INTRODUCTION: WHAT IS MISSION-RELATED INVESTING?

People who become philanthropists do so for many reasons, prime among them to benefit society and improve the communities in which they live. Given the enormity and persistence of need, most people wish they had more resources to give. What many philanthropists often overlook is the untapped power of their portfolio to further their philanthropic mission.

Over the past couple of decades, more and more individual donors and foundations have become involved in mission-related investing as they seek to align their values and beliefs with their actions. In truth, any individual, organization or institution that invests money, no matter how much, can engage in mission-related investing.

According to the Foundation Center for Corporate Responsibility, mission-related investing “integrates the relationships among asset management and charitable purpose. It is the process by which boards seek to reduce what Gandhi called the dissonance between creed and deed.”

 

MRI consists of two main components, each of which has two subcomponents:

Socially-responsible Investing

  1. Social screening of investment portfolios
  2. Shareholder action

Program-related Investing

  1. Community development
  2. Mission-related venture capital

 

The range of participation in MRI activities is very wide. Some investors engage in all possible mission-related investment activities, while others feel more comfortable screening out only the most “obvious” violators of social investment guidelines, or only participating in important shareholder proxy votes.

Some individuals and institutions devote a large percentage of their portfolios to MRIs, while others begin with smaller amounts. Undoubtedly there are also many who are drawn to the concept of MRIs, but who may be not currently be using this strategy for one or more reasons:

  • The time or expertise that they perceive is needed to investigate companies to ensure that they are in compliance with one’s social guidelines,
  • The fear that limiting investment options may limit short- or long-term returns,
  • The lack of agreement among family members or trustees in using these types of investment strategies.

 

This issue of Family Giving News introduces newcomers to the principles of mission-related investing, and provides a comprehensive collection of new resources and organizations designed to help individuals and families to consider their options for “Investing In Your Mission.”

While many of the articles are designed specifically for family foundations, the tools and concepts that are presented are relevant regardless of the giving structure you may choose. Whether or not you currently engage in mission-related investing, we hope that this issue of FGN provides context and information to help you think about how these types of strategies may play a role in your future philanthropic efforts.

MISSION-RELATED INVESTING: A GUIDE FOR PHILANTHROPIC INSTITUTIONS

May 2001, The Investors’ Circle

This report provides a brief history of social investing, also known as “double-bottom-line investing (doing well while doing good)” or “triple-bottom-line investing (financial returns, social returns, environmental returns).”

 

The underpinnings of social investing began with ancient Jewish laws governing ethical codes of business practice, the Quakers emphasis on living their beliefs, and other religious codes of conduct. However, the impetus for what we currently know as mission-related investing really began in the late 1970s with the movement to divest from companies doing business in South Africa. The success of this large-scale campaign gave many investors first-hand experience with the power of international capital to effect social policy.

If divestiture and proxy voting could help topple apartheid, why not apply the same principles to other social and environmental concerns? Today, there are well over 100 socially-screened mutual funds, many foundations and individuals who apply screens to their investments, and an increase in shareholder activities. This report estimates that “social investments have reached over $2 trillion, or 13% of professionally managed money in the United States.”

“For foundations, mission-related investing offers particular opportunities and challenges to utilize the investment management process, in addition to grantmaking, as a tool for pursuing philanthropic purpose.”

The report discusses the relationship between MRIs and fiduciary responsibility, and includes a chapter on social venture capital exploring a variety of these investment opportunities. Another chapter explores common arguments against MRIs, and provides evidence for and against this type of investing. The guide concludes with suggestions for how one foundation—the Northwest Area Foundation—has become involved in mission-related investing.

All in the Stanford Social Innovation Review, published by the Stanford Graduate School of Business. 

For most foundations, 5 percent of capital returns is assigned in pursuit of 100 percent of the institution’s larger social mission, while 95 percent of capital assets are managed in pursuit of increasing financial value, with zero percent consideration of the institution’s social mission.

