Impact Investing for Foundations
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The Ford Foundation’s Board of Trustees has authorized the allocation of up to $1 billion of its endowment, to be phased in over 10 years, for mission-related investments (MRIs). This comes as a result of the foundation’s efforts to explore impact creation through the capital markets. However, to understand why the Ford Foundation is pushing capital to MRI’s, it’s important to understand the history between traditional investments and philanthropic impact.
For foundations, investing with impact started with grant making. Since 1969, US tax law has mandated that foundations pay out a minimum of 5 percent of their total assets each year. For the Ford Foundation today, this translates to an annual grant-making budget of around $500 million to $550 million.
Meanwhile, the other 95% of investments gets put to work in the investment market, with the goal of earning enough profit to sustain the grant making going forward. As one can imagine, this law created a natural divide between philanthropic impact and investments.
On one hand, you are required to grant 5 percent of your total assets every year, while on the other hand, 95 percent of assets need to generate enough profit to maintain, or increase, assets under management.
A potential solution to this problem was identified 50 years ago in 1967, when Ford Foundation staff presented a report to trustees, titled Program-Directed Investments.
Optimizing the 5%: Program-related investments (PRIs)
The Ford Foundation’s ‘Program-Directed Investments’ report argued that philanthropy was about more than grant making. The following year, the foundation sought and received a ruling from the IRS that allowed them to create a new investment vehicle called program-related investments (“PRIs”). These are essentially charitable instruments that take the form of loans, guarantees, and equity.
Like grants, PRIs count toward the 5 percent foundations are required to pay out every year, but unlike grants, they are expected to be repaid. They are not, however, expected to provide a return at competitive, risk-adjusted market rates.
Despite this, PRIs have proven to be effective at optimizing the 5 percent, allowing foundations to take risks consistent with their mission in ways that much larger investors, such as pension funds, often cannot.
Optimizing the 95%: Mission-related investments (MRIs)
While PRIs have allowed foundations, like the Ford Foundation, to tap the power of grant-making budgets in innovative ways, the remaining 95 percent remained untapped.
That brings us to mission-related investments, or MRIs. This new tool seeks to achieve attractive financial returns while also advancing the foundation’s mission.
By doing so, foundations can leverage the power of their endowments, and start to unlock the potential of the 95 percent to create impact through the market.
The changing landscape
A number of foundations have started to use MRIs, including the More for Mission movement, the Rockefeller Brothers Fund, Kellogg Foundation, John D. and Catherine T. MacArthur Foundation, Kresge Foundation, McKnight Foundation, F.B. Heron Foundation, Wallace Global Fund, Surdna Foundation, Bill & Melinda Gates Foundation, and Open Society Foundations.
While these institutions have taken a variety of approaches, their commitment demonstrates leadership and courage. Their initial steps should inspire all of us to consider how we might leverage the power of our endowments to promote dignity, equality, and justice for people around the world.