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Jan 14, 2015

How Our Investments Can Benefit Our Community

Over $1 trillion is committed to philanthropy, “sitting in foundations, donor-advised funds, and elsewhere” as Bruce DeBoskey quipped recently in the Denver Post.  “Only a small percentage is expended on charitable donations….the great majority are invested for a financial return without regard to the impact on society.”

He is referring to the convention that foundations and endowments “spend” about five percent of the invested principal each year.  The IRS requires private foundations to spend at least five percent and state law suggests five percent is a “prudent” amount to distribute each year out of an endowment.  Donor-advised funds have no spending requirement; the money can sit forever without benefitting a charity although data suggest that many funds are actively spending to support our communities.

DeBoskey’s point is that the uses of the 95 percent of investment dollars that remain invested should not be isolated from the uses of the five percent that makes its way to charitable causes each year.  Why not, he suggests, make most of the entire portfolio benefit society?

There is a continuum between conventional, classic investing and philanthropic grant-making that an investment professional should consider.  Stephanie Gripne of the University of Denver notes “There is a shift from fearing a financial compromise by incorporating social factors such as climate change into investment, to recognizing the financial advantage of investing in companies that are addressing or solving those issues.”

The most pro-active investment approach would be to invest directly in social enterprises, called impact investing, where the emphasis on optimization of social or environmental needs likely result in financial trade-offs compared with conventional investments.  Impact investing can occur at various stages of business development: idea formation, seed, angel, pre-revenue, growth, etc.

Acumen Fund is a socially-oriented investment fund that has been an impact investor for 15 years.  According to the Monitor Group, when Acumen started, 78 percent of its investments supported businesses at the ideation and business plan development stage.  By 2010, that share had dropped to 39 percent and a full 61 percent of its investments were at the market development and growth stages.

Monitor found that the “overwhelming majority” of impact investment funds “expressed a strong preference for investing in the later stage, certainly after commercial viability had been established and preferably once market conditions were well prepared for sustainable scaling.”  Unfortunately, there is a shortage of social enterprises that are ready for late-stage investment (the problem that prompted creation of the Center for Social Enterprise Development).

Many foundations and philanthropists that wish to orient their portfolios more toward social impact likely are not ready for the risks inherent in early-stage investing.  This suggests that their first move away from conventional, return-focused investing should be to consider environment, social, and governance (ESG) risk factors to guide investment decisions.  For example, Rockefeller Brothers Fund has divested all fossil fuel investments.  Yale University avoids companies that are not taking steps to reduce greenhouse emissions.  Wallace Global Fund is one of 17 foundations divesting fossil-fuel stocks and investing instead in clean energy.

I give Bruce DeBoskey the final word:  “Ask the manager of your philanthropic capital, ‘Where is my money spending the night?’ Ask yourself deeper questions about the social impact of those investments.  You may be surprised at the answers.”