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08/17/2011

Converting Mission-Related Investing into Action in the Foundation World


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The global economy appears to be settling into a period of protracted sluggish growth where “outsized” returns will be harder to come by. At the same time, trust in the conventional financial markets has sunk to an all-time low. The moment may therefore have arrived for foundations to move in a meaningful way beyond granting making and the occasional program-related investment (PRI) as the sole tool for expressing their missions and to begin deploying their endowments in the service of their missions through mission-related investing.

Mission-Related Investing (broadly defined as market-rate investing that supports a foundation’s mission) has indeed been advancing slowly but steadily in the foundation community over the past several years, reports David Wood, Director of the Initiative for Responsible Investment at the Hauser Center for Nonprofit Organizations at Harvard University, which oversees More for Mission: the Campaign for Mission Investing. The number of foundations who have joined More for Mission has grown to 96, representing over $38 billion in assets.

The Obama administration’s Healthy Food Financing Initiative has provided the impetus for a number of foundations to explore mission-related investing. Examples include the California Endowment's participation in the FreshWorks Fund, a $200 million public-private loan fund created to increase underserved communities’ access to healthy, affordable food, and the Food Trust’s participation in the Pennsylvania Fresh Food Financing Initiative.

Wood also reports having many more conversations in the past six months with fund advisors who say that foundation investment officers are being more assertive about their desire to experiment with mission-related investing. They are saying, “this is the kind of investing we want to do instead of asking if they can do it,” says Wood. “We have moved beyond the existential ‘is it okay’ question to, ‘let’s make it happen,’ which is a sign of progress.”


Endowments


Another promising trend, notes Wood, has been increased activity within the foundation community focused on actively shaping the market for mission investing, not only through direct investments but by advocating for public policies that help increase investment capacity in the space. “This suggests the mission investing market is maturing and that there is less acquiescence among foundations to accept the current market structure as a ‘given,’” says Wood. He also cites the Integration Initiative of the philanthropic and financial institution collaborative Living Cities, which is looking to “leverage the collective power of the public, private and philanthropic sectors through new and innovative ways of aggregating capital” by investing $15 million in grants, $15 million in foundation loans, and $55 million in commercial debt in projects in low-income urban areas around the country.

The Initiative for Responsible Investment is also working with the Rockefeller Foundation on the demand side of the investment equation to build pipelines to make projects with a social or environmental benefit, such as MRIs, more investible.   At the same time,” says Wood, “we want to make sure that we are not creating investment structures that merely put foundations in the position of subsidizing commercial finance, and so it is a balancing act.”

A continuing barrier to mission-related investing is that the space is low on the radar screens of the mainstream investment advisory community. Wood believes it will require more demand from foundations to convince advisors to begin actively offering a menu of MRI products. Currently, although one or two funds may be suggested when endowments make inquiries, Wood says that it is generally true that “advisors are not always able to respond to foundations with large ambitions to deploy assets into MRI.”

Wood notes that MRI advocates like More for Mission continue to “chip away” at the barriers to market entry. For example, More for Mission is working in close partnership with the PRI Makers Network to encourage foundations to look at MRIs and PRIs as a continuum of investments rather than in separate silos. More for Mission is also focusing now on trustee engagement and in entering into conversations with foundations about MRIs through sector specific engagement such as health or transit-oriented development. But Wood says it is unrealistic to expect the foundation community as a whole to embrace mission-related investing overnight. “People in charge of endowments may believe markets are efficient and that you have to take prices as they come,” he reports. “In that context MRI may look ‘alien’ to them."

Wood remains cautiously optimistic that MRI will continue to take hold despite the barriers and challenges. “There is a lot going on and a lot of potential,” says Wood. “We are entering into a testing period over the next three to five years to see if we can convert interest into more substantial action.”

Current market conditions have been both a challenge and an opportunity for mission-related investing, Wood asserts. On the one hand, investment committees are looking to recoup their market losses. But, on the other, while there is perhaps not yet any deep, fundamental questioning of the market structure, foundations are observing the consequences of the excessive leverage and dysfunctionality of the conventional financial markets and asking whether there might not be better ways to deploy their endowments, and for a higher purpose.

Stephen Viederman, the former President of the Jessie Smith Noyes Foundation, has argued that foundations take a much more inclusive approach to defining that “higher purpose.” Most discussions of mission investing, he notes, focus on a foundation’s first defining its mission and then seeking investments that harmonize closely with it. But, Viederman believes, the purpose of any charity or foundation can be more broadly viewed as “the public benefit.” Consequently, he argues, that broader definition of public benefit, which includes all societal and environmental issues and their associated financial risks and opportunities, should be addressed as part of any foundation’s mission-related investing strategy.

–Susan Arterian Chang writes on sustainable investing and is Director of Content Development for Capital Institute, an organization exploring the transformative role finance can play in promoting a more sustainable economy.

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