Moving the Market: The Ford Foundation’s Mission Investments Program is Showing the Power of the Double Bottom Line ￼
The American tax code favors the generous by offering significant financial benefit to those that give to charity. On the very tip of the curve are individuals or families whose living gifts and bequests grow into mighty charitable foundations.
Individuals like Edsel Ford, son of Henry Ford, who created the Ford Foundation with an initial endowment of $25,000. An infusion of $250,000 in Ford stock that came upon Henry and Edsel’s deaths in the 1940s and steady financial stewardship since has grown the Ford Foundation endowment to $16 billion – making it one of the larger charitable foundations on the globe.
The funny thing about the tax code as it pertains to foundations like Ford is that it compels them to spend 5% of their total endowment, or corpus, on charitable giving. The remainder is largely put to work in private markets.
Soon after the foundation’s current president, Darren Walker, joined Ford in 2013, he started agitating to change its investment strategy.
“Every year we use the other 95% of our assets to make money so we can continue doing this forever,” Walker said in a 2020 Harvard Business School case study. “But what if we could put that 95% to use supporting the same concepts and causes the 5% goes toward?”
By 2017 that challenge had become the foundation’s $1 billion Mission Investments Program. The concept was simple – move a portion of the endowment to invest in businesses and other opportunities that generated return, while driving positive impact.
But the field of impact or mission related investing (MRI) was still in its infancy, leaving Ford’s board and staff with the challenge of taking a lead role. A key staff-side architect of that plan was Christine Looney, who came from the world of finance and had led Ford’s massive program-related investment portfolio for years.
As the mission investing space grows and other foundations look for ways to jump in, I took some time to speak with Looney, now deputy director of the Mission Investments program. In the following Q&A, she describes the marker and the most complex part of moving assets to impact: operationalization.
How did the foundation’s early commitment to Program Related Investments influence the development of your MRI program?
We had been active through our program-related investment fund starting in the late ‘sixties. So, as the market evolved, we’ve seen quite a bit, not only of the evolution, but also of some of the key players who we supported very early on.
Some of our early PRI managers became part of the relevant pipeline as we were thinking of building out the MRI portfolio. Ford’s PRI work was incredibly helpful in terms of knowledge of the market, the players, and the sectors that we saw as most opportune.
We had some infrastructure already built internally to move this forward. We had two staff members, with impact investing experience, who knew many of the key players in the market and also well-developed systems around measuring, monitoring and managing the impact of a portfolio, while tracking financial performance. We leveraged all these things as we went to the board and spoke to them about the opportunity.
In most foundations there is a clear line between the program and investment teams. What were the central questions that were important to both staff and the board, notably the investment committee, when launching your MRI program?
There were a number of core issues the board reflected on when considering whether to create this MRI portfolio. One was: will we achieve enough impact in this portfolio? At the heart of Ford’s internal discussions was asking if this was a way for us to advance more of our mission?
On the other side of the coin though, was whether this was the most appropriate source of capital to pursue these goals? Can we actually generate the financial return we need to not compromise the operations of the foundation?
And then there was the question of how you operationalize it. Is this done in house? Do we use external advisors? Ultimately the board and senior staff decided to make the program a staff-driven strategy, because we were best positioned to know what really fit with Ford’s mission.
I’m really interested in asset allocations. Tell me how your allocations are broken down by percentage and space.
We have a number of thematic strategies we’re pursuing in the U.S. and the Global South – in the U.S, we are focused on the preservation of affordable housing, improving job quality for U.S. workers and advancing diverse fund managers. In the Global South, we are focused on advancing financial inclusion and global health/biotech.
We have policy weights and guidelines across real assets, private debt, private equity, public equity, and our largest allocation is to private equity. We have up to about 25% in real assets, private debt and public equities, and up to about 50% in private equity.
In the 2020 HBS Case Study of Ford’s MRI Program, you were quoted as saying, “This is an opportunity to push the market in a way that PRIs never could. Committing a large number like $1 billion is a signal to the market that we’re serious. It can get other capital to move in this direction.” How successful in moving capital has that large number been with both private investors and your colleagues in charitable foundations?
