Maximizing charitable returns: Mission-related and socially responsible investing

In last month’s issue we explored several ways to expand your philanthropic agenda to include new giving vehicles and new ways of thinking about effective giving. Among the giving options we explored was the idea of program-related investing, wherein philanthropies use their financial resources to support ventures or projects whose mission complements their own. This month we’ll look more closely at program or mission-related investing and examine how breaking down the barriers between your philanthropy’s financial processes and charitable goals can help your family get the greatest bang for your buck. We’ll also look at the ways in which some family philanthropies, including the F.B. Heron Foundation and the Jessie Smith Noyes Foundation, are already using these techniques to maximize charitable returns and reconcile fiscal policies with foundation philosophy.

Also, in June the National Center’s Family Philanthropy Teleconference Series will be pleased to welcome Sharon King, President, and Luther Ragin, Vice President of Investments, of the F.B. Heron Foundation, which has employed mission-related investment strategies to further its charitable aims for nearly a decade. Get more information on Maximizing Returns: Mission-Related Investing or to register for this teleconference.

A recent report by the Foundation Center indicates that family foundations in the United States hold more than $200 billion dollars in assets and give away more than $12 billion a year to worthy causes around the nation and the world. Certainly this is no small chunk of change, but what if families could make a larger percentage of that $200 billion available for charitable use and provide a competitive financial return in the process?

Additionally, although their boards and donors often represent a broad diversity of values, some community foundations have begun to look at ways to make program-related investments and ways to bring their investments more in sync with their program goals. If your family has a fund at a community foundation and you care about these issues, ask the donor relations staff to brief you on efforts the community foundation may be making to align program and investing goals. If you have the interest and the time, you can also volunteer to help the foundation explore these issues.

Mission-Related Investing

“Mission-related investing is an excellent way for us to leverage foundation resources to maximize the amount of good we can do for the communities and the people we care about.”

-Sharon King, President, F.B. Heron Foundation

By investigating the philanthropic potential of investment funds, family philanthropies can increase their capacity for affecting good in their communities by freeing up additional funds. These additional funds, properly invested as low-interest loans, social venture capital, or community investments, can not only increase a family’s rate of philanthropic return but have the potential to create market-rate fiscal returns as well.

Although it may seem risky for smaller foundations and philanthropies with less available capital to invest in mission-related ventures, King maintains that small and mid-size foundations, like F.B. Heron, are well-positioned to take advantage of these options. “Unlike larger foundations, which often have an institutional divide between their programs and their investments, smaller family foundations are uniquely suited to this arena because they can be flexible and adaptive.” In addition, because many smaller foundations have small, and usually unpaid staffs, the fiscal stewards and the grantmakers are often the same person or people and therefore may not have the different ideological backgrounds or rhetoric that may make it difficult to get on the same page.

Fears that the rate of return on mission-related investments may be substantially lower than those for other investments, although they appear at first to be a common-sense cause for concern, often prove to be unfounded. In the case of F.B. Heron, which employs 24% of its assets in pursuing its mission of helping low-income people and communities help themselves, its 2005 investment performance was in the second quartile of the Russell/Mellon All Foundation Universe.

To ease concerns about potential financial losses and maximize your chances of having a successful and fulfilling experience, King offers the following four key pieces of advice:

  1. “Be very clear on your mission and work on it with an investment discipline.” As with all philanthropic decisions, a clear vision of your mission is an indispensable tool that will guide your family through the new and exciting territory that exploring these options will open up. Be sure to spend some time thinking about and discussing these goals and how pursuing a mission-related investment strategy will advance these goals.
  2. “Seek out expert advice.” Before deciding to commit your funds, meet with your philanthropy’s financial advisors to get an understanding of your available assets and how they might be invested in a manner consistent with your mission. If your advisors aren’t experienced in this area, ask them to refer you to someone who is knowledgeable and enthusiastic about the process. When the staff and board of the F.B. Heron Foundation began to explore their mission-related investing options, few financial advisors were able to offer the sort of guidance they needed, but now King asserts that the field is changing: “As more families become interested in these kinds of investments and the demand for information increases, more advisors are able and willing to offer advice. If you don’t get the information you need at first, keep asking.”
  3. “Exercise discipline and due diligence in your investment strategy.” Just like choosing grantees, the success of a mission-related investment program is large dependent on the research and thought that goes into decision-making. Researching your investment options and spending time gathering information are key components in using these strategies to free up more resources to direct towards your mission.
  4. “Start with a small piece.” Although F.B. Heron now commits nearly one quarter of its assets—more than $65 million worth—to mission-related investments, it isn’t necessary for your philanthropy to take an enormous leap of faith to reap the benefits of these strategies. Start by making a program-related investment to better understand the process and how it differs from standard grantmaking, before committing investment or endowment funds to these kinds of activities. Or for your first mission-related investment use non-program allotted assets to make an insured deposit to a local community-development credit union or community-development bank. Making an insured deposit is a safe, secure way for a family to get its feet wet in this arena without financial risk. “Insured deposits are a great way to put money back into your hometown and help people close to you. You can deposit up to $100,000 into a credit union and up to 20 million in a community-development bank with full federal deposit insurance. The funds are then loaned out to people in your community at reasonable rates. And if, for some reason, the credit union or bank fails, your investment will be refunded.”

