Impact investment: Foundations go deeper
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Impact investment: Foundations go deeper

While foundations may be known for their giving, their investment portfolios lack creativity when it comes to solving environmental and social challenges. Some are taking their missions further.


According to the Foundation Center, at the last count there were 86,726 foundations in the US. Together they had more than $865 billion in assets. In Europe, there are some 130,000, according to Fondation de France, with a combined €22.5 billion. Whether in size of assets or in number, foundations are a large and powerful group of investors – because the majority of their money is indeed invested.

European foundations allocate just 12% a year to their missions through grants and expenses, while US foundations allocate 7% on average. 

With social or environmental principles at the core of their existence, one might assume that these investments are subject to some sort of environmental, social and governance (ESG) screening or socially responsible investing (SRI) guidelines at a minimum – but that assumption would be wrong. 

While data on foundations’ investments is patchy, the surveys of the community from the Commonfund, US SIF and The Center for Effective Philanthropy over the last five years reveal an interesting story. The percentage of foundations that engage in anything from SRI guidelines to full-blown impact investments never reaches more than 50%. In fact, the average is closer to 25%. That leaves around $615 billion of investments that could be managed in an impactful way that simply are not. 

“It is often a surprise to people that many foundations don’t consider their investments as having an impact in addition to their grant-making work,” says Elizabeth McGeveran, director of impact investing at the McKnight Foundation. “Asset managers expect them to be at the forefront of aligning their missions with their endowments, and yet they lag behind US and European pension funds to some degree – as well as behind many asset management firms.”

Why have foundations become the laggards in the revolution towards using investments as a force for good? One head of ultra-high net-worth clients at a global private bank says he thinks it may be generational: “There are two schools of thinking we see among our foundations. Some believe that it’s more important not to limit the ability to make returns on the investment side to ensure the 5% being donated can keep being fulfilled. Others believe that the investments should be aligned with the mission.” 


 Catherine Howarth, ShareAction

In the former set-up, the opinion is that ESG screening, impact investing or shareholder activism are only useful if returns to the endowment would remain the same or increase – and they do not believe that would be the case, says the banker. Although he points out that it is “something of a generational belief” and could change as evidence grows in support of higher returns from SRI or impact investing, or as younger generations take over the reins.


McGeveran says there is even a notion that foundations should split functions in-house, with grant making on one side and investment management on the other: “To a large extent, the investment decisions have tended to be ring-fenced because of outdated ideas of what it means to be a fiduciary – that is, that the investment portion of the endowment needs to remain mission neutral.” 

She also expects a change in mindset and points to research by law firm Reinhart Boerner Van Deuren that highlights that the legal fiduciary duty for endowments and foundations includes: “Providing instructions to investment managers that are consistent with the purposes of the institution and fund.” And that “any fiduciary should consider the charitable purposes of the institution and the fund when making investment decisions.

“In other words, as a foundation, you have an obligation to consider the impact of your investments,” says McGeveran. “Slowly foundations are starting to realize this.” 

Catherine Howarth is chief executive of ShareAction, a UK non-profit organization that encourages investors to use their shareholder rights to bring about positive change. She says even more could be achieved by foundations if they raised their voices as shareholders: “Foundations could ask themselves: ‘If my mission is an environmental one, then why support high-carbon industries as an investor?’ Or: ‘If we are a social relief organization, then why not consider how the companies we invest in treat their workers?’”

Howarth claims that a growing number of foundations in the UK now recognize the added impact they can achieve by using their voices as shareholders and by encouraging their asset managers to be responsible and socially engaged as investors. 

In 2011, for example, the Living Wage Foundation was set up to research the pay level working people in the UK need to achieve a ‘low-cost but acceptable’ standard of living. One in five UK workers earns below the living wage level, since the government’s mandatory national minimum wage was, and remains, lower. Howarth worked on raising awareness of the living wage among large shareholders, including charitable foundations. 

“When we started our work on this, just two of the FTSE100 companies were accredited living wage employers. Thanks to the active support of investors, including a range of foundations, we’ve seen many of the UK’s biggest public companies embrace the living wage standard,” she says. Today, one third of the FTSE100 are accredited living wage employers and a further 20 of the largest firms in the UK are compliant with the standard, although not yet formally accredited. 

“This rapid progress would never have happened without investor support, notably from foundations,” says Howarth. “Many thousands of the UK’s lowest-paid workers today enjoy the dignity of a living wage. That’s a hell of an impact story.” 


Laura Campos, Nathan
Cummings Foundation

Indeed, it is perhaps a greater impact than philanthropic giving could make. 

ShareAction also runs the Charities Responsible Investment Network (CRIN), which now has more than 20 UK-based foundations who work together to hold their asset managers accountable and to interact with listed companies in their portfolios on social and environmental issues. In March, the world’s largest brewer, AB InBev, announced it was going entirely renewable in electricty supplies to its global operations after the company received a letter from members of CRIN. 

“The achievement of these foundations in leveraging their shareholdings to achieve impact is an unsung story, but it’s an increasingly impressive story,” says Howarth. “And we’ve really hardly started.” 

Michael Sonnenfeldt, chairman of Tiger 21 agrees a change needs to occur. His organization serves more than 500 high net-worth individuals with a collective net-worth of $50 billion. 

“Foundations alone cannot harness the scale of the issues they’re trying to solve,” he says. “There’s about $300 billion in philanthropic giving a year in the US, but we need to look at the $75 trillion invested everywhere. We need to think more seriously about putting our non-philanthropic investments to work to complement our values-based giving to solve the problems foundations are trying to resolve.”