I don’t know how much we can attribute the change to our announcement and commitment, but the market has grown significantly since we made that announcement. According to the Global Impact Investing Network, the market has grown from around $100 billion when we launched the MRI program in 2017 to over 700 billion in its last report. So, there’s been huge movement in the market.
From a philanthropy perspective, we’ve seen some announcements from other foundations since we’ve made our own, Nathan Cummings being one. And then there have been a number of foundations that I’m aware of who have started to allocate out of their endowment, but maybe have done it more quietly. And then there’s some who I think have their eye on us and want to see how this portfolio performs and are closely monitoring it.
How is the portfolio performing?
We invested almost exclusively in private equity managers who have then allocated our funds into companies or invested into properties. We are committing the $1 billion allocation over a 10-year period and have committed $300 million of the total, with about 55% of that $300 million invested. So, it’s hard to talk about financial performance right now. Although the financial performance we have, while incredibly early, is strong.
From a social perspective, we’ve been able to see more tangible evidence of the investments and the outcomes they’ve been able to achieve.
We’re very excited by the progress we’re seeing, but also acknowledge that we’re early. I think we’ll be much better positioned to talk about that in five to six years when we’ve fully allocated this portfolio.
You made two investments with the Jonathan Rose Companies’ affordable housing preservation funds. Fund V drew 27% ($191 million) from other charitable foundations. I know you’re going to try to wiggle out of taking credit, but to what degree did you think Ford influenced those other foundations? And how significant is it for the impact world that Rose has been able to unlock that kind of capital from charitable foundations.
I wouldn’t say I’m going to wiggle out of it. That said it’s very important to us with both our program-related and mission-related investment portfolios that we can play an influence role in bringing other investors to consider impact as part of their thesis.
So, it’s incredibly exciting to see what Jonathan Rose and his team have been able to accomplish. Especially in terms of attracting a different set of investors than are normally at the table for some of these strategies.
What other opportunities do you see in affordable housing?
One of the reasons why we chose affordable housing was because we saw that experience and track record and operational capacity of managers, because they’d been operating in the sector for years.
I think that is one of the reasons why that area has been able to really grow when you look at the funds that are being raised. Just look at Jonathan’s evolution from his first fund to his second fund, and the growing fund sizes.
Now we’re seeing offerings in preservation of affordable housing of over a billion dollars. There’s huge market opportunity in the affordable housing space and we’re seeing managers, in turn, able to raise much larger funds relative to everything else we’re doing. We could allocate all our capital into affordable housing. There’s simply much more capacity.
Not to be simplistic, but how important is fund size when trying to move the market towards more impact?
It’s dependent upon the kind of investor group you’re looking at.
Right now, the average impact investing fund probably falls under the radar of many institutional investors because of the size.
Positively, the impact investment market is growing. We’re seeing that happen in a couple of the sectors that we made early investments. Affordable housing is one with financial inclusion being the other, where some of the early funds were in the $50 million range. And now I know many that are planning to go out to market with billion-dollar offerings. So, we’re seeing that kind of growth and acceleration.
For Rose, rental subsidies play a key role in risk adjustment, essentially serving as government-backed security. How important is that risk adjustment quotient in your decision-making when making affordable housing allocations, and why is it an important consideration for people trying to get into the impact space?
When we developed our strategy, it wasn’t only about preserving affordable housing for the lowest income band, because the housing crisis is affecting a range of households across the U.S.
We look at managers like Jonathan who have a significant focus on Section 8 or voucher-based properties. With Jonathan, I think what was important was both that he was focused on preserving affordable housing for very low-income families, but also that he had the team, experience, impact practices and infrastructure in place to manage a portfolio that was reliant on subsidies.
But we also are looking at some managers who are working with more workforce strategies, low to middle income families who are also priced out of the market, who can’t access affordable, safe housing.
