More than just an act of wealth transfer

Sevdalina Rukanova’s update on mission investing and its related issues (Alliance, September 2008) is a solid overview of the many and various discussions presently taking place in both the United States and Europe. However, as we reflect on the activities and issues she cites it is easy to gloss over one very important point: in the US, the discussion has now moved from addressing the question of whether foundations should engage in mission investing to how foundations may best engage in mission investing.

Let me say that again:

It is no longer a question of whether, but in what ways, foundations should leverage their total assets to maximize multiple returns.

Those newer to the debate may feel this is a bold statement, but to those who have watched this discussion evolve over recent years, there is a clear difference in the nature of the questions presently being raised from the types of questions raised in the past. The discussion of how foundations should best approach the development of their overall asset management strategies is no longer the exception it was nearly a decade ago.

While some may become focused upon attempting to answer the many questions raised about this emerging area of asset management practice (questions having to do with definitions and defining various areas of emerging practice), let us not continue to confuse the forest for the trees.

Is the litany of issues and questions documented by Ms Rukanova in need of response?

Certainly!

Do they all need to be answered before individual foundations may move forward in advancing their own particular answers for how best to proceed?

No!

There are two points in particular we should keep in mind.

First, in the same way that one would never promote a single traditional investment approach for all investors, as we explore an understanding of mission investing we must also recognize that the right answer for one investor will not be the right answer for all. Indeed, the correct mix of investments will differ based upon each foundation’s mission, vision, intent and strategic focus. Should all foundations make use of PRIs? It depends. Ought they all to invest in screened funds? Probably not. The ‘right’ answer to what mix of strategy and investment instruments is best will differ for different asset owners.

Again, our intent is not to get all foundations to do the same thing (which is no doubt akin to herding cats) but rather to support each foundation in expanding the specific tool kit from which they draw in support of attaining the greater goal they each seek (more like overseeing a regatta of boats steering different courses, but all attempting to catch most effectively the shifting winds to drive them towards their destination).

Second, in both investment markets and social change efforts, our understanding of what is appropriate and acceptable evolves over time as we experiment, learn and encounter new opportunities which require new thinking and tools. While we may not at present think of foundations as being able to harness more than their grants in pursuit of mission, come tomorrow we will look back and marvel at how we could have been so limited in our understanding of the potential to leverage assets in pursuit of institutional mission.

The experience of the US may be useful in this regard. While this may come as a bit of a surprise, many will be amused to know there was a time when trustees overseeing the assets of organizations incorporated within the state of New York were forbidden from investing in anything other than – wait for it! – bonds issued by the state of New York! Anything else – real estate, stocks, or any other investment vehicle – was viewed as too risky an exposure for a portfolio of charitable institutional investments.[1] But over time these limiting and self-serving regulations have evolved and changed in order to meet the emerging interests of society. The philanthropic community is currently involved in just such a process of evolution and change.

Which brings us to another critical point.

While it may be influenced by regulation and oversight, the change we seek will not come from outside our community of donors, trustees, foundation executives and stakeholders, but rather must be driven by us. The shift in investing options available to New Yorkers came not because some regulator in state government decided to make a change in the rules guiding trustees in their investing practices but rather because trustees filed a law suit claiming it was their responsibility to diversify holdings in order to decrease risk and increase the overall potential performance of their portfolios under management. Today, just as in the not so distant past, we must not wait for leadership to come from others: we must stand up and take the reins of leadership ourselves.

Which brings us to the perennial question of fiduciary responsibility ...

As I have discussed elsewhere, the responsibility of philanthropic fiduciaries is not simple oversight of a set of financial investments but rather oversight of how the total resources of an institution are managed in pursuit of its mission and purpose. While they need not be experts in financial management, trustees should without doubt expect those who manage their financial assets on our collective behalf to bring forward investment opportunities which promise to maximize not simply the organization’s financial returns but its total returns on investment – financial, social and environmental. Until and unless fiduciaries demand that their wealth advisers and fund managers construct investment portfolios that are in alignment with the overall mission of the institution, the market for those investment products will not be able to fully evolve or function effectively.

This is called supply and demand.

We certainly know more today than we did a decade ago about how best to structure microfinance bond offerings, sustainable real estate investments, inner city business development loans and a host of other instruments – but if trustees do not require these instruments be part of their portfolios of rational, reasonable investments, there will be no incentive for fund managers or wealth advisers to bring them forward. We must demand they do so if we are to hope to see them in the mix.

Finally, let us simply stop to reflect on how far we have moved during the course of these last years. Whether the result of an infusion of new leadership or evolution of our previous thinking, the now widely embraced notion that philanthropy should be more than simply an act of wealth transfer – the idea that it may actually create value and leveraged impact – is to be celebrated. The fact that we don’t have all the answers or outlined approaches before us today should be savoured. There will be plenty of time in the future to grapple with the limitations of professionalization, over-confidence and hyper-definition. For today, let us simply acknowledge that we all (trustee, grantee and stakeholder) stand one step closer to more effectively addressing the challenges of our world by moving from grants and aid to grants, aid and structured investments as required tools for change.

And it is not often we can say that!

1 Emerson, Little, Kron (2005) The Prudent Trustee: The evolution of the long-term investor.

Jed Emerson is Managing Director for Integrated Performance at Uhuru Capital, a market-rate fund of funds which contributes financial support to international NGOs working to take social entrepreneurship to greater scale and sustainability. He has written extensively on these topics and various papers may be found at www.blendedvalue.org. Email jed.emerson@uhuru.com