Summertime Reading: 2008 Rockefeller Foundation paper on Mission-Related Investing is Timeless
As someone who joined the Board of a local foundation with the loud and proud aim of ‘converting’ the organization from conventional investing to impact investing (only to walk away two years later with a deflated sense of little forward movement), I sure wish I had taken the time to review the wee tome circulated by Rockefeller Philanthropy Advisors. It might have made my conversion mission seem a lot more to my Board like common sense rather than one kooky Board member’s fanatically pitched agenda.
I am convinced that few Canadian foundation leaders, after having taken some time with this publication, would not think twice about shifting some of their assets to more directly impactful investment containers.
The booklet of which I speak is called Philanthropy’s New Passing Gear – Mission-Related Investing – a Policy and Implementation Guide for Foundation Trustees (say that three times fast!). At 68-pages, it’s more than a lunchtime read, but could be comfortably consumed in three afternoons at the beach. Not only am I recommending a good read here: I am also giving you permission to head to the water! It’s a win-win, particularly as most of the country heats up to record high temps.
Written in 2008, and available as a PDF, Passing Gear (for short!) may at first be written off as too ‘old’ to be germane, or too ‘American’ to be relevant to the Canadian context. I view this booklet as an excellent accompaniment to the practical supports that Canada’s own Coro Strandberg has crafted, which include some inspirational and relatable domestic best practices in impact investing among private and public foundations alike.
I often hear the argument that because American foundation assets (estimated at $600B in private foundations alone) are so much larger than those of Canadian foundations ($34B total: private and public foundations combined), that comparisons to the American work make no sense. Instead, I view the American MRI scene as both aspiration and inspiration, with Canadian counterparts like Bill Young carrying the torch in practical ways north of the 49th parallel.
For those new to the concept of Mission-Related Investing or ‘MRI’, it embraces the idea of connecting foundation investments with community impact. Historically, we have viewed ‘investment pots’ and ‘impact pots’ separately within the context of charitable foundations. We have philanthropic donations held by traditional investment firms, with only the interest earned on those investments directed to grant-making. In terms of organizational governance, we typically have this split operationalized through two separate committees (investment vs. granting), along with corresponding staff delineations.
In Canada, foundations (along with other charitable organizations) are bound by a ‘disbursement quota’ or DQ, through which the Canada Revenue Agency ensures that at least 3.5% of the average value of the foundation’s property is used for charitable purposes. In the case of foundations, this means granting the DQ. This also means that the remaining 96.5% of assets, strictly speaking, do not have to be used for charitable purposes.
To some of the newer thinkers, this seems terribly inefficient, when it comes to community impact. The old guard argues that foundations are bound to retain their nest egg in perpetuity, this element being one of the key attractors of donations to foundations in the first place.
Instead, MRI says, ‘why don’t we invest directly in community now, while also retaining or even growing our base investment?’ So in addition to granting, foundations are extending mortgages to local organizations to grow affordable housing, or to enhance the self-sufficiency of the recipient organization. Foundations are providing loan guarantees to charities engaging in social enterprise, making investments from traditional funding bodies more attractive. Foundations can even invest part of their ‘96.5%’ in for-profit businesses that make a difference in the community, through social hiring as one example.
In the words of Passing Gear, ‘it is logical to consider how these [investment] funds can be put to use beyond generating income for grantmaking and begin to be a catalyst for social change via investments in market-driven entities.’ Further, MRI is viewed as ‘a natural extension of thoughtful and effective philanthropy.’
One of the earliest examples of MRI manifested in 1918, when the Carnegie Foundation for the Advancement of Teaching realized that teachers were aging out with little or no savings. A $1M investment was used to launch a life insurance company for teachers, which now invests over $400B on behalf of 3.2 million participants.
Now more than ever, we are urged to think beyond the DQ of 3.5% (it’s 5% in the U.S.) and consider more alternatives.
