The Other 95 Percent: How Foundations Can Give All They’ve Got
By Melissa Beck, Executive Director of The Educational Foundation of America
As private foundations, we usually focus on the 5 percent mandatory distribution requirement. What if we expanded our view, looking at the other 95 percent, and aiming for 100 percent impact?
I recently enjoyed discussing this with my colleagues – Rockefeller Brothers Fund President Stephen Heinz, and Nathan Cummings Foundation Director of Shareholder Activities Laura Campos – on a panel addressing the question “Active Ownership vs. Divestment: When Is It Either-Or? Can My Foundation Do Both Well?”
Not surprisingly, we agreed that it can be done, and what follows are the key themes that emerged from that discussion.
The first centered on the question of whether or not to divest from fossil fuels. For the 135 foundations (and counting) in the Divest-Invest movement, there are three reasons to divest: economics, ethics, and alignment with grantmaking.
Economically, fossil fuel companies are arguably not a good investment. All of them have assets that are destined to be stranded – that is, reserves on their books that are “unburnable” if the countries of the world are to meet the climate change targets agreed to in Paris last December of ensuring that global temperatures do not rise more than two degrees. Stranded assets have no value to a company or to the marketplace. Companies holding stranded assets face significant liabilities: prudent investors divest and, for those of us, exercising basic fiduciary obligations, this mandates divestment.
There is also an ethical argument for divestment. Let’s face it - climate change is the greatest challenge of our time, fossil fuels are the primary driver of climate change, and divesting from fossil fuels can help protect future generations from the impacts of climate change.
For foundations making grants to fight climate change, divestment also ensures alignment with grantmaking – otherwise, those foundations may be undercutting the very efforts they are supporting through those grants.
The conversation then turned to the power of shareholder engagement and proxy votes. Some foundations both divest and engage in shareholder action – for them, it’s not an “either-or” proposition. These foundations create a dedicated sleeve of their portfolios to include companies specifically targeted for shareholder action. Still other foundations choose not to divest so that 100 percent of their portfolio can be used for shareholder action.
Besides divesting and shareholder activism, foundations can invest in climate solutions and social enterprises that align with the change they wish to make in the world.
In fact, companies delivering products that improve the planet have the sustainable, long-term lifespan that investors seek. Through venture capital, for example, at the Educational Foundation of America (“EFA”), we provided early funds to companies such as Tesla, Nest, and Solar City – companies that align with EFA’s commitment to fighting climate change.
Stephen Heinz sparked an exciting new idea in this framework – foundations could pool funds for the specific purpose of funding social enterprises and then seek, through an RFP process, a venture capital firm to surface new and emerging ideas.
We then discussed the nitty-gritty details involved in different approaches to getting this work done. Some foundations keep this in-house, with full-time staff dedicated to shareholder activism and impact investing, while others rely on investment consultants.
And, finally the panelists agreed that “investing for good means compromising returns” is a myth that has been debunked. The returns of foundations such as EFA - that have been using ESG screens since the early 1990s - consistently validate this point.
After nearly two hours of discussion, the panel’s closing advice to those foundations looking to begin or build an impact investing initiative was: start small, keep expectations low, deliver high, surround yourself with experienced professionals, conduct your own due diligence, and keep talking to your colleagues.