Invested With Purpose

Like many grant makers, the F.B. Heron Foundation’s assets have taken a big hit from the global financial crisis. By the end of October, the value of its endowment had dropped roughly 20 percent for the year. But the New York philanthropy has an unexpected bright spot in its portfolio — the program-related investments that the foundation has made to further its mission to spur economic development and create wealth in impoverished areas.

The $20-million in low-interest loans and other below-market investments that Heron has made represented 7 percent of its endowment before the latest financial turmoil. And while other types of investments were reporting losses, through the first 10 months of the year, the return on program-related investments was 3 percent. The foundation estimates that the full-year return will be 3.6 percent.

Without the earnings from program-related investments, the value of Heron’s endowment would have fallen an additional 1.5 percent, says Luther M. Ragin Jr., the foundation’s vice president for investments. He also notes that while the stocks and bonds that the foundation has invested in with an eye toward furthering its charitable goals have suffered losses, they are outperforming the benchmarks for their asset classes.

But he says that the foundation’s mission investments are important for another reason.

“Whether the market is up or whether the market is down, whether we’re making money or losing money, we’re convinced that the assets of the foundation are to the largest extent possible being deployed to further the mission of the foundation — and that gives us comfort,” says Mr. Ragin.

$10-Billion Potential

The Heron Foundation is in the vanguard of a small but growing number of philanthropies that are beginning to question the traditional wall of separation between investments and programs.

Among the efforts under way:

• Heron, the Annie E. Casey Foundation, in Baltimore, and the Meyer Memorial Trust, in Portland, Ore., have started a campaign to urge fellow grant makers to devote at least 2 percent of their endowment assets over the next five years to investments that further their charitable missions. If every foundation in the United States heeded the call, campaign organizers say, it would help move more than $10-billion into investments that seek both financial and social returns.
• The W.K. Kellogg Foundation, in Battle Creek, Mich., has announced that it plans to invest $100-million — a little over 1 percent of its $7.5-billion endowment — in ventures that will help improve the lives of poor children and families.
• The Northwest Area Foundation, in St. Paul, and the Cleveland Foundation have started professionally managed venture-capital funds to drive business growth in the regions where they make grants.

Foundations need to use all the resources at their disposal, says Christa Velasquez, director of social investments at the Annie E. Casey Foundation.

“The problems that we’re working to address are so large that even if we spent our entire endowment right now, we probably wouldn’t be able to solve anything,” she says.

She adds, “Doing what we can, particularly with our investing, to leverage other sources of investment will bring in greater resources to address these problems right now.”

The Long View

Many grant makers are still tallying the losses their endowments have suffered and bracing for the possibility of a protracted recession.

Foundation investment experts say they are unlikely to make significant changes in their investment strategies right away.

But some observers believe that, in the long run, the financial turmoil of the past several months will encourage more foundations to integrate their charitable objectives into their investment portfolios.

“People are probably a little more open to alternative ideas out there, given that some of the more traditional investments they’ve been doing have not been so good lately,” says Jennifer Christian Murtie, director of foundation services at Federal Street Advisors, an investment-advice firm in Boston.

Interest in learning more about mission investing remains strong. More than 400 foundation executives and trustees were expected to attend a meeting last week about investing and the environment featuring a speech by Al Gore, the former vice president.

But while interest in tying investments to a foundation’s mission is growing, only a tiny fraction of all philanthropic assets are invested in such a way.

In a report published last year, FSG Social Impact Advisors, a nonprofit research and consulting group in Boston, documented $150-million in new money that went into mission-related investments in 2005. The organization estimates that that figure rose to roughly $500-million in 2007. (By comparison, American foundations collectively have assets of more than $600-billion.)

The report said that the fastest rate of growth was among foundations with assets of $200-million or less.

“In many ways, they’re a lot more innovative and willing to experiment than many of the larger foundations,” says Mark Kramer, a managing director of FSG. “Many of them are family foundations or living donors where there’s less ingrained institutional caution.”

Many in the foundation world, however, remain unpersuaded.

Critics argue that taking social and environmental factors into consideration when making investment decisions necessarily lowers financial returns, which, in turn, means less money available for grant making.

Mr. Ragin, at the F.B. Heron Foundation, says the experience of his foundation and others shows that it is possible to produce financial returns that match those of traditional portfolios.

Ten years after Heron started looking at ways to align its investments with its charitable goals, more than $96-million of the foundation’s $266-million endowment is held in mission-related investments. Heron’s overall rate of return on its portfolio places it in the second quartile of the BNY Mellon All Foundation Total Fund Universe, a benchmark that tracks foundations’ investment returns, on both a threeand a five-year basis.

