As the world’s problems become more complex and urgent, traditional models of philanthropic support are not keeping pace. This lag can be blamed in part on the fact that regulations require foundations to donate only 5 percent of their assets. Typically, the remaining 95 percent is invested for growth.
Some philanthropic thought leaders are addressing this problem by proposing new and creative approaches to the deployment of the nearly $1 trillion currently sitting in U.S. foundations and donor-advised funds.
One of the clearest, smartest voices in the modern philanthropic landscape is Clara Miller, president of the $300 million Heron Foundation. The foundation’s mission is to help people and communities lift themselves out of poverty.
I recently spoke with Miller in connection with the release of her thought-provoking essay, “Building a Foundation for the 21st Century.” She said:
“Grant-making and investing operate in a balance of church and state — one devoted to ethereal good, the other to gritty extraction of financial returns.
“Baked into this structure is the fundamental 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 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.”
Heron urges her peers to recognize that every enterprise has impacts on the environment and society in the course of its business — through its products and services, treatment of workers, supply chain and more. All investing has impact — whether positive or negative.
In the United States, nearly every foundation “splits staff, systems, skill sets and roles into a ‘program side’ (which administers grants with little regard for finance) and an ‘investment side’ (which manages the endowment, with little regard for mission),” Miller observed.
Merger of program and investments
Ironically, most of a foundation’s resources are directed to the program side that administers only a sliver of its assets. “This hermetic division makes it difficult for most foundations to coherently mobilize all their assets for mission and to interact positively with (rather than ignoring) money, enterprise finance and the economy in fulfilling their goals,” Miller said.
The Heron Foundation “merged our program side and investing side into a single unit that deploys all the foundation’s capital (financial, social, reputational, intellectual and moral) in pursuit of our mission. In this way, we positioned the foundation (along with the rest of the nonprofit sector) as a distinctive part of, rather than distinct from, the larger economy.
“Money and mission were never meant to be apart,” said Miller. “Nonprofits were always meant to be a very important part of the creative and auxiliary helping part of the world. But it’s not a substitute for a mainstream economy that works for more and more people.”
Heron set out to “know what it owned,” examining the social impact of each of its investments and then eliminating those that counteracted the foundation’s mission. By deploying grants and program-related investments with nonprofits and mission-related investments with for-profit and government entities, Heron sought to direct 100 percent of its philanthropically committed capital toward its mission.
Many traditionalists argue that impact investing results in lower returns and thus less money available for grantmaking. Increasingly, this claim is proving to be false.
Erika Karp, CEO of Cornerstone Capital, a New York-based financial services firm offering a sustainable finance advisory platform, says that “the systematic analysis of material environmental, social and governance (ESG) factors in the investment process is an absolute necessity check this. Ignoring them as critical avenues of inquiry is poor investment research as well as arguably an abrogation of fiduciary responsibility.”
“Given the overwhelming empirical research on the actual investment impact of ESG integration,” says Karp, “this debate has simply become a stalling tactic for those who prefer the status quo.”
By marrying money and mission, foundations and donor-advised funds will have significantly more resources available to achieve their goals. The world’s problems should be addressed using the full engine of philanthropically committed assets — not just the fumes.
Nonprofit of the month: The Bridge Project
The Bridge Project was founded in 1991 as a collaboration between the University of Denver, Denver Housing Authority and community representatives. Designed to mitigate high dropout rates in Denver’s public housing by emphasizing education and a holistic view of child development, Bridge has provided an evidence-based, year-round program for thousands of students in kindergarten through college. The model addresses early literacy, STEM participatory learning, graduation and career preparation, with scholarships available. denverbridgeproject.org
Bruce DeBoskey is a Colorado-based philanthropic strategist working with The DeBoskey Group to help businesses, families and foundations across the U.S. design and implement thoughtful philanthropic strategies and actionable plans. He is a teaching fellow with Boston College’s Center for Corporate Citizenship and a frequent speaker at conferences on philanthropy.