Ford Foundation MRI Investment a Historic Challenge to Other Funders!

Hong Kong boardroom” Credit: ricardo

Ford Foundation’s historic announcement on April 5th to commit up to $1 billion from its $12 billion endowment over the next 10 years to mission-related investing has changed the discussion in board meetings of other foundations and other institutional investors, which are increasingly examining the holistic results of their work on local communities. Mission-related investments (MRIs) are the market-rate assets in a foundation’s endowment that have a positive social or environmental impact. MRIs are distinct from program-related investments (PRIs), which primarily aim to accomplish one or more of a foundation’s tax-exempt purposes. These changing board-level conversations have significant implications: In 2012, the US was home to 86,192 foundations with $715 billion in assets.

Foundations can prepare for these board-level conversations by analyzing the work of the foundations that have taken “into consideration the foundation’s mission as part of meeting prudent investment standards about risk and expected return.” Select details about the mission-related investments of large foundations (i.e., foundations with assets of at least $400 million) are tabulated below. Naturally, a number of sub-$400 million foundations are also innovating with MRIs; these include F.B. Heron Foundation (as detailed further below, a trailblazer in MRIs), TomKat Foundation, Sorenson Impact, Mary Reynolds Babcock Foundation, and Wallace Global Fund. While the work of these smaller foundations is critical, the table below focuses on the MRIs of $400 million+ foundations.

Foundation
 Assets 
MRI Assets
Mission or Program Areas
Comment
 

Gates Foundation

 

 

$44.3 billion

 

 

N/A

 

 

– Globally: enhance healthcare and reduce extreme poverty

– U.S.: expand access to education and IT

 

 

– Invests in PRIs in global health, global development, the US program, and special initiatives

– Considers values when investing

– Negative screens: tobacco, Sudan

 

 

Ford Foundation

 

 

$12 billion

 

 

$1 billion, phased in over 10 years

 

 

– Civic engagement and government

– Creativity and free expression

– Equitable development

– Gender, racial, and ethnic justice

– Inclusive economies

– Internet freedom

– Youth opportunity/learning

 

 

– MRI commitment announced on 4/5/2017 and phased in over 10 years

– Initially, MRIs will invest in private equity funds focused on financial inclusion in the global South and U.S. affordable housing

 

 

W.K. Kellogg Foundation

 

$7.3 billion

 

$100 million

 

– Thriving children: early childhood development

– Working families: helping families obtain stable, high-quality jobs

– Equitable communities: racial equity and community engagement

 

 

Select MRIs:

– Urban Partner Bank: deposit $4 million in the bank’s Detroit branch

– Northwest Louisiana Community Development Fund: Develop commercial and residential real estate projects in Louisiana

 

 

 

MacArthur Foundation

 

$6.2 billion

 

$500 million since 1986 and $225 million on 12/31/2015

 

– Enduring commitments: Chicago and journalism/media

– Big bets: climate solutions, criminal justice, impact investments, nuclear challenges, Nigeria

 

MRI priorities via loans, bonds, stock, equity, deposits, and guarantees:

– Committed up to $25 million to finance energy-efficient affordable housing upgrades

– Continue to provide capital to advance work in Chicago

– Climate change solutions

– Create impact investing products and distribution channels

 

 

David and Lucile Packard Foundation

 

 

$5.8 billion

 

 

Over $750 million since 1980, dedicating up to $180 million at once

 

 

– Conservation and science

– Population and reproductive health

– Children, families, and communities

– Local grant making

 

 

Mission investments seem to be focused on PRIs, e.g.,

– $1.3 million loan to enable the Nature Conservancy, inter alia, to capture Colorado River water rights

– $4.5 million seed capital loan to enable Afaxys to provide 7.2 million US women with family planning through group purchasing and releasing its own generic private label products

 

 

Rockefeller Foundation

 

 

$4.1 billion

 

 

$500 million commitment to impact investing

 

 

Promoting the well-being of humanity throughout the world by (i) building greater resilience and (ii) advancing more inclusive economies

 

 

Primarily focused on financing part of the $2.5 trillion funding gap to achieve the Sustainable Development Goals in developing countries

 

 

Kresge Foundation

 

 

$3.5 billion

 

 

$350 million by 2020, including both PRIs and MRIs

 

 

Arts & culture, education, environment, health, human services, Detroit, and American cities

 

 

A significant number of Kresge Foundation’s social investments will be made through guarantees (to catalyze capital from other investments)

 

 

McKnight Foundation

 

 

$2.2 billion

 

 

$200 million commitment

 

 

Arts, education & learning, Midwest climate & energy, Minnesota initiative foundations, Mississippi River, neuroscience, and regional & community development

 

 

MRI focus areas:

– Accelerate the growth of a cleaner, low-carbon economy

– Contribute to a thriving, sustainable twin cities metro area

– Restore the water quality and resilience of the Mississippi River

 

 

Open Society Foundation

 

 

$1.6 billion

 

 

$230 million through Soros Economic Development Fund (SEDF)

 

 

– Assure greater fairness in political, legal, and economic systems and safeguard fundamental rights

– Advance justice, education, public health, and independent media

 

 

SEDF invests in businesses that provide employment, products, and services for underserved populations in countries open to the development of their economic, political, legal, and civic institutions

 

 

Surdna Foundation

 

 

$0.96 billion

 

 

$100 million

 

 

– Sustainable environments

– Strong local economies

– Thriving cultures

 

 

– 20-30% of MRI allocation will be into via 1-3 investments per year in impact-focused private equity funds

– Targets newer managers, renewable energy, and emerging markets, targeting $1-5 million investments

 

