Pioneering foundations are aligning all their assets with impact

Foundations and endowments could make another $1.14 trillion of capital available for impactful investments by revising how they structure their portfolios – that is the case being made by Capricorn Investment Group, an OCIO for foundations including eBay founder Jeff Skoll’s foundation.

Impact consultancy Bridgespan, in partnership with Capricorn, and the UK’s Impact Investing Institute have each separately produced reports in the past month highlighting why and how foundations and endowments should align more of their portfolios to impactful investments.

Most foundations separate out their commercially-driven, impact-agnostic investments from capital assigned to their philanthropic, mission-driven and impact investing endeavours.

But a handful of foundations and endowments are blurring these lines, aligning most or their entire portfolios to impact. This form of increased alignment across the portfolio can maximise the impact potential of these foundations and make their impact portfolios more financially resilient, Capricorn’s William Orum (one of New Private Market‘s 50 influencers in sustainable private markets) and Mandira Reddy told NPM.

The traditional way

“A foundation is intended to serve multiple functions: it’s intended to fund current payout needs to support the philanthropic and programmatic areas, it’s intended to appreciate in excess of inflation, to maintain your real spending power over time,” Capricorn partner Orum said. “That requires a level of resiliency that comes from diversification and scale.” In most cases, therefore, the majority of a foundation’s assets are invested in a broadly diversified portfolio across public equities, bonds and private markets.

Many foundations also have a small carve-out for impact investing, which combines their impact and financial returns goals. “They have a team that focuses on impact investing – say, 2 or 5 percent of assets – and the rest is invested in the traditional way,” said Capricorn managing director Reddy.

These impact carve-outs were often created as “a test case for impact investing – if it works, the foundation plans to scale it up,” said Reddy. “But our observation has been that the two or five percent allocations remain in the test case mode for a very long time. It is difficult to scale this without setting ambitious goals.”

“We are sitting on £160 million. What we do with that £160 million is probably just as important as what we do with the £5 million we distribute every year.”

Andy Gnaneswaran, head of investment at the Dunhill Medical Trust

Programme-related investments

Programme-related investments are another way foundations deploy capital for impact. These financing models are not quite philanthropy, but profit and capital preservation (above inflation) are not the objective – and thus they qualify within the US’s 5 percent minimum ‘payout’ rule (for an institution to be classified as foundations in the US’s federal Internal Revenue Code, they must distribute 5 percent of the fair value of their total portfolio each year). Programme-related investments typically involve zero- or minimal-interest loans, bonds and other financing facilities.

“We are sitting on £160 million. What we do with that £160 million is probably just as important as what we do with the £5 million we distribute every year,” said Andy Gnaneswaran, head of investment at the Dunhill Medical Trust, in the Impact Investing Institute’s report.

Greater alignment

Bridgespan and Capricorn surveyed 65 foundations for the report released last month. Foundations’ average allocation to impact investing is 27 percent of their total portfolios, but the median foundation has only a five percent allocation to impact investing, the survey found.

This discrepancy is because of the subset of foundations that have invested or aligned more than half of their assets into impact investing. One of the most high-profile examples is the California Endowment, a $4 billion healthcare-focused private foundation that announced last month it will “begin aligning all of our investment assets with our mission and values”. Another is the Blue Haven Initiative, founded in 2012 by Liesel Pritzker Simmons (an heir of the Pritzker family) and her husband Ian Simmons to invest their personal wealth. Blue Haven takes a total-portfolio approach “with the goal of aligning financial performance and public benefit”, according to its website.

Capricorn’s study found 15 foundations that have more than 50 percent of their assets in impact investing, including the Skoll Foundation (managed by Capricorn), the Lora & Martin Kelley Family Foundation, The Nathan Cummings Foundation, The Russell Family Foundation, The Winthrop Rockefeller Foundation and the William Caspar Graustein Memorial Fund.

Total- or majority-portfolio alignment to impact is much less common among larger foundations (with $1 billion or more in assets) and longer-established foundations. The median allocation to impact across all foundations is 2.6 percent, the Capricorn/Bridgespan report shows. Among foundations below $1 billion in assets, the median is 18 percent; among foundations with $1 billion or more in assets, this figure is 2.6 percent. The Rockefeller Brothers Fund, established in 1940, for example, has a 20 percent target allocation to impact investments. The Gates Foundation has a $2.5 billion Strategic Investment Fund, while its entire portfolio is worth $67 billion.

Larger and more established foundations will typically have investment traditions “more deeply ingrained in their institutions, which could result in reduced flexibility”, Reddy explained. They may also have longstanding philanthropic, programme-related and investment partnerships that they are keen to safeguard, or exclude from any restructuring of the investment process.

Maximising impact

For the foundations with siloed impact allocations, “there’s potential to increase your impact alignment 20-fold”, said Reddy – from an average 5 percent allocation to a total-portfolio approach. “Foundations are becoming reasonably interested in this space, but perhaps not fast enough or ambitious enough for a variety of reasons. They have their returns goals which are very important. But it is possible to achieve financial objectives and do it in a way that is aligned to impact.”

Foundations with these siloed sleeves typically focus their impact investing on the same themes as their philanthropic work. Capricorn and Bridgespan’s report found that among the responding foundations that participate in impact investing, only 11 percent invest in issue areas beyond their core mission focus.

“Our view is that there’s a lot to do outside your programmatic focus area,” said Orum. “Think about the integration of sustainability and impact into other verticals, even if it’s not your core focus area. So for example, if your core focus is health and wellness, there’s a lot that could potentially be done at scale in the endowment that incorporates not just health and wellness, but other impact considerations where commercial capital can be very positive.”

Financial upside

When the impact allocation is such a small part of the portfolio, “You’re likely leaving untapped the ability to get diversification, to be strategic in order to catalyse the formation of new activities or in order to diversify your own portfolio,” said Orum. “[Impact programmes] require a level of scale that’s difficult to access if you’re operating with relatively smaller or more limited pools of capital.”

These financial benefits may mean a larger impact allocation financially outperforms a smaller allocation – but it does not mean that a larger allocation or total-portfolio impact approach will outperform a non-impact, traditional diversified investment strategy.