What would our world be like if charitable law required foundations to invest all of their assets in ways consistent with their charitable missions? This important question was recently posed by Mark Finser, chairman of RSF Social Finance.
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 2010, the combined assets of U.S. family, corporate and community foundations approached $650 billion. Today, that number is presumably even larger. 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 might be investing in companies that harm the environment. A foundation supporting organic foods and local sustainable agriculture might be investing in agribusiness and fast food. And so on.
Investing your money where your mission is
For decades, many foundations have been engaged in socially responsible investing (SRI), where negative screens prevent certain types of investments. For example, SRI could prevent inadvertent investments in tobacco, environmental polluters or weapons by foundations with missions to the contrary.
Recently, many foundations have taken this approach a step further, exploring proactive program-related investments and mission-related investments. PRIs and MRIs employ positive investment tools to 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. They fall into the grant-making category because 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 financial and social returns. These definitions come from Mission Investors Exchange, an excellent resource on mission investing.
Demonstrating how it’s done
Denver’s Rose Community Foundation participated in the country’s first Transit-Oriented Development Fund, investing in affordable-housing units along expanding light-rail corridors so that people who depend on public transportation can afford to live nearby. RCF president Sheila Bugdanowitz said: “At our foundation, the silos of investment and grant-making are breaking down because we need to use more of our resources to solve social problems.”
Similarly, the Piton Foundation recently partnered with others to purchase land along a new light-rail line to ensure that community development occurs in a way that links historically isolated urban neighborhoods and provides residents with better access to jobs, education and health care.
The Colorado Health Foundation established the Colorado Fresh Food Financing Fund, a public-private partnership to provide financial incentives of loans and grants for grocery stores and other food retailers in underserved communities throughout Colorado. The CHF has also set up loan funds to support development of mental-health and safety-net clinics.
The F.B. 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 plans to invest 100 percent of its endowment toward achieving its mission.
Billions of dollars in tax revenues are forfeited by the public so that foundations can use that money to benefit society. With 95 percent of those assets often invested with no regard toward public benefit or mission, it’s time for foundations to seriously consider the impact of their investments and create the public benefit they exist for from the engine of their assets, rather than just the fumes.
Bruce DeBoskey is a Colorado-based philanthropic strategist and adviser who helps businesses, families and foundations design and implement their philanthropic initiatives. More at deboskeygroup.com.