Given that community challenges (such as intractable unemployment and skills shortages among the marginalized, poverty and other economic tensions, environmental pressures, and social isolation) are becoming increasingly ‘wicked’ in their complexity and reach, greater resources are required in order to attempt to remediate the issues.
In 2010, The Canadian Task Force on Social Finance, as one of its seven key recommendations [PDF], urged the Canadian foundation community to hive off at least 10% of its 96.5% nest egg into MRI by 2020 – a modest amount in the opinion of we, the ‘converts’. But even so, this commitment would unleash $3.4B for MRI – an exciting starting place.
For change-makers involved with Canadian foundations as either staffers or Directors, the Passing Gear booklet is a must-read. It provides a contextual rationale to the ‘why now?’ and ‘why us?’ questions, stressing that ‘values should inform investment decisions’ – and that ‘Value is whole. The world is not divided into corporate bad guys and social heroes.’
Following the contextual rationale is a roadmap for moving a foundation to MRI, from idea to execution. The roadmap outlines how to:
- Ground a strategy within the values and mission of your foundation;
- Understand the various catalysts for MRI within a foundation;
- Structure a policy discussion in the boardroom;
- Integrate MRI into existing program and investment processes;
- Link your investment allocation with your program goals;
- Determine the appropriate MRI investment tools and strategies for the foundation;
- Select appropriate financial, program and investment consultants;
- Organize the board, and staff and investment consultants to find, evaluate, approve and execute MRI investment vehicles;
- Monitor investment performance of an MRI portfolio; and ultimately,
- Integrate social returns into the ongoing investment and program decisions of the foundation.
For those considering moving ahead with MRI, Passing Gear suggests considering values and motivation, mission and objectives, operational goals, and tactics (or ‘giving interests’). For many foundations, triggers to move from conventional investment approaches to MRI can include an ethical imperative, value creation and efficient resource management, relationship building, reflecting who the foundation is, and investment attractiveness. That’s right folks: MRI’s can actually make money!
In the Canadian context, the MRI practices that Coro Strandberg highlighted in 2010 demonstrated returns of 5-6%. Compared to what the traditional foundation nest egg is generating in investment interest today, MRI may never see a better time for introduction to even the most traditional foundation leadership.
Passing Gear shares study data from FSG Social Impact Advisors, demonstrating that 85% of all MRI’s between 2001 and 2005 were directed to four program areas: economic development, housing, education, and the environment. It would be interesting to know whether our nascent Canadian MRI practices show any deviation from the American stats.
The Passing Gear booklet is peppered with case studies relevant to the sections under discussion, giving a sense of how these ideas are applied in real world situations, and even sharing a sample investment policy which includes spending and investment goals, investment guidelines, asset allocation, screening practices, proxy voting guidelines, monitoring responsibilities, performance standards, benchmarks, and more.
The F.B. Heron Foundation (one of the key American trailblazers) views MRI as manifesting in nearly every aspect of its organization, and gives specific examples throughout the activity continuum from below-market to market-rate investments, and with varying risk levels:
Deeper into the booklet, we are given a breakdown of what five concrete MRI tools and their associated tactics look like. These are delineated as follows. Would a Canadian map look exactly the same?
- Active share ownership strategies such as proxy voting, shareholder resolutions, and shareholder coalitions
- Screening (negative, best-in-class, positive screening)
- Below-market investments (also known as program-related investments)
- Market-rate investments
With new, more enabling guidance released in late July by CRA with respect to Program Related Investing (i.e. acceptable investing with the 3.5% DQ set aside for charitable programming), I think we can expect to see more action in this area specifically, as Canadian foundations become equipped with greater certainty with respect to CRA-accepted activities. (See a summary of the new guidance on SocialFinance.ca).
That said, the less-than-stellar returns now being experienced via traditional investment portfolios will energize foundations with respect to market-rate MRI’s as well.
The time is ripe to pick up the Rockefeller publication, and consider its potential application to your own foundation. Now get to the beach!