Foundations own huge amounts of stocks. Are they using them for good?

At the end of 2024, MacKenzie Scott made an announcement. In an essay titled “Investing,” she said that she planned to make an impact not just with her grants, but with the money she didn’t give away. “When I make gifts, rather than withdrawing funds from a bank account, or from a stock portfolio that increases the wealth and influence of leaders who already have it, I’d like to withdraw them from a portfolio of investments in mission-aligned ventures, with leaders from the populations they are serving, or from generally undercapitalized groups like women and people of color,” she wrote. Philanthropic development funders are estimated to control hundreds of billions of dollars in assets, the majority of which is held in U.S. and European stock markets. As Scott noted in her essay, how these assets are invested matters: If a foundation wants to combat climate change, it shouldn’t have an investment portfolio full of fossil fuel companies. In the last decade, foundations — and others — have been gradually moving toward a model of values-aligned investing, funneling their endowments into portfolios that yield both financial and social returns. But it’s still a subject that many think is underexplored. “We spend so much time focusing on the 5% of annual giving that foundations are required to distribute, but no one talks about the other 95% — the capital that’s being invested to grow their endowment,” Naina Batra, CEO of the Asian Venture Philanthropy Network, or AVPN, told Devex at an event earlier this year. “Imagine if even a fraction of that were deployed with an impact lens.” So, how much are foundations thinking about that exact question? Are they trying to do good with their investments? And if they’re not, what’s stopping them? The terms, defined First and foremost, what do the words mean? Is impact investing the same as values-aligned investing? What about mission-related investing and program-related investing? Where is environmental, social, and governance, or ESG, in all of this? You’d be forgiven for being confused — a surprising number of investing professionals aren’t clear on the differences, either. “Just like science tells us no two snowflakes have the same design, I used to joke and say there are no two people that use the same definition of impact investing,” Roy Swan, director of mission investments at the Ford Foundation, told Devex. The Global Impact Investing Network, or GIIN, — widely regarded as the preeminent authority in this space — defines impact investments as funds that are specifically directed toward projects and businesses in the private market that generate social or environmental benefits. While impact investing typically refers specifically to private assets — ones you can’t buy on public exchanges such as the stock and bond markets — values-aligned investing and ethical investing are umbrella terms that also include public markets. This wider application is what Scott was referencing in her essay. Foundations have two tools at their disposal for making ethical investments: mission-related investments, or MRIs, and program-related investments, PRIs. While similar, they have a couple of important distinctions. MRIs are made from what is referred to as “the other 95%” of a foundation’s assets, with the intention of generating both a social and financial return. While the Internal Revenue Service in the United States offers guidance on MRIs, there are no rules dictating their use. PRIs, on the other hand, are drawn from the 5% of the total endowment that a U.S. foundation is required to make as a charitable payout each year. To qualify as a PRI, the IRS stipulates that an investment must meet three conditions: its primary purpose must be to advance the foundation’s charitable objectives; producing income or appreciation of property cannot be a significant purpose of the investment; and finally, the funds cannot be used directly or indirectly for political lobbying. The restrictions around PRIs are partly responsible for generating one of the greatest misconceptions around all of values-aligned investments — that they do not generate the same returns as traditional investments — said Lauren Sercu, the chief investment officer at the Sorenson Impact Foundation, one of the first foundations in the U.S. to ethically align 100% of its principal. In fact, this misconception is “the biggest bugaboo” the industry still maintains, Sercu said. Because PRIs are by definition concessionary, there’s a belief that all other forms of impact investing must be concessionary, too — but they do not have to be. “The data is getting harder and harder to ignore. You can do well and do good at the same time.” --— Lauren Sercu, chief investment officer, Sorenson Impact Foundation Frequently, impact investing is conflated with ESG investing, said Sercu — even by seasoned investment professionals. Primarily focused on the stock market, ESG’s target issues include a commitment to sustainability, how employees and other players are treated, and operational transparency, among other factors. One way to think about ESG is that it’s a framework primarily designed to help generate returns; an assessment of past actions to help players understand the risks and opportunities around sustainability and social issues. Impact investing, by contrast, is a strategy that seeks to produce measurable benefits. It’s a shame that the two are often conflated, said Sercu, because ESG is becoming increasingly politicized. Republicans took aim at ESG initiatives well before Trump took office, deriding them as “woke” and pushing various forms of legislation to restrict their influence in corporate and financial decision-making. But ultimately, ESG generates data, Sercu said — and more data is never a bad thing. Ethical investing, then and now The notion of ethical investing has roots both in Judaism and Islam, though its modern conception dates back to the 1750s, when the Philadelphia chapter of the Quakers prohibited members from investing in the slave trade or any affiliated industries. In the 1900s, the strategy expanded to avoid investments in so-called sin industries, including alcohol, tobacco, gambling, weapons, and others. Opting out of sin stocks is what’s called exclusionary investing, or negative screening — avoiding investments affiliated with industries out of sync with investors’ values. If negative screening is based on omission, positive screening is based on proactivity — in other words, all of the ethical investing mechanisms described above. Such investment strategies have evolved significantly over time since religious groups started shunning tobacco products. Billionaires Pierre Omidyar and Jeffrey Skoll, eBay’s founder and first president, respectively, both launched eponymous philanthropies around the turn of the century