Executives at private foundations are spending more time thinking about ways to advance their missions through their investments.
Such impact investing — taking into account environmental, social or governance factors — is increasingly being seen by these executives also as good investment strategy.
“There is definitely an intersection of those interests,” said Margaret Chen, managing director of Cambridge Associates LLC in Boston. “Private foundations are more interested in how their investments are managed given the mission of the institution. They want to be aware of all their relationships.”
One survey of private foundations found 17% use ESG criteria in their investment decision-making, up from 9% in 2011. For those with more than $500 million in assets, the figure jumps to 35%.
Investment options that appeal to foundations are also on the rise, experts say. Bain Capital LLC is launching a fund focused on impact investing this year, while BlackRock Inc. launched an entire business unit, BlackRock Impact.
“We've seen more impact-oriented investment products, particularly those with some kind of track record,” said Reid Smith, a New York-based principal with Mercer Investments who focuses on impact investing. Those include strategies focusing on, for example, LEED certification and green building; moderate-income housing; and timber, with a conservation angle. “The challenge becomes, are there enough (such investments) for any particular foundation to align a significant part of their investment pool,” he said.
Arguing that impact investing is a good investment has become less of a challenge. “Historically, the knock was if you are going to do it, you are giving up on the return. Now you can have an impact-focused strategy that actually creates investment opportunities,” said Mr. Smith.
Additional pressure from investors, asset managers and the communities they serve is “creating a little bit more of an ecosystem,” he said. “I see it continuing to grow and becoming much more prevalent across the landscape, partly with mission-aligned institutional investors but also more broadly. People are just more sensitive and aware.”
Jean Case, CEO of the Case Foundation, Washington, devotes a lot of time talking to potential partners and investors to build that ecosystem. “It's amazing the traction that we are seeing,” she said. While her foundation has the freedom to be creative with impact investments, “there is a lot of work to be done on foundations,” she said, especially when there is a “Chinese wall” between foundation executives and the investment office. “In the foundation world, it is not one answer,” said Ms. Case.
Kyle Johnson, managing director of consultant Cambridge Associates LLC, Boston, Mass., discourages private foundations from setting top-down impact investing allocation policies that could jeopardize both investment and social returns, stressing foundation executives should focus on impact investments that “are truly additive” to the organization's goals.
While thinking about long-term returns and a foundation's mission, investment officials also need to scrutinize both opportunities and risk to improve downside protection, experts say.
It can also be time-consuming, cautions William Jarvis, managing director of the Commonfund Institute. “For an organization going into this area, they need to have the staff. It's not just writing a check.” He cites the $36.4 billion Bill and Melinda Gates Foundation's early experience with impact investing, “where they found it was hard to give the money away well,” forcing them to aggressively build up a capacity that few organizations can emulate.
