What’s the historical model of investing and impact? Investments produce a return and, separately, social impact was made with distributions through foundations. Today that’s changing. With social or impact investing, there’s a melding of the two. Impact investments are made for a “double or triple bottom line” effect while also producing risk/reward return.
And it’s not all done within a foundation. As JP Morgan for the Global Impact Investing Network reported on Jan. 7, 2013 in their “Perspectives on Progress, The Impact Investor Survey,” family offices, pension funds, endowments, banks, investment managers and individuals are increasingly making impact investments, which are driven by philanthropic intent. From 2012 to 2013, survey respondents reported that they are increasing their allocation of impact investments by 12.5 percent.
In a post 2008 economic climate, in which foundations are on a multi-year uphill climb to regain previous asset levels, the world of philanthropy is no longer relying on traditional grant making and is utilizing other tools in the toolbox for social change. These forms of impact investing can vary—including loans, asset lending, bank guarantees, shareholder advocacy, bonds, private equity, pooled investments and partnerships—yet the results are the same: targeted impact with a return. These investments have the power to produce a greater and more sustainable impact on the organizations and issues they attempt to support. Here are three examples of foundations that have successfully used impact investing.
F.B. Herron Foundation
The F.B. Herron Foundation has fused its grant-making and investing activities by pledging to invest 100 percent of the foundation’s endowment through a single capital deployment office, which, according to the foundation’s website, removes the traditional distinction between the two areas. While adopting a full range of impact investment strategies, the foundation focuses on two primary investment tools: capital investment and philanthropic contracts. After carefully reviewing an organization’s capital returns, growth, operating reliability and other areas, the Herron Foundation will deploy financial capital through a multitude of investment vehicles, such asgrants, private or public equity investments, program-related investments and bonds. In the case of philanthropic contracts, the foundation has ceased providing ongoing operational and revenue support for grantee organizations, but rather presents organizations with a contract of distinct deliverables due within a particular period of time.
W.K. Kellogg Foundation
As highlighted by Arabella Advisors in their 2012 report, “Use Your Investments: Generating Impact and Returns in New York,” the W.K. Kellogg Foundation has successfully used impact investment as part of a program that uses the foundation’s endowment funds to simultaneously further its mission and create market rate financial returns between 15 percent and 25 percent. To advance its mission of creating the conditions of success for vulnerable children, the foundation made a $500,000 direct private equity investment in Acelero Learning, a Harlem-based company that supports and manages multiple local early childhood programs. The investment allowed Acelero Learning to grow and refine its business model and has nearly doubled the number of children and families it serves, concurrently strengthening the company’s positive social impact as well as its value for investors both financial and philanthropic.
The Andrea and Charles Bronfman Philanthropies
The Andrea and Charles Bronfman Philanthropies(ACBP), unlike most foundations that exist in perpetuity, was created with a 30-year spend down period, placing the philanthropies in a unique position to accept much of the extra risk and challenge associated with impact investment. The Koret Israel Economic Development Fund (KIEDF) is an organization that, through the purchasing of Israeli government bonds, provides microloans to small business owners and entrepreneurs in Israel, to increase self-sufficiency of individual Israelis, while simultaneously strengthening the Israeli private sector as a whole. Rather than allocating a traditional grant to KIEDF, ACBP provided the organization with a $1million, 5-year, loan. True to their mission, KIEDF used loan like these to invest in Israeli government bonds. These bonds served as collateral for loans from Israeli banks, which creates a larger pool of resources that, in turn, allowed KIEDF to award over 10,000 loans and facilitate $225 million in financing to 8,000 small and micro businesses while creating and supporting more than 40,000 jobs.
The New Normal?
As clients begin to express an interest in impact investing, wealth advisors, tax attorneys and other financial professionals can look to the philanthropic field for case studies. With the adoption of these strategies by individuals and institutions across the financial spectrum, impact investment might just grow to be the norm, rather than the exception, especially in the world of charitable giving.
Sharna Goldseker is the Managing Director of 21/64, a non-profit consulting practice specializing in next generation and multigenerational engagement in philanthropy and family enterprise. John Hoover is the Chief Financial Officer of the Andrea and Charles Bronfman Philanthropies and Managing Director of Chasbro Investments, a family office.