WHERE MONEY MEETS MISSION: BREAKING DOWN THE FIREWALL BETWEEN FOUNDATION INVESTMENTS AND PROGRAMMING

Summer 2003, Stanford Social Innovation Review

This article encourages foundations to look beyond grantmaking as the only tool for pursuing their mission, and consider the many ways in which their substantial assets also can be put to work to meet the foundation’s goals.

Historically, most foundations have maintained a “firewall” between their grantmaking and their investments. For many, the purpose of the portfolio was, and still is, to generate high enough returns to fulfill the 5 percent pay out rule without spending down the corpus, “the idea being that what’s business is business, what’s social is social, and never the twain shall meet.” The author suggests that foundations should adopt a “unified” investment strategy that views grantmaking, investments and low-interest loans “as three integral parts of a holistic approach to applying, and maximizing the impact of, foundation capital resources.”

Five strategies are presented, including “engaged investing of mainstream assets” (i.e., shareholder action), socially-responsible investing of core assets, investing in alternative asset classes (e.g., small and medium-sized businesses), low-interest loans and below-market-rate investments, and investing for corporate transformation. Each foundation must assess which approach or combination of approaches is appropriate for their particular situation.

The process of shifting from the traditional “firewall” approach to a unified approach requires various stages of development. Foundation leadership might begin by engaging trustees in discussion to ensure that everyone agrees with the concept. The different investment strategies and opportunities should be assessed and a decision made as to which should be adopted. A clear investment policy should be drafted and approved and explained to staff and asset managers (see ADDITIONAL RESOURCES for links to examples of investment policies). The final step in tearing down the “firewall” is to facilitate discussion among trustees, staff and money managers so that a shared understanding of how each contributes to the whole is developed.

SOCIALLY RESPONSIBLE INVESTING

AN INTRODUCTION TO SOCIALLY RESPONSIBLE INVESTING

The Social Investment Forum

This online guide from The Social Investment Forum provides a brief and easy-to-understand introduction to socially responsible investing. This introduction describes three components of SRIs: social screening, shareholder advocacy, and community investment.

Social screening involves developing criteria for the inclusion or exclusion of corporate securities based on values or mission. Investors may “seek to own profitable companies with respectable employee relations, strong records of community involvement, excellent environmental impact policies and practices, respect for human rights around the world, and safe and useful products.”

Shareholder advocacy may include the voting of proxy resolutions, filing and promoting shareholder resolutions, or engaging in dialogue with corporations on social, environmental or labor issues.

“Integrating personal values and societal concerns with investment decisions is called Socially Responsible Investing (SRI). SRI considers both the investor’s financial needs and an investment’s impact on society. With SRI, you can put your money to work to build a better tomorrow while earning competitive returns today.”

PROXY VOTING: UNLOCKING THE POWER OF THE PROXY

February 2004, Rockefeller Philanthropy Advisors and As You Sow Foundation

Whether a portfolio includes socially-screened investments or not, shareholder action can be a useful strategy for individual donors and foundations seeking to further their philanthropic missions. This newly released report on shareholder proxy voting provides a comprehensive guide to help foundations understand the value of proxy voting, and develop and implement voting policies and procedures. A proxy voting policy not only can strengthen corporate governance, it also is a way to further the mission of the foundation by supporting social and environmental goals. Recommendations put forth for developing an institutional policy include:

  • Identify one person to coordinate the effort,
  • Research what others are doing,
  • Make a proposal that suits your board, and
  • Address common objections directly.

Implementation of policies may be simplified by hiring a proxy research and voting service, relying on experienced and informed financial managers, or bringing the effort in-house. The report also includes a sample proxy voting policy, links to organizations and other resources, and suggestions for foundations who want to go beyond the proxy vote. For example, the As You Sow Foundation, one of the authors of the report, uses dialogue with corporations, shareholder resolutions, coalition-building and media initiatives, to raise awareness and promote more responsible corporate behavior.

