(Illustration by iStock/champc)
Just as the world’s challenges are interconnected, so too are effective solutions. Adding foundations’ endowments to the impact equation holds potential for accelerating solutions to some of the world’s largest challenges.
Social Innovation and the Journey to Transformation
Philanthropy has long invested in solutions to societal challenges like climate change and inadequate health care. Transforming entire ecosystems requires more investment in social innovators who can build bridges across sectors and between disparate parts of a system to drive collective action and impact all with a greater emphasis on equity, trust, and partnership. Sponsored by the Skoll Foundation
Read more stories and behind-the-scenes lessons about how social innovators shift systems through collective action in “Orchestrators of Change and the Journey to Transformation,” sponsored by the Skoll Foundation
What if foundations aligned impact and investment strategies intentionally and strategically to fuel change across multiple dimensions? Foundations can operate across a spectrum of capital opportunities from general-operating support grants at one end to market-return endowment investments on the other—with a variety of options, such as concessionary and returnable capital constructs, in between.
The longstanding partnership between the Skoll Foundation and the B Corp Capricorn Investment Group (CIG) shows us how this approach has created outsized impact. In 2020, Skoll and CIG developed impact-investing portfolios that could drive social change alongside commercial opportunities. Together, we shifted the foundation’s endowment to a net-zero status by changing our holdings to drive innovation and returns and by investing in nature-based carbon-offset projects for the residual emissions.
Our work shows that when a foundation, in collaboration with an experienced and like-minded partner, invests its endowment in alignment with its core mission, it is possible to compound the impact of its grantmaking and accelerate progress toward transformational social change without compromising returns.
Both mission-related investments (MRIs) and program-related investments (PRIs) are tools we use to generate positive societal impact while also yielding financial return. Through MRIs, we invest in opportunities that have positive social impact while contributing to the foundation’s long-term financial stability and growth.
PRIs have been part of the foundation’s portfolio since the first class of Skoll Awards in 2005. Over the past four years, we have collectively deployed $32 million in first-time and undercapitalized fund managers in the United States and abroad through our PRI and MRI programs. We have allocated capital across the spectrum and vehicles to help organizations grow and expand their impact.
For example, the nonprofit Water.org was created to provide potable water and sanitation services to millions of people around the world. One of the many challenges facing Water.org was the lack of capital it needed to build the structures and systems that would give families affordable access to clean water and healthy sanitation solutions. In response, Water.org focused on supporting microfinance approaches to ensure low-income communities can make the capital investment needed to have access to water and sanitation.
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The Skoll Foundation first funded Water.org in 2009 by providing $765,000 as a general operating grant via the Skoll Award for Social Entrepreneurship (now the Skoll Award for Social Innovation). This grant contributed to the organization’s efforts to prove the impact and financial viability of making microloans to families to fund access to clean water and sanitation solutions.
Too often, communities have funds to pay for water, but not enough for an upfront investment in the infrastructure. A loan and payment model that first allows repayment of the loan and then continues paying for the infrastructure maintenance enables long-term sustainable water access. Once Water.org incubated a fund (WaterEquity) to scale access to these kinds of loans by investing in the lenders, the Skoll Foundation provided first-loss guarantee capital via a grant and two PRIs of debt capital to seed a series of water credit investment funds. These funds demonstrated the opportunity to scale access to critical water and sanitation solutions and unlocked institutional capital from the Development Finance Corporation (DFC), Bank of America, and others.
With this partnership in place, the Skoll Foundation made a $10 million mission-aligned investment (MAI) as an anchor in the market return-generating Water Access Fund through our standard endowment investment process. This positioned Water.org to raise a total of $150 million for this fund and deploy it to create access to water infrastructure. Today, Water.org is a multibillion-dollar entity that has provided water access to more than 65 million people through microfinance tools and blended finance structures comprised of philanthropic capital, debt, and equity.
Experiences like this bolstered the Skoll Foundation’s and Capricorn’s confidence in this full-spectrum approach to driving social change and fueled our work together to move beyond climate-focused opportunities where the bulk of our impact investing had been directed prior to 2020.
