Friday, August 03, 2007

More money for your mission

Most discussions about socially responsible investments focus on whether or not the returns can equal those of value-neutral portfolios. But these comparisons miss the boat when it comes to philanthropic foundations.

Endowed foundations exist to support selected social goals. Their missions range across the spectrum. But regardless of their values, most philanthropists agree on this: more money going to their chosen missions beats less. In fact, those who argue for value-neutral investing do so claiming greater returns lead to more money for grants.

Here’s the irony. Putting the most money toward mission actually results from aligning a foundation’s investment policies with its social goals. It’s not magic-- just simple math.

Two philanthropy basics. First, private foundations must spend at least 5% of their endowed value on their missions each year. That’s the law. Second, foundations care about protecting their principal and are not known for aggressive investment policies. Most tend to seek returns of 9-10% per year.

Imagine a foundation that invests just for greatest returns and achieves 15% growth. A $100 million endowment would grow to $115 million, pay $5 million in grants and start the next year with a value of $110 million.

But suppose the foundation invests 10% of its endowment toward its mission instead. This can mean they invest directly in community-based ventures, vote proxy shares, or make low interest loans to mission-related ventures. If it earns back its money on these investments and makes 15% on the remaining portfolio, it will have directed $15 million toward its mission ($10 million investments and $5 million in grants) and have an endowment of $108.5 million. The foundation will have realized a 200% increase in money toward mission at an (unrealized) loss of just 1.5% in total value.

When the goal is putting more money toward mission, aligning investments with a foundation’s values simply adds up.


Unknown said...

Hi Lucy

You raise an important point in your discussion about foundations making an impact with their investments, as well as with their grants. I’m sure you know Jed Emerson’s focus on blended value.

Taking nothing away from your general point, let me nitpick on five items:

(1) I think you cloud your argument by predicating it on targeting a 15% return; the point is just as valid with a more conservative investment strategy.

(2) Also, I think you ignore an important consideration when you write, "When the goal is putting more money toward mission. . .” Of course, the goal should never be "putting more money toward mission," but rather in making a bigger impact.

(3) Increasing from $5M to $15M is a 200% increase, not 300%.

(4) You compare an x% increase in money towards mission with a 1.5% loss in portfolio value. However, that 1.5% loss is annual, so your comparison only holds up if the investments are also for a 1-year time period.

(5) Let’s be careful not confuse an x% increase in “money towards mission” with an x% increase in social impact. We cannot assume that a dollar loaned or invested at no return will automatically have the same social impact as a dollar granted.

Keep up the good work.

Robert Tolmach

Lucy Bernholz said...


Thanks for this. Of course you are right about all of the math (thanks). Regarding the 1.5% annual (loss) - a colleague calculated the following for me:

"Over a 100-year time span, this investment
advice makes sense up until year 81. At that point, the amount paid out
under a mission-driven investing plan over the course of 81 years is much
higher than that of a regular investing plan. But looking just 10 years
after that, at 91 years out, the regular investing plan has made all that up
and now the amount paid out over the course of 91 years is about equal for
both plans. Beyond 91 years, the payout for the regular investing plan is
more than for the mission-driven plan."

Which is important to note, but we should also pay attention to the conservative estimates I did use - such as earning 0% on your social/program/mission related investing. Since Goldman Sachs has just issued a report on ESG screened investments returning 22-25% more in short term than non-screened companies, it is that estimate that is most unlikely - and I used it just to make the point.

As for "more impact" not "more money," yes, of course I agree, but since money is the proxy throughout this discussion we'll just have to grin and bear it.

Thanks for the comments

Pete said...


Great post, a very powerful argument made very simply.

The 81 years vs. 91 years analysis is interesting, but as you imply, it actually argue for the aligned investing approach - in the long run, as Keynes said, we're all dead, and with the problems we're trying to solve today (global warming, for one example), may worrying about having less money to spend in years 91 and onward is a weak consideration, for me at least.

If the top 100 foundations by assets put a mere 5% of their portofolios toward aligned investing, that would generate an additional $11.5 Billion in investment for development in poor communities and threatened environments, which might even exceed the current total of all grant funds going to those causes and communities. If they were to dedicate 10%, as in your example, that would bring $23 Billion, compared to $36 Billion in grants from all foundation sources. (Prompted by some of your earlier posts and your white paper on aligned investing for community foundations, I took a run at this analysis for the NCRP blog last week:

Thanks for your leadership on this issue.