Thursday, March 08, 2007

Self Interest and Social Capital Markets

Bob Ottenhoff of Guidestar offered this proposal for social investing in his President's letter of March 2007:

"Foundations manage hundreds of billions of dollars, but most hold very stringently to using no more than 5 percent of their investment returns for philanthropic purposes. Current practice is to build a high wall between a foundation's investment arm and its program activities. More than one program officer has been told that he or she doesn't have a prayer of influencing a foundation's investment practices. But does that have to be the case?

What would happen if every foundation took a tiny percentage of its assets—let's say one-quarter of 1 percent—and invested—not granted—it in nonprofit organizations and required a modest return, one roughly equivalent to investments in other low-yielding investments, such as government bonds? What if foundations invested this money in such activities as Program Related Investments (PRIs), or created something new like "nonprofit investment bonds," or started a lending program for nonprofit organizations with scalable economic models of sustainability?

Many nonprofit organizations have the capability of expanding their scope and impact but are hindered by the systematic lack of investment capital. Foundations have the potential to do more to advance philanthropy and meet the needs of communities today. Small changes in foundation investment practices can unleash new resources that could strengthen nonprofits and provide a return on investment for foundations' investment managers.

It would be a small step, but a step that could have a dramatic impact on—with lasting consequences for—the nonprofit sector."

So, here's what I'm wondering about the "small step" above, and others like it:

The critics of social investing rely on their claim that "a foundation's decision to invest/not invest in certain ways would have no effect on the capital markets because endowments are bit players." But to what extent are the financial firms that might lose some small percentage of these dollars to PRIs or community investing just looking at their own bottom lines when they criticize strategies such as Ottenhof proposes?

As (a paraphrase of) the old adage goes, "One-quarter of 1 percent here, one-quarter of 1 percent there, and pretty soon you're talking about real money." Endowment funds may not be more than a blip in the overall capital markets, but pull them out of an investment manager's portfolio and see if they notice.

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