Editor's Note: As part of a regular series published by Family Wealth Report, here Meg Lassar, analyst at Strategic Philanthropy, gives an insight to trends in the philanthropy space.
For decades, giving for social benefit and investing for financial return have been practiced as separate and distinct activities. But today, these lines are blurring; there are now a range of philanthropic investment strategies available to your clients that simultaneously yield social and financial returns.
While the family foundations that you manage and advise likely implement their philanthropic missions – be it to end homelessness or to mitigate the effects of climate change - through grantmaking (i.e. the practice of giving money to support nonprofit organizations with the expectation that it will be used to generate certain social benefits), this only accounts for how a small percentage of foundation assets are allocated. In the US, for example, the legally required annual foundation “pay out” rate (the amount a foundation must spend for charitable purposes) is just 5 per cent of the average market value of its net investment assets. This means that the majority of foundations’ assets are invested with the sole objective of generating financial returns without regard for philanthropic mission.
However, as a younger generation of philanthropists takes the helm of their families’ foundations, they are increasingly looking at how all of their assets can be leveraged to achieve their social missions. As advisors, it is our job to apply the best practices of the investment and philanthropic worlds in order to help clients maximize the power of their philanthropy.
There are several philanthropic investment strategies beyond grantmaking that allow family foundations to grow their asset-bases while maintaining alignment with their philanthropic missions. The three strategies discussed below – socially responsible or sustainable investing (SRI), impact investing and program-related investing – fall under the overarching rubric of mission investing. These types of investments – in socially responsible companies, for-profit social enterprises, revenue generating nonprofits or traditional nonprofits – offer investors a way to advance their philanthropic missions while generating financial returns that the typical grant-funded initiatives don’t.
Making all of these options available to your clients is smart business. According to Craig Muska, an investment advisor with US-based Threshold Group, “family foundations and their investment advisors are increasingly exploring frameworks, working relationships and investment portfolios designed to align investment strategy and implementation with the mission and values of the philanthropic organization.”
Indeed, mission investing is not a fleeting trend but, rather, a new direction. Many family foundations are just beginning to explore how they might head down this road and will no doubt be looking to their wealth and investment advisors for guidance.
Mission investing refers to the practice of making investments that yield social as well as financial returns and are consistent with investors’ philanthropic goals. Unlike traditional grantmakers, mission investors expect that the funds they invest will be paid back. These funds can then be recycled into new investments that further the investors’ social mission.
Socially responsible (or “sustainable”) investments (SRI) and impact investments are two types of mission investments that seek market-based returns comparable to those of the traditional investments in a foundation's portfolio. Investments that accept lower returns than traditional investments would yield but have the potential to generate significant social impact are called program-related investments (PRIs). A further explanation of these terms follows:
· Socially responsible investing (SRI) / sustainable investing refers to investment decision-making that takes into account a company’s environmental, social and governance (ESG) policies and records.
Perhaps the most common SRI strategy practiced by fund managers is screening. Through “negative screening” managers create a list of unacceptable products, services, or corporate governance practices and uses it to omit companies or industries from their portfolios. The most common industries that fail to pass SRI negative screening are tobacco, alcohol, mining, forestry, and weapons. “Positive screening,” conversely, looks for socially responsible stocks that have sustainable, environmentally and socially beneficial operations. Industries such as high-technology, education, renewable energy, and biotech may be included. “Best in class” screens look for companies that take positive environmental and human initiatives in their particular industry.
Adopting an SRI strategy makes particular sense for clients whose foundation missions are focused on environmental sustainability. Foundation trustees who, for example, devote a portion of foundation assets to conservation and clean technology initiatives often prefer not to invest in the very companies that perpetrate the environmental degradation they are working to end.
SRI is growing at a faster pace than the broader universe of all investment assets under professional management.A white paper by Booz & co, titled Responsible Investing: A Paradigm Shift predicts the sustainable investment market will become mainstream within asset management by the year 2015, reaching between 15 per cent and 20 per cent of total assets under management.
· Impact investing refers to the intentional use of investment capital to create positive social and environmental outcomes along with financial returns by investing in for-profit social enterprises.
Impact investors seek out market-based solutions that address the world's most pressing challenges, including sustainable agriculture, clean technology, and financial services for the poor – issues which may be the primary focus of many of your clients’ foundations. Impact investing can, therefore, be an exciting and rewarding choice for foundation clients seeking alternative approaches to funding social innovation in their specific areas of interest.
As participation in the impact investing field grows so too does the universe of impact investment opportunities. A 2010 study published by Hope Consulting revealed that 48 per cent of high net worth investors in the US “wanted to learn more” about impact investing. And, according to a study by JP Morgan, assets in the impact investing sector, currently estimated at $50 billion, are expected to grow to $500 billion over the next three years.
· Program-related investments (PRIs) are vehicles for making inexpensive capital available to organizations that are addressing social or environmental concerns. Unlike grants, PRIs are expected to be repaid, often with at least a modest rate of return. They are usually made in the form of deposits, loans or equity investments. Once repaid, PRIs are re-used for other charitable purposes.
Many foundations use this strategy to complement their traditional grantmaking often in concert with market-rate mission-related investments. PRIs can be used for a diverse range of charitable purposes: from developing affordable housing, to protecting wildlife habitats, to promoting entrepreneurship and economic development.
The burgeoning mission investment marketplace offers several resources for wealth advisors and clients who are interested in learning more about how to include these types of investments in their foundation portfolios. For example:
· US SIF is a membership association for professionals, firms, institutions and organizations engaged in SRI. They publish educational resources and create opportunities for collaboration among SRI practitioners.
· ImpactAssets, a non-profit financial services company, aggregates information and resources on impact investing to assist advisors in educating clients about opportunities to invest in for-profit social enterprises.
· PRI Makers Network – a membership organization of more than 150 foundations and social investing organizations – provides a forum for networking, professional development and collaboration for both new and established PRI practitioners.
Working with clients to incorporate these strategies into their charitable plans will involve a willingness on the part of advisors to challenge the long-established boundaries between the philanthropic and financial sectors and to embrace a new investment framework that will allow clients to achieve the double-bottom-line results they seek, i.e. strong financial as well as socially meaningful returns that yield positive impacts on the environment and on communities around the world.
Meg Lassar is an analyst with Strategic Philanthropy, a global philanthropic advisory practice headquartered in Chicago. The firm works with individuals, families, closely-held and family-owned businesses helping them plan, assess and manage their charitable giving.