This article looks at the so-called field of "mission-related investing" and examines the approach that private foundations should take.

Jeffrey Haskell, chief legal officer for Foundation Source, which serves private foundations, goes into more detail on how private foundations can handle impact investing. The first half of the article can be viewed here. The editors of this news service are pleased to share these insights and invite replies and debate, so please contact us at tom.burroughes@wealthbriefing.com  The usual editorial disclaimers apply. 

Private foundations offer nearly limitless options for charitable giving. Beyond grantmaking, they can align their investment portfolios with their philanthropic missions so that both pools of assets are working to effect positive change in the world.  In other words, they can engage in impact investing, a widely popular investment strategy that aims to generate a positive social or environmental impact in addition to providing a financial return. 

This two-part article presents four distinct approaches to impact investing. Part One discusses the first three: community investing; socially responsible investing; and program-related investing. Here is insight to the fourth, mission-related investing.

Mission-related investing
Traditionally, philanthropists give away money and investors make money. The former want to create change and the latter want to pocket it. You’d think that the two goals would be incompatible, but a new hybrid of philanthropy and private equity investing blurs the lines, allowing foundations to do well by doing good. Similar to private equity investing, foundation donors make investments in private companies or venture capital funds – the difference being that these investments go beyond mere financial returns to provide social and economic benefits. Foundations that engage in mission-related investing (MRI) use their endowment funds to invest in profit-seeking solutions aligned with their mission. These are often social, environmental, and economic challenges that cannot be easily met through grants alone.

The determination as to whether these “social venture” investments are PRIs or MRIs depends on whether they exist primarily to return a financial profit or to accomplish a social good. Let’s take two examples for that foundation fighting childhood asthmas: 

In our first example, the foundation becomes aware of a promising drug that’s in development. 

It’s only effective against a rare variant of childhood asthma, so it doesn’t have much commercial potential and is therefore unlikely to make it into production. The foundation could provide a seed money loan for the drug’s development and this “poor investment for a good cause” would qualify as a PRI and count toward its 5 per cent minimum distribution requirement.

In our second example, the foundation becomes aware of a terrific new company that’s developing an inexpensive, electric car capable of going 500 miles before recharging. This is a very exciting investment opportunity for a whole host of reasons. From a financial standpoint, an extended-range, inexpensive, electric car has tremendous market appeal; from a mission standpoint, it’s also attractive because car emissions contribute to childhood asthma. Clearly, investing in this start-up would be compatible with the foundation’s fiscal goals and mission objectives. However, because the venture is foremost considered a good investment from a financial standpoint, it qualifies as an MRI and not a PRI. 

Keep in mind that MRIs, unlike PRIs, are subject to jeopardizing investment rules and that a private foundation can be subject to excise taxes for making imprudent investments. For this reason, involvement in any of the activities outlined here and below should be based on a well-considered investment policy that includes a thoughtful asset allocation strategy among different classes of risk.