“Roof at Ford Foundation Building,” D_M_D

March 1, 2018; Fast Company

Darren Walker, president of the Ford Foundation, made headlines in April 2017 when he announced that Ford would commit up to $1 billion from its $12 billion endowment over the next decade to support mission-related investments that offer both social and environmental returns. So far, out of that billion-dollar commitment, Ford has made a $30-million investment in affordable housing in the US. Ford has indicated that its next investment is likely to support financial services for the poor in developing nations by “backing creative ways to provide savings, insurance, and payment options.”

Not only would this new initiative impact Ford and influence other foundations, but, “this moment,” wrote Walker, “offers us an opportunity to help capital markets become accelerators of justice.” Earlier this month, Fast Company named the Ford Foundation No. 24 on the 2018 World’s Most Innovative Companies list, an unusual accolade for a philanthropic institution.

Most commentators have applauded Ford for assertively focusing on “mission-related investing.” Said David Bank, editor of ImpactAlpha, “For decades, philanthropy has been stuck in a rut, with only five percent of philanthropic endowments paid out in charitable grants each year, while 95 percent of the (tax-advantaged) capital is invested for maximum returns with little regard for impact.” Former Institutional Investor senior writer Imogen Rose-Smith, however, has publicly expressing skepticism about Ford’s direction, noting that the new fund will report to the foundation’s program side rather than to its investment managers. In Rose-Smith’s view, what Walker has done amounts to capturing an additional $1 billion ($100 million/year) for the grants side, bringing this level up from $500 million to $600 million a year. Rose-Smith’s point is that putting fiscally focused decision-makers on the sidelines was a missed opportunity to change the culture of the financial investment world. And in its coverage of impact investing, NPQ has raised the critical question of who defines impact. “In a drive for global scale in impact investment, we will lose the voices that should matter the most—the billions of people who will be affected by social enterprises funded by our investments.”

Mission Related Investments (MRIs) are distinct from Program-Related Investments (PRIs), an approach pioneered by Ford 50 years ago and through which it has directed more than $670 million in below-market lending to nonprofit organizations. PRIs are counted as part of a private foundation’s 5-percent minimum annual distribution requirement; MRIs come out of the 95-percent side and seek to balance financial returns with mission impact, aka “doing good and doing well.”

Ford is not the first foundation to espouse MRIs or impact investing: In 2016, the MacArthur Foundation allocated $500 million of its corpus for impact investments; the Heron Foundation recently announced that it is now investing 100 percent of its $300 million endowment to its mission; and the Surdna Foundation, in honor of its 100th anniversary, pledged to direct $100 million of its endowment to impact investment. But Ford’s is the largest philanthropic commitment to date.

In addition to questions about the impact that Ford’s initiative will have on philanthropy and the broader world of institutional investing, are central matters such as who defines and measures impact. Ford has committed $30 million since April 2017 in investments to two for-profit developers (Jonathan Rose and Avanath) and to the nonprofit Capital Impact Partners.

There is no question that affordable housing developers and owners need significantly more capital to scale up their construction and preservation efforts, particularly given today’s daunting market and policy challenges and that private equity capital is perhaps a logical source. In practice, however, the long-term goal of keeping rents affordable for low- and moderate-income families means tight operating margins and an inability to pay market returns to investors. Private equity investors in the affordable housing market are typically able to get their desired returns by financing properties that serve renters earning between 80 and 100 percent of AMI (the top half of the lower and middle-income category). Is this the US market that the Ford Foundation seeks to impact, or is it also concerned with those between 60 and 80 percent of AMI? Typically, private equity investors exit after seven years. Who will then invest in these affordable properties and will they continue a commitment to affordably house lower income families? Though the foundation’s PRIs still support affordable housing for lower income levels, Ford (with the exception of its recent participation in the $4.9 million Funders for Housing and Opportunity, one of nine funders) no longer makes grants for affordable housing.

The Ford Foundation is indeed taking a much-needed step forward in substantively earmarking its endowment for mission-focused investments. But serious questions must continue to be asked as this initiative and others like it move forward.—Deborah Warren