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As every sector of society rethinks the economics of financial investing in the aftermath of the Great Recession, nonprofits and philanthropic organizations are no exceptions. While governments and the private sector explore new ways to build financial stability, innovative ideas in the nonprofit sector, like mission-related investing or “mission investing,” are gaining more attention.
A leading thinker around mission investing, Luther M. Ragin, Jr. is the William H. Bloomberg lecturer in public management at Harvard Kennedy School, an affiliate of the Hauser Center for Nonprofit Organizations, and Chief Investment Officer of the F.B. Heron Foundation, a national philanthropic foundation based in New York City.
Q. Please explain the concept of mission investing and whom it affects.
Ragin:Mission investing is a strategy whereby foundations and other institutional investors can increase their social impact by providing additional resources to support both non-profit and for-profit organizations engaging in areas of programmatic or mission interest to that foundation or institutional investor.
I like to think of it as the opportunity for foundations to broaden their “philanthropic toolboxes” – the tools they can use to engage for social purpose. Classically, we think of the toolbox as consisting largely of grants, and grants are very important. But the toolbox can be broadened to include loans, guarantees, and other investments which catalyze change and promote social benefit.
So, not only foundations but also institutional investors – such as public pension plans, insurance companies, and commercial banks – practice and can practice aspects of mission investing which essentially is a commitment to bringing greater resources to bear for social change.
Q. Can a private foundation prudently make investments without jeopardizing the value of its endowment? Won’t donors be worried?
Ragin:Mission investing, at its best, is conducted and carried out in a manner which is consistent with basic investment principles and basic portfolio management practices. Institutions considering mission investing should not leave those disciplines at the doorstep. They are crucial to how a well-executed mission investing program operates. Serious mission investors, for example, look very closely at quality and rigorous underwriting of investment opportunities. They look very closely at benchmarking, both financial and social performance of a prospective investment. Finally, they also monitor those investments on a very consistent basis over their lifespan.
So from my vantage point, mission investing should only be carried out when it’s carried out consistent with a well-organized, disciplined, rigorous investment program.
With respect to donors and whether they should be concerned: in fact, we’re finding that as mission investment is explained to foundations – whether family foundations, mid-size, smaller – that it’s actually a point of attraction for donors because it gives them a way to think about how to broaden their impact for mission especially in the current environment of diminished financial resources.
Foundations have assets under management of some $600 billion in the United States and they gift on an annual basis perhaps $40 billion. This is really an opportunity to begin to identify and engage for social purpose a portion of that larger endowment, and in doing so significantly increase the resources available for an institution to carry out its programmatic and mission objectives. That I think is often very attractive to donors.
Q. Are there sufficient investment opportunities aligned with a foundation's mission?
Ragin:I think that depends ultimately on the nature of a foundation’s mission. If your mission includes, for example, areas such as microfinance, community economic development, environmental sustainability, or some of the newer alternatives in public education, particularly charter schools – you will note that there is a growing and quality product available for potential investors in those areas.
For some other areas of programmatic interest, there may be fewer opportunities at present. But the point is that for any given mission or any given programmatic area, there will probably be opportunities – whether they are below-market or market-rate – that would be accessible to a foundation if they were really interested in this area.
I note also that one of the great opportunities in mission investing is for foundations to play a role in bringing quality products into being. And that’s one of the remarkable stories about mission investing in recent years. For example, the Northwest Area Foundation used its grant making and convening power to actually create a private equity fund which specialized in distressed areas of the Iron Range in Minnesota and other contiguous rural areas. So it was a case of a foundation actually creating an investable product which it could then invest in and could attract others to invest in, with some success.
Another example would be the F.B. Heron Foundation which created a best-in-class public equity vehicle which identified the largest U.S. companies with the best track records of engaging with underserved communities in the United States. It’s now called the U.S. Community Investing Index.
These were investment products that did not exist prior to the foundations’ interest in developing additional product and opportunity across the mission investing spectrum.
Q. Where do foundations in general and mission investing in specific fit into the effort to create more stable economics throughout society, especially among vulnerable populations such as those that suffered most from predatory lending and the subprime mortgage crisis?
Ragin:Foundations really have a very unique role. They are the beneficiaries of a dynamic market economy; their endowments flow from the wealth that those dynamic economies create. At the same time, they are created for the purpose of addressing some of the externalities which exist as a result of a dynamic market economy – everything from inequality to pollution. This is the nature and duality of the private foundation role, both in the United States and in the rest of the world.
Essentially mission investing is a tool which allows a foundation’s leadership to think about how to carry on that mission, how to manage that duality, how to think about addressing the externalities in a more effective way. That’s really the key issue for mission investing – using the broader philanthropic toolbox, can we achieve greater social impact than we can through a grant-making-only strategy? I believe the answer – at least from those who have been active thus far in mission investing – is yes.
Those with further interest in this area are encouraged to visit the website of the More for Mission Campaign Resource Center at the Hauser Center for Nonprofit Organizations.
Q. Is there anything you’d like to say in summing up?
Ragin:Mission investing is practiced differently by different institutions. That makes perfect sense because institutions have different missions and programmatic interests. It also reflects the fact that there are institutions that would prefer mission investing be, for example, in the below market space or program-related investments, or those who might prefer the market-rate space. The principle take away I would like all of you to have is that this can be customized in a way that is unique to the mission, to the risk profile, and staff capabilities of each individual institution. There’s no one pattern that fits all institutions. This is inherently a customizable strategy built around the notion of how to help individual philanthropies, individual institutional investors achieve greater impact around their mission.