Corporate Foundations: Challenges in Adopting Mission Investing

 

In my previous post, I argued that corporations and corporate foundations should strongly consider integrating mission investments as a key component of their social impact portfolios. Mission-related investments(MRIs) and program-related investments (PRIs) differ from other forms of philanthropic investment because they are designed both to achieve a measurable social impact and to provide a financial return that can then be reinvested into other charitable pursuits.

 

Despite many examples of successful mission investments, mission investments are still relatively rare in the corporate world. Corporations and their foundations lag far behind their family, community and private foundation peers in their use of mission investing tools. The corporations that do participate are primarily from the financial services industry, primarily banks and insurance companies.

 

I recently have spoken with a number of representatives of corporations and corporate foundations, trying to pinpoint the challenges corporations and corporate foundations face in considering mission investing. Some key factors are: 

 

The majority of corporate foundations are considered “pass through” – they receive annual funding from their parent corporation roughly equivalent to the amount of funds they anticipate distributing during the current or subsequent fiscal year. In contrast to community foundations and other types of private foundations, most corporate foundations are not endowed. They lack a large corpus of funds for long-term investment.  

 

Because many corporate foundations have limited funds for longer-term investments, their investment policies favor liquidity and preservation of capital. Unfortunately, many mission-related investments take time to mature and provide a return. As a result, many corporate foundations consider it impractical to do mission investments from foundation investment funds. 

 

On the other hand, the parent corporations have many more investable assets than do their foundations. Compared to their foundations, corporations also have longer investment windows for at least a portion of their funds, and have more opportunities to diversify their portfolios. In short, corporations have a greater flexibility and ability than do their foundations to set aside some portion of their portfolios to accomplish social and environmental objectives through financial investments, as well as produce a market rate financial return to the corporation.  

 

Rather than make mission-related investments from their investment portfolios, corporate foundations are more likely to make program-related investments from their program budgets. PRIs provide a clear benefit to the foundation in that once the funds are repaid, they can be used again for new charitable purposes. However, of the several foundations I interviewed, some mentioned that foundations are concerned that making a program-related investment would reduce the amount available for grants and other purposes. Many foundations have either commitments or highly anticipated grants as they enter each fiscal year, so have relatively little uncommitted discretionary funding from which to consider new PRIs. Basically, they have no easy way to “expand the pie.”

 

Of course, this does not preclude corporate foundations from making PRIs, but it does make it a bit more challenging. Clearly, it would take careful planning to make the transition—without impacting current grant obligations—from an exclusive focus on grants to a program that includes both grants and mission investments.

 

Many of the corporate representatives I interviewed have only a general knowledge of mission investing. They expressed a desire for more detailed descriptions of how the mechanics of mission investing work, supported by detailed case examples, so they can more clearly envision how they could implement mission investing in their own organizations. For example, what are the appropriate investment options for a given situation, how does one structure a PRI, how does one account for it on the books, how does the foundation account for returned funds/assets, how is it reported to the IRS?

 

In order to make more informed mission investing decisions, corporate foundation leaders—including foundation finance managers—need enough detailed information (through case examples, for instance) to be convinced that they can successfully operationalize mission investing. They also need to show their board of directors how mission investing can positively impact the foundation’s “bottom line” by preserving or returning capital, producing a social impact consistent with the foundation’s mission, enhancing the foundation’s reputation and building good will. In short, foundation executives and their finance managers need the information that will allow them to make the business case for mission investment.

 

Similarly, mission investing advocates need to educate not just corporate foundation managers, but also their counterparts in corporate finance and treasury offices. These are the people within a corporation who typically manage the investment of funds for both the corporation and the corporate foundation. They need more training, information and clear case examples of how mission investing can contribute to the bottom line while at the same time help to catalyze or achieve social impact. If both investment managers and those responsible for corporate philanthropy learn more about the benefits of mission investing and how to make it operational, it can help foster internal discussions of how to incorporate mission investing into the broader portfolio of the corporation and the foundation. 

 

A few corporate representatives mentioned that they receive very few inquiries about mission investingfrom the very organizations in the for-profit and nonprofit sectors who would benefit from these alternative sources of financing. While foundations regularly receive requests for grants, sponsorships and other more traditional forms of corporate support, they are rarely approached by a nonprofit or small business with a proposal for investment such as a loan, loan guarantee or other mission investingvehicle. This may be because most foundations do not publicly communicate a willingness to consider support for nonprofits other than through grantmaking. However, it is also likely that both foundations and nonprofits need a more detailed understanding of mission investing so that foundations and nonprofits can explore together how to structure deals that could operate to the benefit of both.   

 

Most corporate foundation staff are grantmakers, and are very busy doing the important job of managing their grant portfolios and grantmaking programs. However, most foundation staff have no particular background or expertise in investment strategies or management, and little time available to learn it. That limits their ability and willingness to consider PRIs, conduct research on investment options, conduct due diligence, structure financing deals, assess risk and make decisions on investment proposals.

 

Most of the companies that do make PRIs, such as banks and insurance companies, have many people within the corporation who are already investment experts and can help structure financing deals and guide investment decisions, including mission investments. That presents an opportunity for corporate foundation managers to work closely in partnership with the investment experts on the finance side of their corporations. The foundation managers can serve as consultants on social impact; the investment managers can advise on how to evaluate, structure, and manage an investment.

 

It also presents an opportunity for educating corporate staff on the potential use of intermediaries. These are external organizations who do have staff with the time and expertise to conduct research and due diligence on funding opportunities that would be consistent with corporate objectives, minimize risk and provide a reasonable opportunity for financial return. 

 

A few corporate foundation managers offered their perception that some key issue areas don’t easily lend themselves to mission investments. For example, some folks told me that there are many more options for making mission investments in areas such as alternative energy, low-income housing and to spur economic development than improving STEM (science, technology, engineering, math) education.

 

In the education field in particular, corporate foundation managers perceive limited options for mission investing, and those that exist are primarily focused on construction bonds and financing for charter schools. That perception, coupled with the limited time foundation staff have to research investment opportunities, contributes to the limited interest of some foundations in exploring mission investing.

 

These perceptions may or may not be correct. A few foundation representatives pointed out that some areas of mission investing, such as providing working capital, debt financing and fostering entrepreneurship, can cut across issue areas, including education. However, well-justified or not, these perceptions exist. This highlights a need for foundations to have vehicles to share information and case studies that highlight the breadth of possibilities for mission investments focused on some of these key issue areas.

 

Corporations and corporate foundations that are not in the financial sector face numerous practical challenges to adopting mission investing as part of their social impact portfolios. However, the challenges are not insurmountable and the resources do exist. With proper education, guidance and coaching, most companies and their foundations can learn to integrate mission investing—including both MRIs and PRIs—as key elements of their programs.