Why Are Foundations Putting Small Dollars Toward Impact Investing?

Impact investing at independent foundations is a mile wide and an inch deep. I think that’s a fair summary of CEP’s latest research report released in May, Investing and Social Impact: Practices of Private Foundations, based on a benchmarking survey of private foundations making at least $10 million in grants annually.

First, the mile wide part. Impact investing is either underway or very much on the table at 80 percent of the foundations whose CEOs responded to our survey. More than 40 percent do impact investing. Another 6 percent of responding CEOs said their foundations plan to do impact investing, and a third said they are unsure. Only 20 percent said their foundations aren’t doing impact investing and don’t plan to.

In short, all the kids are doing it — or at least thinking about it. (We used the definition of impact investing articulated by the Global Impact Investing Network. Mission Investors Exchange helped us write the questions and co-sponsored the survey.)

Now the inch deep part. Of the foundations currently engaged in impact investing, most are allocating small dollars — just 2 percent of endowment and a half a percent (.5) of program/grant budget at the median.

Not exactly big bucks.

The number of foundations either doing impact investing or considering it was higher than we might have predicted. But the dollars involved struck me and my CEP co-authors on the report — Ellie Buteau and Jen Glickman — as surprisingly small, particularly given all the attention paid to this topic.

As I pointed out in this 2013 blog post, impact investing has been hailed as a “game-changer.” It’s been the subject of numerous articles in the business, trade, and mainstream press, as well as several recent books by prominent sector leaders.

Foundations are typically featured centrally in the story of the rise of impact investing. A 2013 Marketplace segment, for example, asserted that “foundations increasingly see for-profit investments as a tool to do their social good, sometimes as a better tool than grants.”

So what’s going on to explain the mismatch between the attention paid and the dollars allocated?

Honestly, we don’t know — but here are some possibilities.

  • Foundations may be limiting their impact investing out of the endowment side because of a concern that returns will be lower. Respondents to our survey were clear that their boards see their fiduciary responsibility as maximizing financial returns. CEOs seem to agree – 86 percent say achieving a financial return is a very important factor to their foundations’ investment decisions. Just 8 percent say investing in companies that align with the foundation’s values and/or mission is very important to their investment decisions. Perhaps this explains the low proportion of endowments allocated to impact investments?
  • Foundations may be realizing that there are a limited number of programmatic goals for which impact investing is a viable tool. Notwithstanding the hype about the potential for “market solutions” to be found for our social problems, it’s hard to envision how impact investing could be deployed in certain areas — such as child welfare, for example. In our research, the most frequent areas in which CEOs said their foundations are making impact investments were community development and employment/economic development. Maybe foundations are launching impact investing efforts only to realize – or maybe they are fully aware – that they aren’t relevant to many programmatic areas?
  • Foundations could be intentionally starting small — in a pilot way — to see what they’re learning before going big. Perhaps this is just the beginning and foundations are wisely choosing to start small, learn, and then expand their impact investing efforts. Our data collection captures a moment in time; maybe it’s the early days of what will prove to be a trend toward more resources allocated to impact investing?

I don’t know whether the correct explanation is one of the above, some combination of the three, or something else entirely. I hope foundations weigh in here on our blog with their own experiences.

My own personal view — and that’s all it is — is that impact investing is likely a useful tool in certain, discrete situations. But there are also likely many more areas in which making impact and making a financial return don’t coexist easily. In those cases, supporting nonprofits through smart grantmaking will continue to make the most sense — however comparatively unsexy it may be.

Phil Buchanan is President of CEP and co-author of Investing and Social Impact: Practices of Private Foundations. He is also a regular columnist with the Chronicle of Philanthropy. Follow him on Twitter at @philCEP.

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