For more about the F.B. Heron Foundation and the ways mission-related investment strategies helped them maximize their work for good in the community, read Luther Ragin’s New Frontiers in Mission-Related Investing.

Socially Responsible Investing: Screening and Shareholder Advocacy

While mission-related investing involves the convergence of a philanthropy’s grantmaking and investment strategies to optimize social returns, socially-responsible investing, with which it is often confused, simply involves eliminating conflict between financial decisions and mission or ethical beliefs. The awareness of this conflict, which is what Mahatma Gandhi called the conflict between “deed and creed,” is not unique to philanthropic families and accounts for the stunning growth in the amount of money invested in socially-screened investment funds in the past decade. According to a report by the Social Investment Forum, between 1995 and 2005, assets in socially responsible investment funds grew 258% from $639 billion to $2.29 trillion.

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For example, suppose your family’s philanthropy is committed to preventing animal neglect and abuse and gives a substantial grant each year to the local SPCA. In reviewing your philanthropy’s fiscal portfolio, you realize that one of the funds in which your endowment has been invested includes stocks in a successful cosmetics manufacturer. From your philanthropic work in the realm of animal protection you know that this company uses lab rats or rabbits to test the safety of its cosmetics and is on a “do not patronize list” among your peers. Although the stock has performed well and increased endowment revenues for your philanthropy, you and your family are uneasy with the conflict that has arisen between your mission and this investment strategy.

If you want to bring your investment strategies more in line with your ideals and your philanthropic mission, how can you do so without risking your philanthropy’s financial stability? Is it fiscally responsible for your board to withdraw its funds from an investment that has proven to be lucrative?

Don’t be alarmed! Aligning your investment policy and your mission does not involve throwing caution to the wind or abandoning all hope of the financial returns you’ve come to expect. The growth in socially responsible investment funds over the last decade, which out-paced the growth of other kinds of investment during the same period is not an accident. People have become more conscious of where their money goes and more conscientious about how they spend it—buying only fair-trade coffee, shopping only in stores with good employee benefit policies, or investing only in eco-friendly companies. Accordingly, interest in and demand for socially responsible investment options has grown expanding the universe of what is available. For an index of socially responsible companies to invest in, visit the Domini 400 Social Index.

For more about how one foundation, the Jessie Smith Noyes Foundation, dealt with a similar conflict between their investments and philanthropic work on behalf of environmental causes, check out chapter 9 in Investment Issues for Family Funds.

Changing your own investment policy is not the only way to mitigate conflict between your investment and your ideas. In fact, some would argue that to withdraw your financial backing would limit your capacity to bring about change rather than increase it. Instead, you might consider shareholder advocacy as a way to use both your assets and your influence as a shareholder to lobby for change within the company. It is a topic that deserves more time and consideration than we are able to allot here, for more information visit the Social Investment Forum: Advocacy and Public Policy Program.

More Information on Mission-Related and Socially Responsible Investing

  • 2005 Report on Socially Responsible Investing in the United States
  • A Call for Mission-Based Investing by America’s Private Foundations
    Domini 400 Social Index
  • New Frontiers in Mission-Related Investing by Luther Ragin, F.B. Heron Foundation
  • Social Investment Forum: Advocacy and Public Policy Program
  • The Social Investment Forum: Social Screening
  • Where Money Meets Mission: Breaking Down the Firewall Between Investments and Programming