For more than 80 years, the Ford Foundation has fulfilled its mission to reduce inequality worldwide by paying out 5% — or about half a billion dollars — of $12 billion in assets in the form of grants and other philanthropic vehicles, while investing the rest in traditional vehicles to maximize returns.
In April, the foundation said it would take up to $1 billion from the traditional investments side and invest it over 10 years into mission-related investments (MRI) — those that yield good returns while making a positive social impact, such as funds that invest in efforts to improve education, provide affordable housing or offer financial services to the underserved. It is the largest commitment ever made by a foundation to MRIs.
Overseeing the MRI investing team is Xavier Briggs, the nonprofit’s vice president of economic opportunity and markets. He spoke with [email protected] to explain the foundation’s strategy.
[email protected]: Could you give me a sense of why the Ford Foundation decided to get into impact investing and what some of the objectives were?
Xavier Briggs: We have been doing impact investing since the late 1960s, but only from our program monies — the side of our work that is considered charitable. In other words, our reason for being. What is new is making impact investments from our endowment. Traditionally, there was a very strict line between those two. Like other institutional investors, in particular endowment-based investors, we interpreted fiduciary duty to focus on the most attractive financial returns within ethical boundaries, but not to specifically pursue social impact through endowment investing.
We are seen as leaders in impact investing and have been for a long time, but always in the form of what are known as program-related investments. This is a distinction given to us by the IRS; it’s not a Ford invention. Program-related investments must meet a charitable test, or a charitability standard, whereas mission-related investments from the endowment have to meet a prudent investor test. So, it’s the mission-related investments, the investments from the endowment that seek both financial return and a social impact, that put us in a category with many other institutional investors who are likewise looking at this question and figuring out what is right for their institutions.
[email protected]: Could you explain why the distinction between program-related investing and mission-related investing is significant? I know that you described it as the next generation of innovation in philanthropic impact.
Briggs: Under IRS guidelines, private foundations are required to pay out 5% of their assets each year. That’s to ensure that they’re actually implementing a charitable mission for which they have a special tax status. Though some of us pay out more than 5% — Ford has historically exceeded that threshold — it nevertheless is the more limited part of your assets in the corpus. Ford went to the federal government in 1967 to specifically seek to do permission to do PRIs.
That was based on a lot of work we were doing to revitalize declining American cities, to support working families, the comeback of neighborhoods. We were running into the limits of what you could do under charitable guidelines, and out of that need the PRIs were born. Ford pioneered that, and then it grew in the field, and other institutions have done very innovative things. [PRIs are charitable investments in the form of loans, guarantees and equity. Unlike grants, they are expected to be repaid but allow for lower investment returns, according to the foundation.]
“We have been doing impact investing since the late 1960s. … What is new is making impact investments from our endowment.”
While we’re pleased about all of that, [Ford Foundation President] Darren Walker in his essay described this as the next great innovation because clearly much more capital is at stake in the 95% category as compared to the 5%. We concluded that this was important for us as a matter of consistency with our mission, and that the marketplace is ready. Metrics have evolved, investible opportunity has grown and evolved, the number of funds has grown and grown, the number of fund managers with a track record and a seriousness about measuring non-financial returns — all of that has evolved quite a bit.
In addition, under the Obama administration, the IRS issued updated guidance to make clear that the federal government sees it as perfectly consistent with fiduciary duty to pay attention to or to consider mission-related impacts or social impacts. That answered the question about fiduciary consistency and consistency with law. Uncertainty about that had been a barrier in the field for private foundations in particular. Some had made MRIs, but it was relatively few.
We wanted to join them, and to do so with a large-scale commitment. This is the largest ever that we are aware of by a private foundation — $1 billion over 10 years. We hope in doing this to construct a successful portfolio and to accelerate momentum in the field, to inspire and encourage other institutions likewise to find their own way in the space.
[email protected]: You have two initial areas of focus: affordable housing and access to financial services in emerging markets. Why were those areas identified as the most important?
Briggs: We identified them as the two best places to start for our effort for two reasons. One is alignment with our larger strategy to combat growing inequality in our world. The second reason is investible opportunity. In other words, the first was a threshold test, but the second was necessary as well. We didn’t want to begin in areas where there are for now fewer investible opportunities, though as I said the marketplace will continue to evolve. I think institutional investors should be encouraged by that. There will be more opportunities going forward in a greater range of sectors and markets, both in the U.S. and the emerging markets.
But why the alignment? What is that alignment all about? Affordable housing in the U.S. has emerged really over the last several decades as a critical area for providing families, including the disadvantaged, with a critical platform for a successful life. Not only having shelter, as we all know that it is a basic human need, but access to decent, safe, affordable housing, including if you are on the bottom of the economy — affordable rental opportunity.
It’s crucial to garnering savings, to having a solid base from which to construct healthy family routines, connect to educators and service providers. It literally is the foundation for successful life, and it’s a foundation that has been slipping out of the grasp of millions of people because of the back-breaking rents, failure of incomes and housing supply to keep up with demand. It’s not a new problem, but it has worsened considerably over the past decade. We have been active in this field for about half a century now, working with partners in the private and the not-for-profit and the public sectors, and we wanted this commitment through the MRI tool to be another powerful signal that affordable housing is vital and investible, and more institutions should commit to solving this truly urgent national challenge.
[email protected]: Have you identified some innovative solutions