 

Rockefeller Brothers Fund

 

 

$0.86 billion

 

 

$232 million ESG investments + $100 million impact investments

 

 

3 practice areas:

– Sustainable development

– Democratic practice

– Peace building

 

 

Hired Perella Weinberg as outsourced CIO on 9/24/2014 to divest fossil fuel holdings and align investments with charitable aims

 

 

Meyer Memorial Trust

 

 

$0.8 billion

 

 

10% of the portfolio in 2010 ($80 million). The current level is unclear

 

 

Works with and invests in organizations, communities, ideas, and efforts that contribute to a flourishing and equitable Oregon

 

 

On 4/28/2014, launched “Invest Oregon,” an initiative that makes $100K-$2 million investments in Oregon and southwest Washington from the endowment

 

 

Omidyar Network

 

 

$0.45 billion

 

 

$40 million

 

 

Digital identity, education, emerging technology, financial inclusion, governance and citizen engagement, impact investing, and property rights

 

 

Investment focus areas:

– Emerging markets: provide the bottom of the pyramid with access to capital

– Developed world: encourage individual participation in media, markets, and government

 

In addition to reviewing other foundations’ MRI commitment size, investment strategy, and portfolio composition, foundations should also examine MRI performance data. Because MRIs are a relatively new innovation, such financial and social performance data is scant and should grow over time. The Heron Foundation is likely to be an early data source. Heron unleashed the paradigm shift of MRIs in 2012 when it committed to transitioning its entire $270 million endowment by 2017 into investments aligned with its mission of poverty alleviation. Not only did Heron complete this transition to 100 percent MRIs in December 2016, but Director and President Clara Miller also told Forbes that its performance generally matches or exceeds that of its peers. Similarly, the transparency of the Ford Foundation’s approach in going Live on Facebook on April 12th to announce an initial MRI focus on private equity funds that invest in financial inclusion and US affordable housing suggests that Ford Foundation is likely to generate useful data for foundations on MRIs.

Public Pensions

Foundation boards should also take note of public pension and Taft-Hartley pension approaches to and returns from economically targeted investments (ETIs). Taft-Hartley pension plans are collectively bargained plans maintained by more than one employer, usually within the same or related industries, and a labor union. ETIs are investments that are selected for the benefits that they create in addition to their investment return. These benefits may include providing capital or liquidity to underserved communities. With aggregate public pension assets at the end of 2016 totaling $3.86 trillion and the largest number of ETIs per year taking place between 1994 and 2008, ETI data is much more abundant and richer than MRI data. A great starting point for foundations seeking such data is the Pacific Community Ventures catalog of the $115 billion of economically targeted investments and the 118 pension funds that made them.

MRI Asset Allocations

Foundations have an increasing breadth of choices should they decide to convert the various components of their asset allocations to MRIs.

  • Cash and cash equivalents. Foundations seeking to make cash MRIs may choose to make deposits in community development financial institutions (CDFIs) and other banks focused on underserved communities. For example, W.K. Kellogg Foundation deposited $4 million in the Detroit branch of the CDFI Urban Partnership Bank.
  • Public equity. Foundations seeking to make public equity MRIs might consider the wide range of environmental, social, and governance (ESG) indices and actively managed socially responsible investment funds. ESG indices include the MSCI Global Sustainability Index series and the S&P Dow Jones Sustainability Index family.
  • Fixed income. Green bonds are an example of fixed income MRIs. Rather than managing bond portfolios in-house, most foundations use consultants and external managers. Many consultants that Divest-Invest Philanthropy uses approved green bond funds for their clients. Divest-Invest Philanthropy is a coalition of foundations that pledged to divest from fossil fuels.
  • Real estate. A foundation seeking MRI real estate investments may focus on affordable housing. Ford Foundation is doing just that in the initial phase of its $1 billion MRI commitment.
  • External managers. Foundations may focus on allocations to the investment managers among the 1,700 signatories of the United Nations Principles for Responsible Investment (UNPRI). UNPRI is a voluntary and aspirational set of investment principles with a range or potential approaches to incorporate ESG issues. Foundations interested in private equity MRIs should have a wide range of impact investment managers to choose from, including the 158 respondents to the annual Global Impact Investment Network Annual Impact Investor Survey.

Shifting Policy Winds

Foundation boards may also wish to consider the risk of shifting policy winds. The issuance of IRS Notice 2015-62 and the Department of Labor Interpretive Bulletin (IB) 2015-01 in late 2015 provided regulatory support for institutional double bottom line investments. IRS Notice 2015-62 permits endowments of U.S.-based private foundations to consider the relationship between investments and the foundation’s mission, and Department of Labor IB 2015-01 clarifies that pensions may consider ESG factors and ETIs. As the IRS and Department of Labor issue new notices and bulletins under the Trump administration, regulatory guidance may facilitate or thwart mission-related investments.

To illustrate shifting policy winds, Department of Labor guidance facilitated ETIs under Clinton and Obama and limited them under George W. Bush. More specifically, under Clinton, the Department of Labor’s stated objective in issuing IB 1994-01 was to clarify that investments in ETIs could be compatible with fiduciary duty if the investments were appropriate for the plan. By contrast, under George W. Bush, Department of Labor IB 2008-01 recommended that ETIs be “rare” and required special documentation to prove compliance with fiduciary duty. Finally, under Obama, the Department of Labor IB 2015-01 removes the special documentation requirement for ETIs.

Effective foundation board discussions of the historic Ford Foundation $1 billion commitment to MRIs could lead to broader use of MRIs, and ideally at least more robust risk management with such investments and wider dissemination of best practices and lessons learned.