An Impact Investing Guide for Private Foundations

Imagine that your foundation is dedicated to eradicating childhood asthma in your home state. One day, you are listening to the local news during your morning commute and you hear a report about an aging coal-fired power plant where the sulfur dioxide emissions are so bad as to be implicated in the high incidence of childhood asthma in the neighboring towns.

A week later you are reviewing your foundation’s investment portfolio and realize that you own a good chunk of shares in an energy company — the very same energy company that owns the power plant. In fact, the dollar amount of the company’s stock in your investment portfolio is almost equal to the dollar amount you are putting into your childhood asthma eradication efforts.

Moral Dilemma: What to Do?

It’s a common conundrum for private foundations:  Many foundations that are established to solve society’s most pernicious problems have investments as their lifeblood. Their assets need to be invested in profitable businesses in order to sustain operations and grow. So what happens when a foundation’s mission is directly contradicted by its own investments? What if the very ills a foundation fights are exacerbated or even caused by the behavior of business entities found in its own portfolio?

It can sometimes seem as though the foundation’s assets and its grantmaking programs are in direct opposition to each other, or at the very least, failing to work together to accomplish a charitable mission. And since many foundations invest 95% of their assets while distributing about 5% for charitable purposes, it’s even conceivable that the damage done by the investments exceeds the good accomplished by the distributions!

Over the last decade, more foundations have been attempting to address this issue and get all of their horses pulling in the same direction. These foundations want their investments to enhance their philanthropic efforts or at least not run counter to them. If their 5% for their minimum charitable distribution requirements are regarded as the “do good” portion of their foundations, the goal for the other 95% might at least be conceived as “do no harm.” Hence, their adoption of “impact investing,” a widely popular investment strategy that aims to generate a positive social or environmental impact in addition to providing a financial return.

Source: Kiplinger
Author: Jeffrey D. Haskell, J.D., LL.M.