The report can be downloaded in its entirety from the As You Sow Foundation website (www.asyousow.org). Hard copies are available by calling Rockefeller Philanthropy Advisors at 212 –812-4330, or emailing info@rockpa.org.

SRI RESULTS

2003 REPORT ON SOCIALLY RESPONSIBLE INVESTING TRENDS IN THE UNITED STATES

Social Investment Forum, December 2003

According to this new report by the Social Investment Forum, $2.16 trillion in professionally managed assets in 2003 used one or more of the three core socially responsible investing strategies: socially screened equities/funds, shareholder advocacy and community investing. The vast majority of these assets, $2.14 trillion, were invested in portfolios that applied one or more social screens, and represent a 7% increase since 2001, a period during which all managed assets declined by 4%.

Between 1995 and 2003, investment assets involved in SRI activities grew 40% faster than all assets under professional management, and in 2003 accounted for over 11% of all investment assets under professional management. Growth has occurred in all three SRI strategies, with the largest increase found in community investments, which rose 84%, from $7.6 billion to $14 billion, between 2001 and 2003. The report also found that the SRI concept is going global, with more than 21 countries now offering SRI products.

A HALO FOR ANGEL INVESTORS

February 2004, The McKinsey Quarterly

Investing in socially-responsible companies has traditionally been thought to require individuals to accept a “social discount” in financial returns in exchange for intangible social and environmental benefits. What has been unknown until now is the extent of that discount.

Surprisingly, a recent study conducted by McKinsey Quarterly found that a portfolio of socially-responsible investments earned a respectable 8 to 14 percent return over a 10 year period, comparable to those of the S&P 500 during the same period. The study created a hypothetical portfolio based on the holdings of members of Investors’ Circle, a nonprofit national network of angel and institutional investors, foundation officers and entrepreneurs.

Using two different investment strategies to calculate returns from 1992-2001, the study simulated investment of $72 million in 95 socially-screened operating companies and 15 social venture capital funds. As with any portfolio, they found that diversification was the key to better returns, since one-third of the companies delivered returns comparable to venture capital funds, while one third went bankrupt.

Among the 21 socially and environmentally screened mutual funds with more than $100 million in assets, 15 (71%) received top rankings from Lipper and/or Morningstar in 2003.

The Domini 400 Social Index (DSI 400), the oldest index fund of socially screened companies, earned returns equal to the S&P 500 in 2003, and in total returns over a 10 year period. In 2003, the DSI 400 gained 28.47%, while the S&P 500 rose 28.66%. For the 10-year period ending December 31, 2003, the DSI 400 showed returns of 11.86% and the S&P 500 earned 11.07%.

This report also looked at SRI mutual fund expense ratios and found that they are no more or less expensive than other similar funds.

PROGRAM-RELATED INVESTMENTS

 

“PRIs sit between traditional grants and investments, offering both financial and programmatic returns.”

– A Basic Guide to Program-Related Investments,

The Grantsmanship Center

 

A BASIC GUIDE TO PROGRAM-RELATED INVESTMENTS

The Grantsmanship Center

This succinct guide provides clear information on progra-related investments: what they are and how to use them effectively.

The majority of PRIs take the form of loans, which can be made directly or indirectly through intermediaries with greater expertise in lending. There are many other creative ways that foundations use PRIs to further their mission. For example, foundations may provide loan guarantees, or linked deposits at conventional lending institutions to procure low-interest loans for community groups. Some foundations combine PRIs and grants to help ensure the success of a project, or invest in social venture capital funds or purchase stock in minority owned banks. Other funders have purchased real estate and rented it to nonprofit organizations at below-market rates.

PRIs have been used to finance a wide range of activities and program areas, including affordable housing, education, books, theater, videos, health centers, shopping centers in disadvantage neighborhoods, small businesses and land conservation.