He says one challenge that any investor faces, however, is that large parts of a portfolio are often invested in the S&P500 through large index managers.

The likes of Vanguard and Fidelity have been noticeably absent as active shareholders around issues such as high carbon emissions and human rights. 


For high net-worth investors who use passive funds, that may be problematic. But foundations are also guilty of ignoring their responsibility as investors and of remaining silent on important issues. So far this year, onlysix foundations appear on Ceres’ database that tracks US shareholder filings on sustainability-related issues. 

One of those six is the Nathan Cummings Foundation. It had long employed a screen for tobacco, but in 2001 began to look at how it could better use its role as an investor to bring about change. Since 2003, the foundation has filed more than 200 shareholder proposals that support its mission, the focus of which is inequality and climate change. This year to date the foundation has made eight filings, including one at FirstEnergy about lobbying activity and another at Occidental Petroleum regarding climate change and carbon asset risk, which made history by being the first ever climate risk proposal be to passed at a big US oil and gas company.

Laura Campos, director of corporate and political accountability at the Nathan Cummings Foundation, says it puzzles her why peer foundations aren’t being more active as investors. 

She suggests it may be as simple as a resource issue: “We are unique in that we have chosen to staff a position with responsibility for corporate engagement and oversight of our shareholder proposals. It could also be that it is deemed too complicated, but dealing with the Securities and Exchange Commission is actually not that tricky.” 

She also wonders if there is another misperception: that being an active shareholder and filing a proposal is deemed to be an aggressive course of action. 

“I have heard board members of other foundations voice concerns that it could be seen as confrontational, but that is not the case,” she says. “We are long-term investors and we want the companies we invest in to succeed. We care about their long-term profitability and want to help them.”

McGeveran says that foundations would do well to look at their whole endowment holistically and think about what is right for them in terms of leveraging it to fulfil its mission: “There is a huge menu of options for foundations, it doesn’t have to be a one-size fits all. People will say ‘divest from fossil fuels’, but there are other ways to manage decarbonizing a portfolio, for example.” 

The McKnight Foundation is evaluating its investments to determine how to make more of an impact.

“We’re not seeking to make our investments a perfect reflection of our mission, but we are looking at what we can do in the area of investments that can advance our mission,” says McGeveran. “And we’re working with fund managers to do that. It’s important to ask them the tough questions.” 

McKnight has removed coal bonds from its $180 million portfolio, working with the manager as it sought to define what coal exposure meant. It also worked with Mellon Capital Management to create a carbon efficient strategy seeded with $100 million. 


When it comes to rethinking how to have the largest impact, the Berggruen Institute, a think tank founded by philanthropist and investor Nicolas Berggruen, is applying an entirely different strategy to many of its peers: engaging with government. 

It has already worked with the State of California on the referendum system and is now working on tax reforms; with the Chinese government on building relationships; and has gathered political leaders and thinkers to discuss the future of Europe. The foundation also has an online-media platform called the World Post in partnership with the Huffington Post. 

“The trouble is that you can identify a need for schools in a country and then build those schools, but you haven’t asked the question: ‘Why aren’t there schools there in the first place?” says Berggruen. “Perhaps the government doesn’t support education, for example, and then your investment in schools is all well and good, but it is not sustainable. Or perhaps your project employs women or immunizes children… these are all very valuable, but in the end we have to ask the deeper questions. If the governments are not functional or supportive, then nothing will change. Instead, we look at the system, meet with leaders and open up the conversation.”

The desire to start conversations and new thinking inspired Berggruen to launch an annual $1 million prize in philosophy. Last year’s inaugural winner was Canadian Charles Taylor.  

We are long-term investors and we want the companies we invest in to succeed. We care about their long-term profitability and want to help them - Laura Campos, Nathan Cummings Foundation

“Developments that have been slowly building over the last 30 years have been turned on their heads,” says Berggruen. “We were heading towards globalization, but now we are noticing the challenges, and democracies are being threatened, yet democracy comes with its own issues. We need new ideas, new ways of thinking about how societies work, religion, economics… this is philosophy and we want to empower great thinkers.”

Working at the system level is not glamorous work, he adds. Often philanthropists are entrepreneurs who are looking for immediate impact and measurable success. He suspects it is why few foundations have yet to follow his institute’s lead. 

“It can feel more rewarding to open a school, for example,” Berggruen says. “And we do that too. We funded a teachers’ village in Newark and we have also carried out projects in Africa around farming, which is wonderful. But we also need the long game. And government is the longest game there is, so we have to work alongside them if we want to see structural change.”

It is not an easy fix, he admits, and the institute’s four areas of focus are indeed lofty: cultural transformation, redesigning democracy, rethinking globalization and human interaction with technology, such as genetics and artificial intelligence.

“These are complex themes,” he says. “If you can convince an authoritarian regime, for example, of the negative impact of carbon on their country’s ecosystem, then bizarrely you’re more likely to see an immediate change in policy, while a democratic government on the other hand can be slow to move. Things are being turned on their heads.” 

He admits there are unlikely to be any silver bullets, however: “We may come up with ideas that fail, but we have to start somewhere. As human beings, we each have a responsibility – that’s a given – but today there is an urgency for us to step up and come forward with new ideas. I strongly believe that charitable foundations are doing good work, but we are facing some very large issues that require a different approach and a different level of engagement.”

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