Executive Recruiting Blog

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September 5, 2018

Impact Investing in Foundations and Endowments

By: Dan Cummings

A growing number of foundations and endowments are turning to impact investing, a relatively new strategy that channels money toward a social or environmental cause. Like charitable giving, impact investing puts money into certain philanthropic efforts, but because those efforts are in for-profit businesses and organizations, impact investing should also realize a financial gain.

The Bill and Melinda Gates Foundation was one of the pioneers of impact investing – what they call Program-Related Investments – more than a decade ago, though impact investing has become increasingly more mainstream over the years. Last year, the Ford Foundation announced it would commit $1 billion over 10 years to mission-related investments, its first to affordable housing in the United States. And the Nathan Cummings Foundation recently became one of the largest foundations ever to commit 100 percent of its half-billion-dollar endowment to organizations that find solutions to climate change and inequality.

Now, investors worldwide are managing $114 billion in impact assets, according to the Global Impact Investing Network (GIIN).

Unlike a grant or a scholarship, an impact investment expects a return on capital. So, does it make economic sense to turn to impact investing, if your obligation as an investment professional is to deliver maximum return?

Fortunately, the answer is increasingly yes.

According to a survey of endowments and foundations conducted by NEPC, LLC, an institutional investment consulting firm, more than 86 percent of asset owners who practice impact investing end up with allocations that deliver returns equal to – or that outperform – the overall market. Ninety-one percent of impact investors surveyed by GIIN said their impact investments performed in-line with or exceeded financial expectations.

And that’s great news, because the more investors who climb aboard this emerging market, the more profitable it becomes. The flow of additional capital into social or environmental impact opportunities can improve the overall return, and ultimately incentivize others to invest.

Plus, the more who practice this type of investing, the easier it is to reach the end goal of realizing impact. Foundations are increasingly collaborating, partnering and pooling resources to meet the greatest need. Investors are choosing nationwide causes that, by partnering, they know will make an impact. But they’re also partnering on local issues they know will benefit their immediate community. This approach can help make progress on much more personal issues unique to a community’s or company’s needs.

Foundations are increasingly feeling a sense of urgency to deepen their impact investing practices, and are doing so “at an impressive pace,” according to Matt Onek with Mission Investors Exchange. Many in today’s climate find it imperative to align their investments to address racial equity, like the Entrepreneurs of Color Fund in Detroit, which provides growth capital to minority-owned small businesses.

“There has never been a greater need for philanthropy to focus on equity – in their impact investing, in their internal practices, and in the economy and society as a whole,” Onek told ImpactAlpha.

Of course, every new investment comes with its risks. For impact investing, those risks may include capital losses, lack of exit strategy, transaction costs, and potentially having to prove to investors the worthiness of diverting funds from other investments.

Like many things, there’s no one “right answer.” For many E&F investors, the intrinsic benefits – in that it’s for a worthy cause that resonates with the organization’s mission – outweigh a focus on solely maximizing the long-term capital return.

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