So, our portfolio is broader.
What are some of the other foundations that have made substantial shifts towards mission-related investing?
Of course, I have to give a shout out to some of the ones who came out really early. The Heron Foundation and Annie Casey and Meyer Memorial Trust were all in the market in the start of the 2000s, arguing that foundations should put more of their assets behind their missions. And then groups like McKnight and Kellogg and Kresge followed.
So those were all our predecessors who we leaned on quite a bit as we were developing our own MRI strategy.
A recent survey by Exponent Philanthropy found that only 18% of small to mid-size foundations were engaged in impact or mission-related investing. What is the most expedient way to convert those smaller foundations that want to enter the space?
There’s a group that we’ve been funding, and in all transparency, I sit on their board, called the Mission Investors Exchange that was founded to support philanthropic investors as they explore impact investing.
I think it’s important to have some of those trade associations that can provide the curated education to philanthropies as they’re starting to think about this.
And, what’s great about Mission Investors Exchange and some of the others are that they can bring in a cohort of investors of similar size and geography who can go through that journey together.
It seems to me that while education is great, there also needs to be more products and access to top-flight managers for foundations that are just tipping their toes into mission-related investing.
We are not starved of pipeline. We’re inundated with pipeline opportunities. But we’ve also been public about our work and strategy and been around for a long time.
Living Cities, which is a membership organization of foundations, banks and insurance companies, has put together two investment vehicles to enable their members, many of whom had never used investments to support their or missions or programmatic goals, to solve for some of the problems that you’re referencing. And through those vehicles, they have been able to help people come to the table and leverage the work of players like a Ford Foundation.
I still think though, to fundamentally scale this work, these organizations need to ask themselves a set of questions like: Why should we be doing this? What are our return objectives? How much risk are we willing to take? How do we want to resource it? What impact are we trying to achieve?
Those are some fundamental questions for foundations to think about to really build out a program or a fund versus just dipping their toe in the water.
What is the veracity of the assumption that one must compromise returns when making mission-related investments?
I don’t know if this is as straightforward as a question as it may appear. And I don’t think it includes the notion that incorporating impact as part of your investment decision making can be a value driver.
And when I think of changes, I’ve seen among more traditional managers over the last four to five years that ESG considerations are now actually moving from a one-pager in someone’s deck to be part of their value proposition – how they create value for a company. That’s important when we’re talking about this because I don’t see it as a compromise.
I don’t think all impact investments are going to generate the level of return that people think of as market, but they may not have been intended to do so. I don’t think you need to compromise returns when making them as long as you develop the right strategy and have very disciplined investment selection. Because when you make the right bets, the more successful they are on impact, the more successful they’re going to be on financial return. Those [impact and returns] can be bolstering each other versus you’re getting one and compromising the other.
What are your thoughts on the fact that the majority of charitable foundations incorporated for the public benefit still invest most of their wealth in private markets, largely focused on perpetuity and returns rather than impact?
I’ll answer it this way. When we developed our mission-related investment program, we had two large social goals in mind. One was to use this investment capital to make investments that advance Ford’s mission to reduce inequality. And the second was to use these investments in our work to encourage other investors to consider impact as part of their strategies to create more positive benefits for all stakeholders. We do that as investors using our own balance sheet, but also through a number of field-building initiatives where we’re trying to drive more inclusive capitalism.
Our goal is to encourage foundations and other investors to consider the positive impact that can come through investment strategies, and we want more capital invested responsibly. That’s how I think about it in terms of our own engagement and what we’re trying to do.
How does doing this work make you feel?
I’ve worked at Ford a long time. It’s a privilege to work for an organization where the staff and strategy has social justice goals in mind.
And then to sit in a role where all I get to see are innovations on how to contribute to social change generally, it’s one of the luckier jobs I think I could have. I feel incredibly privileged to sit in the role and do the work, and watch the evolution of this market. It’s all incredibly exciting.
Daniel Heimpel is the executive editor of The Giving List.