US Foundation Endowments: A Missing Piece to Maximizing Impact

Imagine that you are a committed environmentalist. You believe that climate change is the biggest challenge facing society, and you want to find solutions. Yet, you decide to spend only five percent of your available time and energy on this, forfeiting the other 95 percent that could be put towards that effort.

At an institutional level, this is what many foundations are doing.

Foundations, by definition, are designed to "serve the public good." The role of foundation philanthropy in addressing a range of important social, environmental and other issues is part of our societal structure. Yet, foundations have largely addressed these issues with five percent of their endowments, the level of grantmaking required by law. A recent report from the US SIF Foundation, "Unleashing the Potential of US Foundation Endowments: Using Responsible Investment to Strengthen Endowment Oversight and Enhance Impact," documents the low level at which foundations are utilizing their endowments to address foundation goals and other social missions.

With approximately 80,000 private foundations in the United States, and billions of dollars in these endowments, most foundations are leaving potential impact untapped by not harnessing their endowments to address their mission. Furthermore, by de-linking investments from grantmaking, many foundations unknowingly exacerbate the issues that they are trying to address or that they might otherwise care about. Consequently, up to 95 percent of foundation assets could be invested in companies and sectors that work either at cross purposes to foundations' stated goals, or in ways that do not support companies that are making strides towards overall environmental and social sustainability, as well as good governance practices. For example, a foundation may provide grants to non-profit organizations that work on human rights issues. Yet, that same foundation, like many other investors today, may also invest in companies with poor labor practices and policies on gender. This is not an unlikely scenario because program and investment staff are not coordinating with each other, speak different "languages" and often have different priorities.

Foundations -- mostly small- and medium-sized, but some of the larger actors as well -- are beginning to recognize and address this disconnect. Data suggest that several hundred foundations are practicing sustainable and responsible investment (SRI) as a way to ensure greater alignment with their foundation goals and social mission. Sustainable and responsible investment -- also called mission or impact investing -- considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact. Various investment strategies are utilized by institutions practicing SRI including: shareholder advocacy, venture investments in companies working to solve pressing social problems, screening to identify companies with the highest ESG rankings and deposits with community development credit unions and banks. For example, the Cordes Foundation, founded in 2006, has over 30 percent of its investment portfolio in impact investments with a particular emphasis on education and the empowerment of women and girls, health care and job creation. One of the Cordes Foundation's impact investments is in the Northern California Community Loan Fund, which supports low-income neighborhoods in the region with financing and expertise. According to the Cordes Foundation website, "during the financial crisis in 2008, the best performing investments in our portfolio were our impact investments -- which were largely uncorrelated with the global turmoil ravaging the traditional financial markets."

The F.B. Heron Foundation also actively practices sustainable and responsible investing. After re-evaluating its goals and strategies two years ago, the foundation committed to fully invest its $274 million endowment in line with its mission of supporting economically disadvantaged families and communities through a focus on employment opportunities. For example, it recently invested in an environmentally responsible packaging company that is committed to improving the skills and livelihood of its employees as well as in a real estate fund that finances projects to revitalize low and moderate income communities in northwest Louisiana. F.B. Heron also reorganized its staff, creating a "capital deployment team" that focuses on both grants and investments, rather than having two teams that work on each area separately. Other foundations have taken similar steps, helping to bridge the two sides and enhance their impact.

A handful of foundations leverage their shares in public equity investments to directly engage the companies they hold in their portfolios. The Christopher Reynolds Foundation, Nathan Cummings Foundation and Needmor Fund, for example, actively file shareholder resolutions with companies to address important ESG issues. Other shareholder engagement activities include voting proxies in a manner that accords with their investment policies and joining investor coalitions to address questionable corporate practices. In 2013, through shareholder engagement, foundations encouraged companies to adopt policies such as disclosing their political spending and expanding their anti-bias policies to cover sexual orientation.

In addition to enhancing mission-related and other environmental, social and governance outcomes, foundations pursue responsible investment strategies to manage financial and reputational risks. Additionally, many studies have shown that SRI financial performance is comparable to conventional funds.

There are several relatively simple steps that foundations can take to begin the process of aligning a larger share of their investments to mission or other social goals. They can ask their investment consultants or advisors whether their consulting practices have SRI experts with whom foundation staff can confer. They can establish ESG proxy voting guidelines and join investor coalitions to learn about corporate ESG issues of concern and to participate in the filing and co-filing of shareholder resolutions.

Philanthropic giving by foundations has been and continues to be an important contribution to social, economic and environmental justice here and abroad. Yet, foundations are unnecessarily limiting themselves if they leave their investment portfolio out of their impact strategy.