There are thousands of philanthropic foundations in the world, many of them supporting community revitalization, heritage restoration, climate resilience, and environmental regeneration.
But did you know that only about 5% of the money they manage actually goes towards their mission? The other 95% is invested in the same sorts of portfolios an ordinary banker or mutual fund might own. Sometimes, these investments actually undermine their mission, such as a foundation that fights climate change, but invests in oil companies instead of renewable energy companies.
Clearly, the foundation “industry” is in need of redesign, rebuilding, and renewal, in order to reconnect foundations to their missions.
It’s calling on its philanthropic peers to jettison outdated operating models that leave resources untapped in the face of systemic social ills.
In a treatise entitled “Building a Foundation for the 21st Century,” Heron President Clara Miller makes the case that the modern economy demands a different practice of philanthropy, one that makes use of all of its resources to actively engage with the capital markets for the public good.
Heron, whose mission is to help people and communities help themselves out of poverty, is among a growing number of institutions and investors working to advance the practice of philanthropy to match the needs of modern society. Many U.S. philanthropic institutions today are structured to meet—and rarely to exceed—the IRS requirement of five percent minimum annual charitable payout.
Miller’s essay comes as number of bold moves have brought new attention to the philanthropic sector and its relationship to the economy at large. The Ford Foundation’s President Darren Walker announced a new strategic direction focused on inequality, while Facebook founder Mark Zuckerberg pledged the majority of his wealth toward fixing social ills, making the deliberate choice not to do it via the rubric of a traditional private foundation.
Miller writes, “Baked into [the traditional philanthropic] structure is the sacrosanct belief that mainstream profit-making cannot be philanthropic and philanthropy cannot be market-connected, that grants could not be available without the profits that only unfettered capitalism can provide, and that furthermore, the best use of philanthropic grants is to finance nonprofits to be a cleanup crew for the inevitable mess real capitalism leaves in its wake.”
She explains that a shift is necessary if philanthropies are to avoid undermining with their investments the progress they are making via grants, and lays out the changes Heron is making in its own operations. In 2012 Heron first declared its quest to deploy 100 percent of its investment capital toward its poverty fighting mission, without becoming a “spend-down” foundation—which was considered a groundbreaking approach at the time. With experience of working toward that goal, Miller appeals to foundations to abandon the common practice of separating grant making from endowment investments, and to instead merge mission and finance functions into a single office of philanthropic capital deployment, looking at both the financial and social impacts of every outlay of capital.
Heron presses peers to recognize that every enterprise impacts the environment and society in the course of its business, through its products and services, treatment of workers, supply chain and more. Therefore all investing also has impact, whether positive or negative, and thus investing for impact is not limited to a particular asset class or enterprise type, but implies understanding and improving social and environmental outcomes across an entire portfolio. For Heron this means maximizing the opportunity to improve economic outcomes for workers and businesses, and the communities in which they operate.
Specific calls to action in the essay include:
- Examining the enterprises in investment portfolios (“know what you own”) and the effects they have on all facets of society;
- Committing to measure social performance across enterprises (nonprofit and for profit, public and privately held) and asset classes over time;
- Collaborating with co-investors and partners for greater impact;
- Developing common data standards and cohorts;
- Transitioning foundation infrastructure to be more responsive to external opportunities and conditions.
Heron’s mission is to help people and communities help themselves out of poverty. Their vision is to help people in the United States to escape poverty, thrive and enjoy the benefits of full livelihood, opportunity and community. Their strategy is to invest capital in ways that expand reliable employment and economic opportunity.