CR mission related investments

For nonprofit organizations with a fund balance, reserve fund, or endowment, knowledge of the choices for investing those funds is increasingly important. Investing can be exciting but most nonprofit leaders run organizations because they know their fields, not because they’re investment whizzes.

The good guidebooks tell nonprofits to earn investment returns and get as much out of every buck as possible instead of letting funds sit idle. Increasingly, they also recommend that nonprofits think about the social purpose of their investments. Why invest in environmentally and socially destructive corporate stock when social-investment funds offer a combination of healthy market returns and contribute to nonprofits’ socioeconomic missions? Why not pursue the idea of putting nonprofit endowments and assets into mission-related investments?

The movement for mission-related investments has been growing in recent years. It is worthy of recognition and support not just by nonprofits managing large endowments, but by mainstream nonprofits concerned about maximizing the capital markets’ support of socially beneficial investment opportunities. We suggest the following:

1. Foundations and other endowed nonprofits can and should devote substantial portions of their investment dollars to support nonprofits’ mission-related ventures.

2. Foundation and other nonprofit investments should go beyond issuing program related investments to provide equity-like capitalization for nonprofits and nonprofits’ partnerships with for-profits.

3. Foundations can and should devote a portion of the billions they spend on investment advisors to capitalize intermediary organizations for the purpose of pooling and investing foundation assets for mission-related purposes.

Although usually thought of as the province of large, endowed nonprofits like universities or foundations, social investment is a tool that every nonprofit can take advantage of by matching its resources with investment possibilities. For quite some time, versions of social investment, such as foundations’ “program-related investments” (PRIs), have been in the investment mix for some foundations. Since the Tax Reform Act of 1969 allowed PRIs, several foundations have actively made below-market loans and investments, Notable examples include the Ford Foundation, the John D. and Catherine T. MacArthur Foundation, the Annie E. Casey Foundation, the W.K. Kellogg Foundation, and the David and Lucile Packard Foundation, among others. Since PRIs like grants count toward private foundations’ federally mandated qualified distributions, they are especially attractive to foundations. However, many more ought to be making PRIs.

The PRI concept is that foundations issue debt or equity investments to nonprofit or for-profit entities with a charitable purpose and they do so without the expectation that the investment will earn a market-rate return. The PRI idea harkens back to the fertile mind of Benjamin Franklin, who actually left the bulk of his wealth to capitalize several revolving funds for tradesmen and shopkeepers, according to biographer Walter Isaacson.

Different Forms of Mission-Related Investments

By definition and experience, most foundation PRIs are predicated on accepting below-market rates of return. According to the Handbook on Responsible Investment Across Asset Classes, socially conscious investment need not be structured to earn less than conventional market alternatives. Mission-related investments—MRIs—that achieve market returns constitute another tool to address economic and environmental issues of concern to socially minded institutional and individual investors.

Funded in part by the investment-innovative F.B. Heron Foundation, the Handbook, produced by the Boston College Center for Corporate Citizenship and the Social Investment Forum, lays out a framework for nonprofits to sort through mission-related social investment options. It is a broader, more robust concept of “responsible investment” than simply making program-related investments. As the Handbook notes, the lens is one of “investing in financial products that seek to achieve social and/or environmental goals as well as yield market rate financial returns.”

According to the authors, “Foundation and university endowments, pension funds, socially responsible investors including church pension funds and socially responsible mutual funds, high–net worth individuals, nonprofits, and others [can] target investments that create long-term societal wealth while also achieving institutional financial objectives.”

Rare is the well capitalized nonprofit that doesn’t diversify its assets, and the Handbook offers organizations a schema for examining responsible investment options among various classes of assets. The Handbook’s framework for investments categorizes them into the asset classes that are listed and briefly described below.

Cash and cash equivalents. The Handbook suggests that market-rate returns can be achieved through cash investments in community-oriented banks such as community development finance institutions (CDFIs), community development banks, and community development credit unions (CDCUs).

Fixed-income instruments. Investors can make fixed-income investments toward “community development–targeted investments” such as the fixed-return bonds issued by local governments, corporations and larger nonprofits (think of asset-backed or mortgage-backed securities for small business activity, how income home purchases, or government debt such as bonds that would support the creation of infrastructure improvement or sustainable energy development). Another option would be to utilize responsible investment funds, such as those offered by Domini Social Investments and Parnassus Investments, to invest in corporations that contribute to society and to avoid those that are economically, socially, and environmentally harmful.

