The COVID-19 pandemic, the racial justice movement and the climate crisis have pressured foundations to expand their giving, but solving our global challenges and changing systems calls for more than grantmaking. Foundations must lead with all their capital and deploy their assets—which exceed $1.5 trillion globally—into impact investments.
Foundation program departments are on board: A recent Inside Philanthropy survey of program staffers found that 60% say their institutions should be more engaged in mission-related investing, including large majorities of those who characterized their foundations as “highly engaged” or “somewhat engaged” in MRI. So what’s getting in the way?
Five of the top barriers preventing foundation investment leaders from putting foundation assets to work for impact are misconceptions around fiduciary duty, risk, liquidity, portfolio allocation and the roles of grantmaking and investment staff, according to Toniic’s “T100 Focus Report: Foundations on the Road to 100%.” The report draws on data from 18 foundation portfolios representing $1.7 billion in committed capital, included in Toniic’s ongoing study of investors building 100% impact portfolios.
Misconception 1: Fiduciary duty prevents mission-aligned endowment investments.
Reality: Fiduciary duty compels mission-aligned endowment investments.
Foundations differ from other types of impact investors in that they must answer to charitable foundation trustees. As a result, many foundations are hesitant to start impact investing because they mistakenly believe that fiduciary duty prevents it.
“Fiduciaries are less risk-taking than individuals,” said Stephanie Cohn Rupp, chief operating officer of Veris Wealth Partners, in the report. “Any investment criterion that is arguably unrelated to financial return is suspect in the fiduciary mind.”
Yet 38% of T100 foundations believe that impact investments yield higher financial returns compared with traditional long-term investments, and 62% see them yielding the same returns. Given this finding, impact investing foundations believe fiduciary duty compels mission alignment of endowment investments for two reasons: Foundations should put advancing their mission on par with fiduciary duty, and disregarding environment, social, and governance factors in investment performance is actually a failure of fiduciary duty.
Misconception 2: Impact investments are too risky.
Reality: Impact investments can be as risky as or less risky than traditional investments.
Another argument foundation trustees often make against impact investments is that they are too risky. This belief is typically based on lack of familiarity with impact investing and an assumption that options are limited. T100 foundations know that’s not true.
“As the impact investing space has continued to gain momentum, we recognize we are at a time when we have enough options to truly invest our portfolio for impact and financial growth simultaneously, without concession or undue incremental risk,” said Jim Sorenson, founder of the Sorenson Impact Foundation.
Only about a quarter of T100 participants considered impact investments more financially risky than traditional investments, while 46% considered them equally risky; another quarter considered them either less risky or much less risky. Not only do impact investors see financially material ESG factors as mitigating risks, but they also believe that investing in positive impact is less risky than the alternatives: continuing climate change, resource scarcity and social instability.
Misconception 3: Foundations need more liquidity than mission-aligned portfolios can provide.
Reality: T100 foundations achieve sufficient liquidity in all impact areas.
Many foundation decision-makers believe that they can’t meet their liquidity needs with 100% mission-aligned portfolios. In reality, T100 foundations reported that they have sufficient liquidity with impact investments across asset classes: 67% of the foundations’ investments could be liquidated in less than 90 days and only 19% were locked up for more than five years.
As the impact investing industry has matured, the availability of liquid financial products has increased. The Toniic Diirectory, a public resource of anonymized investments from T100 participants, includes over 500 investments with a reported liquidity profile of 90 days or less. These investments range from cash deposits at banks like the Native American Bank or Triodos to thematic index funds like the SPDR SSGA Gender Diversity Index ETF.
Misconception 4: Only private equity investments have impact.
Reality: T100 foundations are achieving impact with a whole-portfolio approach.
Impact investing is no longer limited to early-stage private equity investments in social enterprises. T100 foundations are taking a whole-portfolio approach across all asset classes: Public equities and fixed income are the largest asset classes in T100 foundations’ portfolios (36% and 32%, respectively). Fixed income investments might be more prominent because they fared well in the last economic downturn.
For example, when the Panahpur foundation moved to 100% impact, it held cash, private and public debt and equity, and real estate. It moved cash from HSBC to a range of sustainable banks. The rest, apart from public equity, followed the same investing path. Panahpur found public equities more complex, but has invested in a couple of funds (WHEB Sustainability Fund and Wellington Global Impact Fund) that it believes are authentic impact investments.
Misconception 5: Separation between grantmaking and investment-making teams is necessary.
Reality: Both foundation teams can work together to maximize impact.
Larger foundations typically silo their grantmaking staff from investment staff, believing that the investment team should focus on financial return and endowment risk management with no concern for the foundation’s mission.
With each team acting autonomously, the investment side may undermine the mission, but working together, the teams can maximize the impact of every foundation dollar. For example, in 2011, the Heron Foundation moved its ceiling of 40% endowment assets invested for impact to reach 100% mission alignment while meeting financial return requirements. To achieve this, Heron eliminated the division between the endowment and grant sides of the organization. All the members of its unified capital-deployment team now work together to source, vet and manage a broad spectrum of opportunities, from grants and loans to private equity investments and public company shares.
For the real story about two other misconceptions, and more examples of how foundations are embracing a whole-portfolio approach to positive net impact, see the full report.
At this critical time, we need foundations to go all-in on impact. While many are hesitant, pioneering foundations—from the large and experienced to the small and scrappy—are making progress on aligning 100 percent of their assets to their missions, without sacrificing fiduciary responsibility. They prove that a total portfolio approach to impact investing is achievable, regardless of constraints.
Melody Jensen is T100 project manager for Toniic.