The most important factor in making a PRI is the relationship between the foundation and the recipient. Once a PRI opportunity is identified, the risks must be evaluated, the appropriate investment vehicle determined, and terms and conditions negotiated. The board must review and approve the deal, the transaction must be documented, and the deal closed. Ongoing monitoring of the investment is also necessary.

The guide notes that as people become more engaged in PRI activities, they may come to “think differently about the very nature of philanthropy.” It may take time and experience to see that PRIs serve a charitable purpose and to stop thinking of below-market rates of return as “bad” investments.

According to the most recent research on program-related investing, foundation assets invested in PRIs increased by 90% between 1990/1991 and 2000/2001, from $222 million to $421 million. These investments include no- or low-interest loans to organizations, assets used for charitable purposes (such as below market rents), and participation in community development loan funds and social venture capital funds. The number of foundations making PRIs and the total number of PRIs also have increased since 1990 when the Foundation Center first began tracking program-related investments.

Foundations with PRIs tended to be larger than most foundations, with over 50% of PRI funders holding assets of $50 million or more. Asset size does not appear to be a factor in the decision to make a PRI, however. Many of the largest foundations in the U.S., those with assets over $1 billion, made no PRIs in the 2000/2001 period, while 24 foundations with assets under $10 million accounted for 20% of the 667 PRIs included in the report. One quarter of PRI dollars went to community development, followed by the environment (18%), education (17%) and housing (12%).

Although current trends clearly point toward increasing interest and participation in PRIs by foundations, PRI financing accounted for less than 1% of the $60.5 billion in grant dollars paid in 2001.

HELPING PEOPLE HELP THEMSELVES: A CONVERSATION WITH F.B. HERON’S LUTHER RAGIN

In a two-part interview, Luther Ragin, Vice President of Social Investing at the F.B. Heron Foundation in New York City, discusses the extent and range of the foundation’s mission-related investments, the success of those investments, and why other foundations should consider becoming involved in community investing.

The F.B. Heron Foundation was established in 1992 with a mission to “help people and communities to help themselves.” In 1997 they developed a policy for mission-related investing (see the ADDITIONAL RESOURCES section below for a link to the policy). At the end of 2002, about 18% of their $230 million in total assets were invested in MRIs, with about one-third in program-related investments (PRIs) and two-thirds in socially-responsible investments (SRIs). The Foundation also made $10.5 million in grants.

Mr. Ragin reports that the average rate of return on their PRIs is about 3%, and ranges from 1% to 7%. He describes three asset classes among their SRIs: the insured and uninsured deposit portfolio (mostly certificates of deposit), fixed income securities and market-rate bonds, and private equity (e.g., real estate and social venture capital funds). The first two asset classes are tracking at or above appropriate benchmarks, while the private equity class has only been invested since 2000, so the long-term return is unknown, but they were doing well at the time.

“….there are opportunities for all foundations, and certainly other socially motivated investors, to engage in community investing to a far greater degree than most have to date….(I)t’s possible to have a social mission and to earn a very competitive risk-adjusted rate of return.”

COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS

INTRODUCTION AND DESCRIPTION

National Community Capital Association

Because individual donors and foundations often lack the expertise to make direct investments in their communities, may rely on intermediaries, such as Community Development Financial Institutions (CDFIs), to facilitate their program-related investments. CDFIs have community development as their primary mission, and provide ample opportunities for PRI activities. The National Community Capital Association (NCCA) identifies five basic types of CDFIs:

  • Community Development Banks Target lending and investment to economically distressed communities
  • Community Development Credit Unions Promote ownership of assets and savings and provide affordable credit and retail financial services to low-income people with special outreach to minority communities
  • Community Development Loan Funds Make loans at below-market rates primarily to nonprofit housing and business developers in economically distressed urban and rural communities
  • Community Development Venture Capital Funds Provide equity for community real estate and medium-sized business projects
  • Microenterprise Development Loan Funds Provide loans and technical assistance to low-income people involved in very small businesses or self-employed and unable to access conventional credit

According to NCCA, there are approximately 800-1,000 CDFIs in the U.S., including more than 250 community development credit unions, 230 community development loan funds, 50 venture capital funds, and 40 community development banks.

