Maximizing Our Missions

This month’s publication of a series of Los Angeles Times articles detailing how the Bill & Melinda Gates Foundation’s investments often contradict its social goals should not have surprised anyone in philanthropy.

In fact, the vast majority of foundations in the United States are active investors in global capital markets that provide financial fuel to corporations around the world. Many foundations invest equally in companies that act as responsible corporate citizens as well as ones that do not.

This historical contradiction hidden in the philanthropic closet has been a quiet little secret for years. Most foundations create a firewall between the grant making (typically conducted with close scrutiny and engagement by staff members and donors) and their investment management (usually overseen from a distance and entrusted to professional managers charged with maximizing financial returns, often at the expense of social or environmental values). The reality that the Gates family has opted to follow the practice of its peers may be disappointing, but should come as no shock.

It is, however, neither naïve nor unrealistic to suggest that foundations should manage all their assets — the legally required minimum of 5 percent that must be paid in grants as well as the 95 percent that is invested to finance future grant making — in a way that advances their institutional missions.

Any business model that uses only 5 percent of its assets to advance its mission surely needs improvement, especially at a time when many mainstream investors are already considering environmental and social factors in their investment decisions.

However, before any of us rush to criticize the Gates Foundation for its investment practices, we should pause to reflect upon how we each manage our own assets — both personal and corporate.

How we all live our lives, what we drive, eat, and wear, have implications for social justice and for the future of our planet. It is easy to become overwhelmed and to worry that social investing could force us into a life where we can wear only sackcloth and sandals. Foundations are similarly concerned about whether they can simultaneously fulfill both their philanthropic and their fiduciary obligations.

The results of research that we have conducted at FSG Social Impact Advisors, with financial support from the David and Lucile Packard Foundation, make clear that it is possible to do both. While a report on the research will not be released until March, one finding is especially striking: Over the past decade, the number of foundations engaged in some form of mission-related investing has doubled — while the amount of new foundation dollars invested annually in mission-related investments has tripled.

What’s more, while one might think such activities are the purview of large, well-staffed foundations, the philanthropic segment with the fastest growth in both the number of participating foundations and the amount of dollars invested was foundations with $200-million or less in assets.

Indeed, one could argue it is the large foundations that are behind the curve when it comes to innovative approaches to using their capital to advance their missions.

A study conducted last year by The Chronicle found that of the 50 wealthiest foundations in the United States, only one — the Gordon and Betty Moore Foundation — actively screened investments for conflicts with its mission, although roughly one-third screened out companies involved in tobacco (a policy that the Gates Foundation has stated it will also follow).

Only two of the 50 largest foundations had formal policies designed to ensure their proxy voting was consistent with their grant-making objectives.

Each foundation’s response to the challenge of effectively managing assets to generate greater social returns will vary, just as investment choices vary depending on an institution’s goals and its willingness to take financial risks.

But the options available have grown far more sophisticated and reliable in recent years. Foundations can choose fund managers who draw upon the work of organizations like Innovest that provide research on the social and environmental performance of companies, or they can decide to invest directly in so-called sustainable investment funds like Pax Domini, Generation Investment Management, or the Calvert Group, among many others.

Foundations like the F.B. Heron Foundation, in New York, have also found ways to invest a substantial portion of their assets in loans and other vehicles that directly further their missions without compromising their financial returns.

Despite the availability of well-tested approaches that blend social and investment goals, many foundation trustees and senior staff members remain uncertain about how to proceed. Trustees often say they are not comfortable being directly involved in establishing a foundation investment strategy, preferring to leave the task to the chair of the board’s investment committee and outside experts.

The good news, however, is that just as foundation trustees need not be experts in nonprofit issues to oversee effective grant making, they do not need to be experts in finance. Rather, as is true of all effective corporate boards, they should set the expectations for performance, monitor progress toward the achievement of those expectations, and be open to learning from the people who are carrying out an investment strategy.

The first step is for the foundation board of trustees to state clearly and with conviction that it seeks to manage the assets to have the maximum social and financial return possible. To assist them in shaping policies, board members now have a growing body of publications and tools that can help them understand the key issues. (To find links to a selection of these resources online, go to http://philanthropy.com/extras.)

Foundations, of course, are tax-favored entities and are — unlike individuals or corporations — charged with acting to advance the public good in return for avoiding taxes. As a result, they are accountable to a higher standard than other investors.

But an even more fundamental principle is at work, reflected in countless ways throughout our society. As a nation we subscribe to a philosophy that says: Make money however you can, and then give some small portion of it away to solve the urgent needs of the majority of the world’s population.

This approach has given us a vibrant economy and an ever-growing set of nonprofit organizations. It has not, however, made much headway in solving the world’s problems.

It is time to think anew. We must recognize that we are all part of a connected planet. The value we create through the trajectory of our lives, in the course of our workweek and our involvement in civic causes, is a blend of social, economic, and environmental components. We must search for ways to maximize all of those components simultaneously, not in juxtaposition, if we are to make a difference in the world.

So let’s focus not just on how grant making can be more effective, but also on how business is conducted in both corporate America and at nonprofit organizations.

Every one of us, as individuals and through our organizations, must meet this challenge and publicly discuss how we will seek to maximize the full value of our spending and investments to attain the best performance possible from all the resources we control.

Jed Emerson is a visiting fellow at the Skoll Center on Social Entrepreneurship at the University of Oxford and a senior fellow at the Generation Foundation, in Washington and London. Mark Kramer is a senior fellow at Harvard University, co-founder and managing director of FSG Social Impact Advisors, and co-founder of the Center for Effective Philanthropy.