based on leveraging investments to drive social change. Even players in the mainstream capital market, such as banks and other large institutions, have taken the opportunity to brand products as sustainable or socially impactful, further embedding the idea of values-based investing in the everyday financial lexicon. How an entity invests depends on whether it’s a foundation, family philanthropy, or pension fund, explained Jed Emerson, founder of the consulting and advisory firm Blended Value Group. “Where you stand depends on where you sit,” he told Devex. Each investor has its own discrete understanding of its obligations, responsibilities, and purpose. “If you step back and you really reflect on it, it's very logical that you would want to use all of your assets to pursue your institutional purpose and mission,” he said. But that doesn’t mean it always happens that way. Barriers to entry For many organizations, the barriers to values-aligned investing are as much psychological as they are practical. As Emerson explained, most foundations fundamentally consider themselves charitable institutions that manage assets in pursuit of the highest possible net income, which can then be distributed in the form of grants. “They don't think of themselves, first and foremost, as asset managers, as wealth managers, as stewards of capital,” he said. “They think of themselves as grant-makers and philanthropists.” As such, there aren’t a lot of people in the world of philanthropy who also possess a deep expertise in finance and investing, making cooperation between those two spheres complicated. Complicated — but not impossible. Swan, who was recruited by the Ford Foundation from Morgan Stanley, said that while the field is growing, it still requires a staunch commitment from an organization’s leadership. For the Ford Foundation, the commitment came from its president, Darren Walker, who a decade ago pressed the board to think critically about how “the other 95%” of its endowment was being used. After a lot of research and negotiations, it was agreed that $1 billion of its corpus would be funneled into MRIs over 10 years, amounting at the time to 8% of its total principal (because of the growth the foundation has since experienced, that figure has decreased to 6%). Moving a legacy foundation like Ford to consider ethical investing takes courage and conviction, Swan said, and a “cheerful persistence to continue walking into the wind.” Tradition is stubborn, he pointed out. The regular refrains he hears are that organizations don’t know where to start, that boards and executives are unconvinced, and that foundation heads aren’t investment experts. “I think there are psychological barriers, inertia barriers, and ‘if it ain't broke, don't fix it’ barriers that have kind of thrown sand in the gears of forward progress,” he said. Not all or nothing And how foundations invest isn’t purely a matter of principle — they also have to consider how such investments align with what is known as their “fiduciary duty.” Boards are responsible for maintaining the financial integrity of the organizations they serve, and many believe their duty is to prioritize maximum return over ethical issues. This mandate is open to interpretation. In England, a 2022 ruling granted nonprofits expanded freedom to exclude from their portfolios companies that failed to act in line with the Paris Agreement, even if doing so increased financial risk — the latest in a string of rulings going back to the so-called Bishop of Oxford case in 1992, which have given boards increasingly broad — but not universal — discretion. In the U.S., guidance has been issued by both the Department of Labor and the IRS, though Biden-era protections have since been undercut by the Trump administration. Many foundations are working to strike the balance that works for them. Some, such as the Ford Foundation, have a relatively small percentage of their endowment in MRIs (though still a substantial amount in dollars). Others, such as Sorenson Impact Foundation, the California Endowment, and the Joseph Rowntree Charitable Trust, have committed to 100% alignment. All told, GIIN estimates that more than 3,900 organizations worldwide now manage a total of $1.57 trillion in impact investments. The perception that doing good must come at the expense of doing well is misguided, Emerson said. Instead, he urged people to think of capital as existing on a continuum, rather than separate siloes.“The question isn't, ‘How much do you have to give up to do good?’ The question is, ‘As a steward of capital, what is the purpose of your capital?’” Jackie Khor, a strategy consultant for impact investments at the MacArthur Foundation, is adamant that a positive impact doesn’t have to entail financial sacrifice. “I'm on the investment committee for a billion-dollar foundation. They are not compromising their financial return,” she said. Investing ethically doesn’t have to be an all-or-nothing proposition, either, argued Khor. Screening out stocks that contradict your organization’s mission is better than not, even if it doesn’t result in a 100% aligned portfolio. “There is a cost associated with researching to the millionth degree of precision,” she said. “But you can optimize. Don’t use it as an excuse for doing nothing.” Additionally, companies are not immune to outside pressure. Organizations can wield their equity stakes to influence decision-making, a process known as shareholder activism. These advocacy efforts have been hugely successful in pushing companies to shift their behavior — according to the most recent U.S. Sustainable Investing Trends report, it’s one of the pivotal strategies for fostering ESG alignment. Just a few decades ago, it wouldn’t have been possible to find investments that fit both a financial and social mandate, Emerson said. But times have changed. Players who once saw themselves as completely separate — those focused on international development finance versus those in public securities versus those in the private market — have since joined forces. Today, “you can construct a portfolio on this basis in a way that you literally were not able to do 30 years ago,” he added. With the collapse of the U.S. Agency for International Development and the turmoil surrounding aid generally, many feel that now is an excellent time for grant-makers to think deeply about the role their investments are playing in achieving their aims. Foundations, in particular, have leeway with how they invest, putting them in a good position to align their portfolios with what they want to achieve as an organization. “This is no longer a cottage industry,” Sercu said. “There are enough people who view the world that way that I think this industry is going to continue to gain steam.” “The data is getting harder and harder to ignore,” she added. “You can do well and do good at the same time.”