Elise Clark and John Hoffmire
In the past decade, investment companies and foundations have shown an increased interest in impact investment. It is no longer a niche industry, but a mainstream concept organizations use to create social and environmental impact. In an article written by Sridhar Prasad et al., published by The Bridgespan Group, it is reported that investors “have poured upwards of $715 billion into companies that seek both social impact and attractive financial returns.” The report explains that investing in social and environmental companies increases the “scope of a foundation’s work beyond what is possible with grantmaking alone.”
Historically, Prasad reports, grantmaking and endowment investments existed as separate departments within a foundation, with the respective and separate goals to create social impact and see financial return. However, Jed Emerson and Amy Chung, impact investing advocates, explained that, “the emerging field of impact investing invites a productive collaboration between these two disciplines.” Foundations now have several frameworks through which to invest funds that can be evaluated on the basis of monetary, social, and environmental outcomes.
The Bridgespan Group elaborates that the ‘investing toolkit’ consists of grants and Program -Related Investments (PRIs), also called Mission-Related Investments (MRIs). Grants, the most traditional form of helping organizations, focus on providing funds with no expectation of recovering the grants or seeing any income from investments. There are no internal return goals used to track success, but rather, the social and environmental metrics are all that matter. By way of contrast, a PRI has two goals: 1) to benefit or protect the foundation’s financial condition, typically through making loans, loan guarantees, and equity investments into impact organizations; and 2), helping the foundation achieve its social and environmental goals through these investments.
PRIs typically have lower interest rates or lower expected equity returns, making them more practical for foundations to help develop communities and corporations. And loan guarantees have the added benefit of bringing risk-taking banks or Community Development Financial Institutions (CDFIs) into situations where they are supporting impact investments.
Having a variety of investment tools at their disposal allows foundations to choose the best model to help meet social, environmental, and financial goals. Unfortunately, interest in impact investing is higher than the actual utilization of these tools. The Bridgespan Group reports that, “88% of foundations are at least “somewhat” interested in impact investing, and yet, 38% of foundations are not involved” since they feel that their knowledge of the tools is insufficient. Loan guarantees have not seen widespread adoption among US foundations, since the customization discourages many organizations. PRIs are often not employed because of how some foundation representatives view the legal restrictions on their endowments. They feel that laws require certain returns on investment – causing foundations’ financial officers to solely focus on financial gains.
However, the Bridgespan report explains that the benefits of implementing a variety of investing options “gives foundations tools to achieve social or environmental benefits that grants alone could never duplicate” and “loans, guarantees, and equity investments can support community revitalization, build businesses, stoke innovation, and make risky bets safe for conventional investors.” Expanding the creativity of investment will allow for foundations to place an emphasis on racial and gender equality, be more strategic in matching aspirations with goal execution, and change the mindset from being a grant-giver to a financial collaborator. Foundations can utilize loan guarantees to support community-based projects and expand the focus to national or regional issues. Equity investments can provide foundations an extended jurisdiction over making decisions on their investments. Instead of sitting back and viewing, for example, their approach to addressing systemic racism and gender inequality as being purely grant-oriented, foundations can view investing in minority-owned or women-owned businesses through PRIs or MRIs as an extra tool to use to find solutions to these issues. Similarly, as foundations try and address wealth inequality, they may find investing in employee-owned companies is very effective. In summary, nuanced solutions, involving impact investing, can increase foundations’ creativity and provide a wider range for them to deliver actual impact around the social and environmental causes they champion.
Elise Clark is a writer for the Center on Business and Poverty.
John Hoffmire is the chair of the Center.
Prasad, Sridhar, Ben Morely, Alex McCue, Naomi Eisenberg, and Roger Thompson. Sept. 2020. “Beyond the Grant: Foundations as Impact Investors.” The Bridgespan Group: Collaborating to accelerate social impact. https://www.bridgespan.org/bridgespan/Images/articles/beyond-the-grant-foundations-as-impact-investors/beyond-the-grant-foundations-as-impact-investors-sept-2020.pdf