By Erik Schultz
May 2022 –
I believe in the fundamental premise that in exchange for privileged tax-advantaged status, private foundations like ours should do everything they can in pursuit of their charitable missions. Until just a few years ago I thought we did that, by often exceeding the legal requirement to give away 5% of our foundation value each year.
Then someone asked me what that other 95% was doing. Well, what all other foundations do, right? Passively invested in the stock market, out of sight, out of mind. Then came the follow up question—how much more impact could you have if even a portion of foundation assets were invested in a way that complements your charitable mission? As the proverbial light bulb clicked on, I realized…probably a lot more.
That “a-ha” moment started us down the road of aligning the financial resources in our endowment with our mission objectives. We are now seeing exponentially more mission-aligned impact than with our previous style of passive endowment management, and turns out the process is fun and rewarding too. I figured it was only a matter of time before all foundations intuitively caught on and started investing for impact as well. I was wrong.
In the recently released 2022 Foundation Operations and Management Report, 76% of small foundations still do not engage in any kind of impact investing. The biggest reasons given were lack of internal capacity and risk aversion. For these folks I would like to share a quick excerpt from my future book, A Lazy Person’s Guide to Impact Investing.
Chapter 1. Most of you are already paying for your assets to be managed, so find a manager willing to align your endowment assets with your mission. If they are unwilling, it is probably time to find a new manager—after all, it’s your money!
Chapter 2. If you are interested in an easy way to dip a toe in the water, start with your foundation’s checking or money market account. If it is with a big corporate bank, there is a good chance they finance all kinds of unsavory industries, including some contributing to the very problems your grant dollars are trying to fix. Park your cash instead with one of the thousands of local banks and credit unions focused on serving their members, local businesses, and social initiatives right in your backyard.
Chapter 3. Other low-hanging fruit includes talking to your existing grantees to see if direct loans or equity investment would be attractive to them. You already trust them, so most of your due diligence is already done. And remember, grants are an instant minus -100% financial return. With a mutually beneficial impact investment, you can realize a positive social and financial return. The math is simple.
Chapter 4. Reach out to peers already doing impact investing for ideas that align with your mission. Some will share due diligence or offer co-investment opportunities, as both approaches drive more resources to impact while reducing risk.
Chapter 5. Speaking of risk, as I write this the stock market is flirting with a bear market. The idea that this is the only viable place to park your assets is debatable at best when your endowment value tanks 20%. Impact investments provide beneficial diversification to your endowment.
Epilogue. The laziest decision is leaving 95% of your foundation assets on the table by leaving your endowment passively invested. If you align even a portion with your world-changing mission, you can have exponentially more impact. The only potentially challenging part of the journey forward is making the decision to begin.