Public equities. For publicly traded stocks of large corporations, the Handbook recommends employing social investment “screens” (“negative screens” to eliminate investments in noxious industries such as arms production, tobacco, alcohol, gambling, etc., and “positive screens” to emphasize and seek investments in companies that contribute to solving environmental and social problems). In addition, the investor could pursue “active ownership,” from involvement in shareholder votes to filing shareholder resolutions that might promote policies of corporate transparency and accountability.

Private equity. For those considering investing in unlisted companies, such as venture capital investments, the Handbook suggests “product-focused investments” and economically targeted investments to historically underserved communities. The product-focused approach could be used to support “environmentally and socially beneficial products and services” such as renewable energy or “clean tech,” while the economically targeted investments could back enterprises owned by women and minorities in low income neighborhoods.

Real estate. Investors can look to their real estate portfolio to support affordable housing, workforce housing, brownfield development, smart-growth projects, and “green construction.”

The Handbook even takes on more esoteric and specialized asset classes, such as investments in hedge funds and commodities, to demonstrate how the principles of environmental and social analysis of investment options can be applied to align nonprofits’ missions and goals with their appetite for market-level financial returns.

The Growth of Mission-Related Investments

However useful the description of asset classes, the Handbook on Responsible Investment Across Asset Classes’ most important tool is a series of guideposts for each asset class to help investors design an asset–class specific responsible investment strategy. The environmental, social, and governance lenses outlined in the Handbook help investors understand how investment options can fit and carry forward their institutional missions. The challenge for investors isn’t to select one social fund from Column A and a social enterprise from Column B but to deploy an analytical framework for determining what might constitute responsible investments that fit investors’ interests and needs and that generate returns comparable to those of the market as measured by accepted market metrics. As the Handbook makes clear, applying a strong analytical lens is crucial to successful responsible investing.

However, there is plenty of hyperbole in the social enterprise field. Philanthrocapitalists sometimes revert to a one-size-fits-all notion that nonprofits ought to turn a profit and be run like mini-capitalist investment vehicles. Research from the likes of the Ford Foundation’s Michael Edwards should tell nonprofits and investors alike to look before they leap. Fortunately, you won’t find outlandish hyperbole in the Handbook. It is a technical but accessible tool for guiding nonprofits to understand where they might stand as investors with resources to place and as recipients with investment opportunities to offer. For nonprofits, it may be time to take advantage of the Handbook’s advice for institutional investors and add loans and equity to their requests for grants from foundations and others sitting on tax-exempt endowments.

A decade ago, social investments and mission-related investments were relatively new concepts for foundations. For nonprofits these days, it’s a different world. In one of his speeches at a meeting of the Davos World Economic Forum, Microsoft Chairman Bill Gates called for a “creative capitalism” that would “stretch the reach of market forces so that more people can make a profit, or gain recognition, for doing work to ease the world’s inequities.” Not surprisingly, not only did much of the world press take notice, but also, the Gates statement was treated as a serious call to action for Microsoft’s corporate brethren and competitors.

The evidence suggests that, proportionally, socially responsible investment growth is outpacing growth in conventional market investments, though socially responsible investment still makes up a relatively small portion of investment capital overall. As of 2012, according to the Forum for Sustainable and Responsible Investment (formerly the Social Investment Forum), the total volume of professionally managed assets using some combination of three responsible investment strategies—screening, shareholder advocacy, and community investing—has increased to $3.74 trillion in the U.S., a growth of approximately 42.3 percent since 2003.   These socially responsible investments of institutional investors, money managers, and community investment institutions constitute 11.3 percent of all assets under management, according to data from Thomas Reuters Nelson. Nonetheless, for those who find nonprofit finance daunting, putting one’s nonprofit into the position of being either an or an investment recipient sometimes feels like walking a circus high-wire without a net. 

Nonprofits as Investors: Help Is out There

Plenty of us have a tough enough time just filling out our annual tax forms, TurboTax notwithstanding. We often find ourselves frozen and bleary-eyed when we sit down with realtors and brokers to buy a home. So don’t be down on yourself when the nonprofit discussion moves from debates about cash versus accrual accounting into debates about investing money in social investment funds, community development banks, and local economic development ventures.

You may wish to be an investor or an investment recipient. Let’s consider each perspective, starting with the nonprofit as investor. Every nonprofit has resources; they may be short-term resources such as cash, funds held in 60-day or 90-day certificates of deposits, funds that aren’t needed so quickly that can be put into long-term notes or instruments, or perhaps assets with much longer-term investment potential, such as reserves or an endowment. Most groups simply invest these resources for maximum returns, but the Handbook on Responsible Investment Across Asset Classes tells you that your organization can use its funds for social purposes without sacrificing market-comparable returns.

