goldman Sachs is buying Imprint Capital, an innovator in creating investments that deliver social as well as financial returns. Even Pope Francis has praised impact investing. 

Sideshow for Grant Makers

But outside of a dozen or so foundations, such as the F.B. Heron and KL Felicitas foundations, which have made impact investing a priority, the practice mostly remains a sideshow among grant makers.

In The Chronicle’s endowment survey, only 36 of 238 respondents, or 15 percent, reported using impact investments. A survey of large foundations conducted earlier this year by the Center for Effective Philanthropy found higher numbers: Twenty-six of 64 responding, or 41 percent, said they were engaged in impact investing. But the responding foundations told the center they were devoting a median of only 2 percent of endowment assets to the strategy.

"We’ve got a lot of folks who say that they’re doing it, but the dollars are small," says Phil Buchanan, the center’s president. 

"The folks who are leading the way on this are more likely to be family offices and wealthy individuals," says Clara Miller, Heron’s president. "Foundations are moving along much more slowly."

The slow progress may be caused in part by confusion over what exactly impact investing is. The term can mean stock funds that apply environmental, social, and governance screens or program-related investments or direct investments in companies seeking a social return as well as a financial one. 

New IRS Position

Some advocates for impact investing hope a recent announcement by the Internal Revenue Service will persuade a greater number of foundations to invest more of their endowment assets in ways that also further their social goals. The IRS can apply an excise tax on foundations that jeopardize endowment assets by taking big investment risks. The new IRS announcement said that a foundation that knowingly accepts a lower return on an investment that furthers its social goals would not be subject to the tax.

It’s too early to say whether the announcement will make a difference. Some foundations may not be worried about a tax on imprudent investments; they may simply think many impact investments don’t provide an adequate financial return. As noted elsewhere, many chief investment officers are fretting over whether they’ll be able to achieve the long- term returns that are needed to maintain their endowment’s value.

The Kresge Foundation received considerable press attention in September when it announced that by 2020 it would commit $350 million, 10 percent of its current corpus, to impact investments. But the fine print got buried in the news release.

According to Robert Manilla, Kresge’s chief investment officer, $150 million will go out via program-related investments, which aren’t endowment investments at all — they count toward the foundation’s 5 percent minimum spending rate under federal law. Another $150 million will be guarantees, in which the foundation uses its endowment as a backstop for, say, nonprofit borrowers who would have trouble obtaining a loan otherwise. The guarantees put some endowment dollars at risk, but the endowment can also invest those dollars in conventional assets at the same time. 

Only $50 million, or less than 1.5 percent of the endowment, is targeted for mission- related investments. Current areas of investment include affordable housing, health care for low-income people in Detroit, and an equity stake in Sustainable Insight Capital Management, a New York firm that uses environmental, social, and governance screens.

One reason Kresge is keeping the equity portion of its impact-investment portfolio small for now is the limited number of opportunities available, Mr. Manilla says. Although he hopes to expand the dollars committed to mission investments in the future, all such investments must meet the foundation’s return objectives and its programmatic goals, he says. Certain fields, such as health care and education, are more likely than others, such as the arts and human services, to offer attractive investment opportunities, he says.

Solutions and Money?

Mr. Buchanan, of the Center for Effective Philanthropy, says impact investing may never have the reach that its most ardent advocates envision.

"There are a lot of things that you can only really work on through good, old-fashioned philanthropy," Mr. Buchanan says. "The rhetoric would suggest that you can solve every social problem while making a ton of money, but that’s obviously not true. Identifying the opportunities isn’t easy."

Smaller foundations that rely on outsiders for investment management rarely make direct social investments on their own. They often rely on investment advisers to recommend funds that apply screens, such as positive screens for organizations that meet environmental, social, and governance standards or negative screens for tobacco or fossil fuel companies.

Federal Street Advisors works with 15 foundations with assets of roughly $830 million. Five of the foundations, with assets of $230 million, hold significant assets that are invested using environmental, social, and governance strategies.

"It’s a matter of helping clients align their portfolios with their values and mission," says Mark Peters, a principal at Federal Street. "Each investment committee will make its own path as it looks toward that end goal."

Applying screens to stocks has been around for decades; it’s not as sexy as a direct impact investment in a promising young company that aspires to do good.

But many experts believe that impact investing will begin to make a real difference only if large public companies begin to take sustainability standards seriously. Kresge, Heron, and several other foundations have made grants to support the Sustainability Accounting Standards Board, a nonprofit that is developing a list of sustainability issues unique to different industries. Public companies would report progress against those standards in mandatory filings required by the Securities and Exchange Commission. 

Ms. Miller, Heron’s president, serves on the nonprofit’s board along with a number of financial heavyweights, including Michael Bloomberg, the businessman and former mayor of New York, and Mary Schapiro, the former chairwoman of the SEC.

"This is not a tree-hugging board," Ms. Miller says. "These are people with a lot of business sense, and they understand that these things are material to investors."

In 2014, shortly after the provisional release of standards for the technology and communication sector highlighted work-force diversity as an issue, large companies including Google and Facebook voluntarily revealed that roughly 90 percent of their employees were white or Asian. The companies immediately responded by starting efforts to create a more diverse work force.

William Burckart, a philanthropy consultant who specializes in impact investing, says efforts like Sustainability Accounting Standards Board have a long way to go but are likely to make a lasting contribution.

"The better clarity we get around impact, the more we’ll understand which investments are — and aren’t — performing for society," Mr. Burckart says. "The DNA that needs to be in place for this new heart to start pumping is just coming into being."

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