Taking Impact Investing and Accounting Full Tilt

Foundations usually speak about innovation in terms of how they deliver program grants to nonprofits, where they fund, or how they measure results that would not have happened “but for” foundation dollars. But there’s another way to look at philanthropic opportunity these days: Today’s interconnected problems are stirring more foundations to invest all assets affirmatively to support their missions and align their holdings with their fiduciary duty to the public.

This requires taking a more active approach—learning what is in foundation portfolios and assessing how these holdings might support (or undermine) broader philanthropic goals. And while assessing and tracking the social performance of any company (nonprofit or for-profit) is challenging, regular, credible data on social performance (comprising social, environmental, and governance track records) are becoming more readily available.

While trying to account for positive and negative social impact of all investments is relatively new, the ideas and practice behind impact investing are not. Early on, Rockefeller, Carnegie, Ford, and others all made mission-aligned loans and equity investments in addition to grants.

But even now, when foundations make mission-aligned investments, they largely maintain the traditional bright line between the conventionally invested “endowment,” (100 percent of assets, not aligned with mission) and the philanthropic side (5 percent of the endowment value, earned as income from the endowment, and disbursed annually in grants for mission).

Yet increasingly, stirred by the demands of urgent, outsized, and “wicked” problems that require muscle far beyond that provided by the traditional scope of grants or program-related investments alone, foundations are looking to do more. At the Heron Foundation, we are continuing our long-time dedication to this approach by increasing our mission-aligned investing from 40 percent to 100 percent of our assets—grants, loans, equity shares, everything.

As a recent SSIR blog post, “Mission-Driven Returns,” points out, obstacles are numerous. They include regulatory complexity, a perceived risk-return mismatch, limited expertise among traditional investment advisors, difficulties measuring impact performance, and a circumscribed view of fiduciary responsibility. The authors also point out that timeworn habits have prevented foundations from widely embracing this approach.

But things are changing. Organizations are overcoming some of these barriers. In Heron’s case, this has meant finding investment advisors with expertise that matches our investment appetite, revising our investment policy statement to emphasize the private foundation’s fiduciary duty of obedience to mission (along with duties of care and loyalty), looking to achieve credible mission exposures across all asset classes, and combining our investment and grantmaking into one capital deployment unit to facilitate a more active investing operation. As a result, we’re de-emphasizing modern portfolio theory for a more bottom-up, and therefore more “asset aware,” approach.

Most importantly, however, this approach means that we must collect data on the social and financial performance of all investments across the board (including grants and program-related investments) on an ongoing basis. The question has become, “What’s the best use of a Heron dollar for mission and financial return, taken together?” No foundation’s portfolio’s performance is static. As a credible “all in” social investor, we need to track both, and track them over time.

For any foundation looking to—at the very least—eliminate mission-undermining positions from its portfolio, measuring mission performance with reliability and integrity, across the range of exposures in a portfolio, is paramount. One challenge has been a lack of comparable data on the sustainability (meaning environmental, social, and governance, or ESG) performance of public companies. But data providers, standard setters, and ratings providers are emerging. For example, the Global Reporting Initiative, the International Integrated Reporting Council, and the Carbon Disclosure Project have advanced standalone sustainability reports, integrated reports, and the disclosure of climate-related data (respectively). More and more organizations are contributing profile and attracting supporters to the emerging systems of performance measurement.

Recently, the Sustainability Accounting Standards Board (SASB) has focused on developing data standards for public companies to disclose material sustainability information in mandatory filings to the Securities and Exchange Commission, using a process of stakeholder involvement similar to that employed by the Financial Accounting Standards Board (FASB) for financial data and reporting. With SASB standards in place, investors will be able to type in a company ticker and pull up ESG data points—sustainability fundamentals alongside financial fundamentals—and benchmark the relative performance of companies on mission-related dimensions. SASB’s Sustainability Industry Classification System (SICS) surfaces industries with the greatest potential for solving global sustainability challenges, allowing investors to allocate their portfolios accordingly.

Heron is far from alone in the quest for data. Other investors and data providers—including Bloomberg Philanthropies, The Generation Foundation, The Rockefeller Foundation, The Gordon and Betty Moore Foundation, and The Doris Duke Charitable Foundation—are funders of SASB and other data-oriented organizations. KL Felicitas, US Social Investment Foundation, and the G8 Social Impact Investment Task Force, to name just a few—are working to embed the principles of impact investing into the mainstream investment process by building a robust and independent data infrastructure. Impact investing principles are entering the DNA of the economy, and they will change the game for all.

It’s not a moment too soon—like it or not, all investing is impact investing, and we need more enthusiasts. The real challenge is that many investors (including philanthropic investors such as foundations) are often unaware of the social performance of the companies they invest in. Many perform negatively on social criteria, sometimes in direct opposition to the missions of the foundations that own their shares or buy their debt, and may have more negative impact than grants have positive—or even, vice versa.

Business model and accounting innovations are not glamorous, and we don’t often discuss them in the social sector. But new and better data entry/audit formats and tracking systems allow us to examine the true impact of our investment decisions, to create comparability in the larger market, and thus to push capital to seek the most broadly positive results for society—and avoid the negative ones.

Private foundations that invest on behalf of the public are running out of excuses. It’s time for more of us to join the burgeoning group of investors who are making the financial investment needed to build a diverse data infrastructure, use it as customers, and as a result deploy a full range of financial investment vehicles to yield maximum positive social and financial performance for a world that is urgently in need.

Read more stories by Jean Rogers & Clara Miller.