Impact Investing Can Help Foundations Avoid Obsolescence
Thursday, March 19, 2015
John D. Rockefeller would never have considered abandoning the oil business. But that is exactly what some of his heirs did last fall. The Rockefeller Brothers Fund, a family foundation with $860 million in assets and a long history of supporting environmental causes, announced it would divest itself of all fossil-fuel investments.
The decision was not just about a family moving away from its legacy but a sign of a broader trend in philanthropy.
The conventional approach private foundations have used ever since Mr. Rockefeller created his philanthropy was simple: Invest the assets and then distribute a portion every year. But in today’s world, this structure faces some challenges. The intersection of private wealth and public accountability is more complicated, prompting many in the foundation world to operate in new ways — and with approaches that could eventually turn the entire way philanthropy operates upside down.
Among the cross-purposes that are raising questions:
- Federal law requires grant makers to distribute at least 5 percent of their assets every year, but this coupon-clipping leaves the other 95 percent of assets disconnected from the foundation’s mission. In fact, the investments often are in direct conflict with the mission, as the Rockefeller Brothers Fund felt.
- Foundations that are established to operate forever set their investment strategies to make sure they will always have enough money. That drives boards and donors to decide how much to spend based on investment policies rather than on the urgency of the problems their foundation wants to solve.
- With the focus on perpetuity, things can get even worse when the economy is in a downturn, as we learned in the Great Recession: Charities are in more desperate need of money from foundations, but grant makers are generating less income so tend not to give as much lest they risk going out of business in the future.
- Foundations are created mostly by the 1 percent — America’s wealthiest — as a tax-savvy place to park surplus wealth. They don’t exist solely, or even mainly, to achieve social good, yet that is what society expects from them. We could view today’s golden age of philanthropy as the result of a new gilded age of inequality.
The Rockefeller Brothers Fund is but one of many foundations seeking to address the disconnect between their endowments and their social goals.
These foundations are frustrated by the size of the problems facing the world versus the amount of money put into solving them. As new donors get involved in philanthropy, they increasingly want to put more of their assets to work right away. And both veteran foundations and new ones are seeing impact investing as a way to generate both a strong financial return and a social return by placing capital in socially oriented businesses and business-minded nonprofits.