The National Community Capital Association assists CDFIs and CDFI investors to increase resources and opportunities for economically disadvantaged people and communities.

COMMUNITY INVESTING 2002: SAFETY AND SOUNDNESS DATA FINDINGS

National Community Capital Association

A new study finds that loans made by over 130 CDFIs to low-income areas were as safe or safer than loans made by all commercial banks in the country. In 2002, the percentage of CDFI loans that defaulted was 0.7% compared to a default rate of 0.97% among loans made by commercial banks.

According to National Community Capitol Association CEO Marc Pinsky, “CDFIs provide investors the opportunity to be socially responsible and financially prudent at the same time. Community investors now have 30 years of experience and evidence that making investments in low-income communities is no riskier than doing business in mainstream markets.”

CDFIs manage to maintain investor capital through sufficient equity capital and loan loss reserves, as well as tight monitoring of development projects and providing technical assistance to clients.

The report documents the large impact that CDFI financing continues to have in economically disadvantaged areas, through job creation, development of affordable housing, and strengthening of community facilities.

CDFI’S IN PRACTICE: BOSTON COMMUNITY LOAN FUND

March 2004, Family Giving News

Community development loan funds receive a large proportion of assets invested in Community Development Financial Institutions (CDFIs). These loan funds take in money from socially responsible investors, and lend it primarily to non-profit community organizations that are providing affordable housing, childcare, and social services in economically distressed areas. There are at least 230 loan funds currently in operation in the United States. In general, they have proven themselves to be safe investments that provide stable financial returns and excellent social returns.

The Boston Community Loan Fund is one of the oldest and largest, with an impressive history of success. BCLF is but one example of the kind of intermediary institution that individual and institutional investors may want to consider when making a program-related investment.

BCLF was established in 1985 to help provide critically needed capital and technical assistance to community organizations seeking to develop their local communities. Many of these organizations had a vision for revitalizing their neighborhoods by providing affordable housing, decent jobs, and good day care, but had been turned away by traditional lending institutions.

In the nearly 20 years since its founding, BCLF has provided over $100 million in loans to more than 200 organizations, creating more than 4500 units of affordable housing, including the first inner-city low-income assisted living facility in the state. BCLF loans have also supported a variety of local commercial development, childcare facilities, environmental preservation, and community social services.

One example of their work is the One to Four Family Housing Program, a public/private partnership to help people in targeted communities become first-time homeowners. Since the program was launched in 1993, BCLF has provided over $11 million in on going financing to 11 community development corporations that helped rehabilitate affordable homes for 220 families and individuals.

Through the combination of rigorous business practices, knowledge of the communities they work in, and strong community values, BCLF has been able to help communities in a way that few others have been willing or able to do, while maintaining a successful track record that most traditional lenders would envy – since its inception, the loan fund has incurred loan losses of less than one quarter of one percent. BCLF maintains a permanent capital base and loan loss reserves to mitigate risk. One measure of their success is that over 90% of investors renew their loans when they mature.

In 1997, BCLF grew into Boston Community Capital with the creation of the Boston Community Venture Fund to help create jobs by investing in growth-oriented local businesses.

Becoming an investor in BCLF is easy. Individuals can invest with as little as $1,000 and a minimum one-year commitment. Institutional investors are asked to make a minimum 5-year commitment. Under the current interest rate environment, interest rates range from 0% – 3% depending on the amount and length of the loan and the financial and social goals of the investor. Special considerations are made for large, long-term loans.

Of note, two foundations whose trustees sit on the board of the National Center for Family Philanthropy, the Roy A. Hunt Foundation and the F.B. Heron Foundation, have made program-related investments in BCLF and Boston Community Capital.

[See above for an interview with Luther Ragin, Vice President of the F.B. Heron Foundation.]

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