In 2021, we expanded our mission-aligned investing by committing to use endowment dollars to advance both economic inclusion and justice and equity. This plan aligns the Foundation’s investment approach with our focus on equity as a philanthropic priority. As an initial step, the Foundation established MAIs in two funds aimed at closing the racial wealth gap and spurring economic mobility in underserved communities: Apis & Heritage (A&H) Capital Partners’ Legacy Fund I, designed to increase business equity ownership for workers, and Zeal Capital Partners’ Fund I, designed to narrow wealth and skills gaps through tech-enabled solutions.
A&H’s Legacy Fund invests in closely held businesses with large workforces of color and transitions them into 100 percent employee-owned enterprises with its employee-led buyout (ELBO) model. The fund is pursuing the option to purchase companies from retiring founders in order to convert at least 500 workers over the next five years into employee/owners. In America today, 60 percent of Black and 65 percent of Latinx workers have $0 in retirement assets, making workers vulnerable to financial insecurity as they age and without resources to pass on to the next generation. A&H expects an average worker who benefits from an A&H-assisted buyout to accrue retirement savings of $70,000 to $120,000 each, which can be life-changing for groups who face persistent barriers to accumulating and passing on assets to future generations.
Fund I is focused on investing in financial technology and future of work companies in the United States with tech-enabled solutions that address the wealth and skills gaps. The fund plans to invest in up to two dozen businesses that proactively target diverse management teams reimagining the building blocks of wealth, from education to employment and financial health. Zeal Fund I pioneered the concept of inclusive investing, which allows the firm to cast a wide yet targeted net when sourcing companies that position them to reap outsized returns.
The Skoll Foundation’s expansion of our mission-aligned investing has brought approximately 70 percent of our endowment in alignment with our mission. Our long experience of working in partnership with mission-driven investment advisory group, Capricorn has taught us a few lessons.
Reconsider and reframe “risk.” | One of the arguments against impact-driven investments is that they are inherently riskier than more traditional investment models, which are generally perceived as being better at maximizing returns while minimizing risk. We have learned that this is a mischaracterization. With the right level of analysis, diligence, and creativity, impact-driven investments can achieve both commercial and philanthropic aims. Market-beating returns are often possible when we reframe opportunities beyond initial and often misleading risk profiles. Moreover, many standard methods of evaluating investment opportunities actually ignore diverse types of risk, including environmental and economic.
Make the argument for greater impact. | If philanthropies and donors want to see their dollars do good, then grantmaking dollars can go even further with mission-aligned investing strategies. Making the case starts with asking the question: “After the IRS-mandated 5 percent of an endowment is given in grants, would you leave the remaining 95 percent on the impact table or would you leverage it to create outsized impact?” How you go about leveraging endowments to maximize impact is the next question.
Work with interdisciplinary advisors. | Foundations should set high standards for sourcing and evaluating impact-aligned investments, ensuring their entire portfolio contributes to both financial and impact goals. To best source and evaluate impact-aligned investments, it’s essential to assess current capabilities in areas like specialization, execution, and deal access. If there are gaps in capacity or expertise, foundations should consider partnering with impact-aligned investment managers or advisors, who have the experience, skills, and infrastructure to build diverse investment pipelines and evaluate investments for both financial performance and impact potential.
For foundations and other philanthropic entities just beginning this journey, you can find these partners through existing networks and groups designed just for impact investors like Confluence Philanthropy, the Global Impact Investing Network, and the Net Zero Asset Managers Initiative.
Codify an MAI approach in your organization’s by-laws. | By establishing MAI as the norm for an organization with an endowment, foundations can establish best practices, including learning and innovation, then amass the expertise needed to do this type of investing at scale and further amplify the impact of their grant dollars. This approach helps solidify, sustain, and evolve an MAI practice over time, leadership transitions, or generational transfers of assets. The Skoll Foundation endowment has impact embedded within its Investment Policy Statement.
Mission-aligned investing is not new, but despite being highly impactful, is still not as much the norm as it should and could be. By shining a light on what has worked well, we hope that many more asset managers will consider joining this movement to more closely align their philanthropic missions and strategies with their investment approaches.
Listen to this case study of Water.org with cofounder Gary White to learn about the type of innovations philanthropies can support by providing blended capital.
Read more stories by Marla Blow & Michaela Edwards.