Recently, the Ford Foundation announced that it would invest $1 billion from its endowment to fight poverty and injustice in a unique way. This money, which comes from an endowment valued at $12 billion, is earmarked for mission-related investments and will be made through private funds focused on affordable housing in the United States as well as financial services in emerging markets around the world. This commitment, the largest of its kind to mission-related investments made by a private foundation, could radically change the landscape of American philanthropy by challenging other foundations to undertake their own impact investing.
A Historic Commitment to Impact Investing
In a statement about the investment, Darren Walker, president of the Ford Foundation, noted the importance of broadening the ways in which we address injustice and inequality around the world, pledging to leverage the power of the foundation’s endowment more deliberately to push for change. What makes the investment so historic is that foundations in the United States have largely used grants to pursue their missions.
Traditional approaches to generating philanthropic returns involve regular disbursements to various organizations working on the ground. The impact of grantmaking is limited largely by American tax regulations, which require only 5 percent of total assets be disbursed through grants in a single year. That means that the $650 billion currently in endowments of American federations only generate about $32 billion in philanthropic work each year.
For the Ford Foundation, grantmaking totals about $500 million annually. The foundation’s grants have made real change in the United States by tackling important issues like green technologies, civil rights for women, and justice for minority groups. At the same time, says Walker, 95 percent of the endowment goes untapped and it is this money that could make revolutionary change. He concludes that the last 50 years were about making the most of the 5 percent, but we are now entering the age that asks how to harness the power of the 95 percent.
Impact Investing in the Philanthropy Sector
The billion-dollar commitment will be phased in over the course of a decade. Instead of directly investing in companies, the foundation plans to invest through private funds benefiting affordable housing. Ford has pledged complete transparency throughout the process to gauge the performance of its impact investing experiment and, hopefully, to encourage other large foundations to follow suit.
Interestingly, Ford is not the first foundation to make a commitment to mission-related investments. Last year, the Kresge Foundation in Detroit allocated $350 million of its $3.6 billion endowment to mission-related investments. McKnight and the Wallace Global Fund have made similar commitments, and the FB Heron Foundation recently announced that it had invested its total endowment, about $250 million, in its mission to end poverty. However, no foundation has pledged anywhere near the $1 billion of Ford, which could put pressure on other leading organizations around the country.
Ford’s Vision for the Future of Philanthropy
Ford has long been a leader in charitable investment strategies. The foundation was among the first to make program-related investments, which are different from grants but actually count against the federal distribution requirement. These investments, says the IRS, must be primarily charitable, with financial returns a secondary concern. Ford has allocated more than $670 million toward program-related investments since they became a legitimate strategy in the 1960s. This money has helped fund the arts, preserve affordable housing, and create new jobs.
Walker recognizes that philanthropy alone cannot solve the nation’s systemic problems. After all, the systems that have created the inequality that the foundation wishes to address are the very same systems that have allowed for the amassment of a $12 billion endowment. Ford and other foundations have the challenge of influencing the very markets that support their existence. Mission-related investment could be the answer to effect this sort of change.
Support for mission-related investments has also come from the government. In 2015 the Obama administration made a clarification in tax policy that many foundations saw as a barrier to such investment. The IRS verified that such investments in no way need to jeopardize the charitable assets of the foundation, which removed some of the perceived barriers. Shortly after the IRS announcement, Walker wrote about the growing evidence for impact investing in delivering both financial and social returns.
In fact, it is the growing research about impact investing and its ability to achieve these double bottom-line returns that convinced the Ford trustees to make the $1 billion commitment. Walker has stated that even this amount is not enough to prove the validity of the strategy, thereby leaving the space open for other endowments to make similar pledges and add to the growing evidence. In addition to endowments, sovereign wealth funds, universities, and pension funds can undertake an impact investing mission to generate both financial and social returns.