Mr. Ragin estimates that he has made presentations on mission investing to roughly 50 foundation boards and investment committees over the last two to three years. He says that one of the biggest reasons more foundations haven’t adopted the approach is the often dismissive attitudes of foundation investment advisers, who have told clients that it is a nice idea but too risky.

“To organizations that are often very, very closely tied to investment consultants, it’s rather daunting to hear that they can’t help,” says Mr. Ragin.

But that might be changing.

In February, Cambridge Associates, a company that provides investment advice and research to large foundations and other nonprofit groups, announced that it had formed a new department focused on mission investing in partnership with Heron, Casey, and Meyer, the three foundations that lead the 2 Percent for Mission campaign to encourage other grant makers to consider their charitable objectives when making investments.

The decision was prompted by the success of a number of the company’s clients in making investments that align with their charitable missions, says Sona Menon, a managing director of Cambridge Associates.

“Their success has been important and well known and read throughout the foundation community,” she says. “It’s piqued the interest of many foundations to know more about this space and see if it’s relevant to them.”

Pooled Investments

Cultivating interest is only part of the challenge of getting foundations to tie their investments to their missions, says Stephen B. Heintz, president of the Rockefeller Brothers Fund, in New York, which holds an endowment of $709-million.

The Rockefeller Brothers Fund has been exploring the idea of meshing investments with its grant-making goals since 2005, and it has developed a set of guidelines for voting its proxies in a way that is consistent with its mission when shareholder resolutions are brought at companies whose stock the foundation owns.

But it has had more trouble when it comes to making investments. Since the stock market downturn in 2001, the foundation has been working to diversify its portfolio, moving into hedge funds and other alternative investments — asset classes that offer few options to merge investing and foundation goals.

And as the endowment grew and the mix of investments became more complex, the board decided that the endowment needed more day-to-day management than the fund’s investment committee could provide. In November 2007, Rockefeller Brothers hired Investure, a Charlottesville, Va., company that jointly manages 10 nonprofit and foundation endowments, to make its investment decisions.

“All of the clients go into the same pools of investments, so we don’t have the choice to say, ‘We do want this one, we don’t want that one,’” says Geraldine F. Watson, vice president for finance and operations at Rockefeller Brothers.

Even so, the foundation is hopeful that Investure’s clients as a group might make investment choices based on social and environmental factors. Rockefeller Brothers worked with the company to organize sessions on investments in alternative energy for Investure’s annual meeting in October for its clients.

Investure manages more than $6-billion in endowment assets, so the possibility that the group might decide to pursue mission investing is an exciting one, says Mr. Heintz.

“But getting from where we are today to that possibility is going to require a lot of work, because you’ve got 10 separate institutions, 10 boards, 10 different investment philosophies,” he says. “There’s a lot to grapple with.”

Deposits at community banks and credit unions make up an important part of the Annie E. Casey Foundation’s mission investments — $4.3-million of the $44.1-million committed so far. In 2004, the foundation’s board earmarked $100-million for mission investments, roughly 3 percent of the fund’s $3-billion endowment.

The foundation uses the deposits, which are in banks in cities where Casey works, to build relationships with the financial institutions and to try to influence them on behalf of the people served by Casey’s programs. In Providence, R.I., for example, the foundation persuaded Washington Trust to create a low-cost remittance product that immigrants can use to send money to family members in their home country and to put an ATM machine in one of the neighborhoods where Casey works.

Those deposits, along with below-market loans and loan guarantees to charities, make up the majority of Casey’s mission-related investments so far.

Ms. Velasquez, the foundation’s director of social investments, says that while the number of opportunities to blend mission and investments has grown significantly in recent years, finding ones that focus on Casey’s goals — helping vulnerable kids and families — isn’t always easy.

As a result, the foundation plans to add a new “values driven” category to its portfolio, which would allow Casey to invest in green technology, international emerging markets, and other areas that are not directly related to its grant-making priorities, but still have positive benefits for society.

“We’re going to be thinking even broader about what a social investment is,” says Ms. Velasquez.

Shift in Thinking

Even the strongest proponents of aligning investments with grant-making goals think that the financial crisis is bound to slow the rate at which foundations incorporate the approach into their investment strategy, at least for the short term. But they remain optimistic.

Jed Emerson, a managing director of Uhuru Capital Management, in New York, has been writing and speaking about mission-related investing for nearly a decade. He says that he has seen a shift in the conversations he has with foundation officials, which gives him hope.

Fewer of those discussions, he says, focus on whether such investments are a good idea, and many more are about what is the best way to put them into practice.

“You’re going to find increasingly that it’s not a question of responsible investing,” says Mr. Emerson. “It will simply be, ‘This is just sound, good investment practices.’ Ten to 20 years from now, this will just be business as usual.”