Use the asset class definitions in the Handbook to consider your options, but before you do, ask yourself how investing your resources could contribute to the mission and values of your organization. What are the underlying values and motivations of your nonprofit that could be advanced by investing your funds appropriately? That is a crucial board discussion, so the board has to be involved, leading the charge and buying in.

Then bring in the experts. There are plenty who can help you find products and who can guide you through the reasonable options. Consider striking up conversations with some socially minded investment funds, such as the Calvert Foundation, which channels investments into affordable housing, small businesses, and human services through its community investment notes. Also, look to local banks with social investment programs, such as Franklin Bank in Minneapolis. Even if your nonprofit isn’t a billion dollar foundation or university, there are people to call on for advice.

But what if, rather than investing your funds in a socially responsible way, you want to get some of these socially responsible investments for your organization? This isn’t a fly-by-night game in which you can mail out dozens of blind letters of interest to potential funders listed in some foundation directory. Your nonprofit is a candidate for social investment only when it has a business enterprise that warrants equity or loan capital.

One place to list and find these opportunities is the Mission Investment Database of the Mission Investors Exchange, which is, somewhat unfortunately, limited to use by Exchange members. Started in 2010, the searchable database records concessionary investments by Exchange members. It enables users to look for institutions that have made particular kinds of investments, information about potential investees, and potential co-investment partners. The Mission Investment Database will lead to a number of nonprofits that are experienced and generally successful managers of these kinds of mission investments.

The Role of Government and the Nonprofit Sector in Mission-Related Investments

In just the past few months, a number of new investment efforts have been hatched with implications for current issues in philanthropy and public policy. For example, Morgan Stanley, the Kresge Foundation, and the Local Initiatives Support Corporation created a $100 million fund to create improved access to health care and affordable housing for low income residents based on the notion that a healthy community has both. [Full disclosure: Kresge is a Nonprofit Quarterly funder and this author was an officer of LISC during the 1990s.]

In the healthcare field, the impact investing manual prepared by Lisa Richter for Grantmakers in Health provides useful examples of investments in health centers, home health care organizations and health insurers (such as the Rhode Island Foundation’s investment in the state’s Neighborhood Health Plan). It also offers examples of ancillary investments in what constitutes a healthy community, such as child care programs, food and nutrition programs, sustainable development programs, etc.

The LISC fund for healthcare and affordable housing includes the use of New Market Tax Credits (NMTCs), a federal incentive created only a little over a decade ago as a means for bringing private capital to business investments in lower income markets through Community Development Entities (CDEs). CDEs apply for and get allocations of new market tax credits to invest in approved businesses for seven-year periods. The idea is that the NMTC attracts capital to investments that typically don’t get the attention and support of capital markets. Consequently, NMTCs tend to be very useful complements to mission-related social investments.

The healthcare and affordable housing fields are just a few examples. The overarching public policy dimension of mission-related investments by foundations and other reasonably well capitalized nonprofits is that these investments do best when they leverage or play off of governmental initiatives and resources. CDFIs and CDEs are examples of social investment opportunities enhanced by resources and support from the federal government—in the CDFI case, the Department of the Treasury.

Through programs of the U.S. Department of Housing and Urban Development such as the Community Development Block Grants and HOME Investment Partnerships, there is a cadre of nonprofit community development corporations prepared to engage private sector investors with partnership projects that fit the mission investment interests of foundations and others. Likewise, the U.S. Department of Agriculture has programs on renewal energy sources in rural areas, healthy food production, and biotechnology that are all but guaranteed to generate mission-related investment opportunities.

Absolutely none of this activity requires a slide into unproven albeit au courant “hybrid” models such as low profit limited liability corporations (L3Cs) or B corporations. There are plenty of examples of nonprofits, some in partnership with for-profits, which can serve as potent venues for the mission-related investments of endowed foundations or other well capitalized nonprofits with healthy fund balances that can be put to good use.

One of the widely accepted and understood roles of the nonprofit sector is that it steps in where the private market has failed to deliver social benefit. Nonprofits can provide capital through mission-related investments. They can also be intermediaries for capital placement through the development of business opportunities with other nonprofits and for-profits. Both of these roles demonstrate why the nonprofit sector is so valuable in promoting the potential progress of the U.S. economy.