In the past, foundations felt obliged to invest their endowment funds in lower-risk investments, which rarely coincided with their missions. Foundations that did not take the greatest care to invest their endowment funds “safely” were considered at risk for breaching their fiduciary duty to the foundation.

Times have changed. The principles and tools of mission investing available today allow foundations to pursue their mandates wholeheartedly – on both the investing and program sides of the organization. Each foundation’s mission can be integrated with how it makes its money as well as how it spends its money, aligning philanthropic objectives across the entire organization.

In fact, foundations can live up to their fiduciary duties as change agents only by fully implementing proactive, targeted investing. This means actively seeking out opportunities to invest in for-profit or nonprofit enterprises that directly promote their stated goals. For example, a foundation dedicated to affordable housing might invest in the development of for-profit mixed-income housing in a particular neighborhood. A philanthropy dedicated to job creation might invest in a computer training institute located in an economically depressed neighborhood – with a caveat that the institute report ancillary benefits such as the number of unemployed local residents trained.

Misplaced fears of fiduciary breach
Despite this enormous potential to grow the scale of change, foundation boards and staff have historically resisted mission investing. The first and strongest objection is usually the received wisdom that mission investing yields lower returns and brings greater risk than “traditional” investing, creating a breach of fiduciary duty. That objection must come off the table.

Mission investing, by definition, includes the equal pursuit of social and financial returns. A fundamental principle of mission investing is to seek financial returns on investments that take into account social benefits that are equal to – if not greater than – risk-adjusted returns on equivalent investments that do not seek social benefits.³ Anything less is not true mission investing.

While they have expressed doubt about the fiduciary safety of mission investing, many foundations have not hesitated to make other “unconventional” investments that are at least as risky as mission investing, as Kramer and Cooch note. Their recent study of 279 foundations found that unconventional investments such as hedge funds and venture capital comprise 23% of foundation holdings and international investments another 20%. Meanwhile, mission investments make up only about 2.4% of the assets of the foundations in the study sample, and less than one-twentieth of 1% of all U.S. foundation holdings: $300 million.⁴ Against the huge tapestry of the U.S. economy, this number is embarrassing – in fact, shameful.

Skilled, creative mission investing does not jeopardize a foundation’s endowment, nor does it compromise fiduciary duties. In fact, mission investing can further the fulfillment of fiduciary duties in the deepest sense, maximizing the impact of foundation assets by supporting mission-related businesses. Philanthropies are tasked with being change agents – the neglect of mission investing is a breach of fiduciary duty.

The State of California has taken a leadership role in this arena, starting in 2000 with its initiative “The Double Bottom Line: Investing in California’s Markets”.⁵ A major component of this broad-based effort has been the state’s commitment to re-direct a portion of its massive financial resources to remedy the economic inequality that plagues so many of its cities. As one of the state’s two pension funds, CalPERS has played a key role in this, providing an excellent example of a huge institutional investor that has successfully tapped the investment opportunities in California’s underserved markets. This followed the realization by the State Treasurer that CalPERS was investing more than $5 billion in overseas “emerging markets” – with annualized losses of 29% in Indonesia, 24% in Malaysia, and 25% in the Philippines. Meanwhile, California’s emerging markets, with their rich potential, were neglected and undervalued.

Pursuant to the Double Bottom Line Initiative, in 2001 CalPERS launched its “California Initiative”, committing $475 million for private equity investment in traditionally underserved markets located primarily, but not exclusively, in California. The California Initiative “seeks to discover and invest in opportunities that may have been bypassed or not reviewed by other sources of investment”.⁶ By June 2007, the Initiative had invested $359 million in 175 companies through private equity funds and a fund-of-funds, all with investment objectives that match those of CalPERS. (It’s important to emphasize that CalPERS regards impact on underserved markets in California as an ancillary benefit – with attractive financial returns the primary goal.)

California Initiative companies run the gamut of industries and businesses, with emphasis on consumer-related and service businesses, manufacturing, and communications. These companies range in size from as few as three to over 22,000 employees, with more than 70% employing 100 or fewer and 60% employing 50 or fewer. Just nine companies, or 11% of all California Initiative companies, have more than 1,000 employees.

While the California Initiative is young, its outstanding financial results should dispel any lingering doubts for those who continue to question the opportunities in our inner cities. CalPERS reported a return of 20% for the first phase of the Initiative, which concluded in November 2006. One-year performance for September 2006 to September 2007 was a return of 70%. The Initiative’s “ancillary benefits”, or social returns, include the creation of more than 3,000 jobs across the country. The Initiative companies invested in employ more than 5,000 Californians, including 2,000 (40%) who live in economically disadvantaged areas of the state. What’s more, 90% of California Initiative companies with fewer than 100 employees offer health insurance, compared to only 63% nationally.⁷

With the majority of CalPERS beneficiaries living in California, the Initiative acknowledges the true nature of its dual fiduciary duty: it protects future benefits while at the same time making California’s underserved markets a better place for its beneficiaries to live and work today.

New York City and Massachusetts employee pension funds have also adopted policies that add geographic targets to the requirement of focusing on underserved markets. Lisa Hagerman, Gordon Clark, and Tessa Hebb, in Community Development Investment Review of Fall 2007, note that approximately $11 billion of public-sector pension funds are now committed to urban revitalization, emerging domestic markets, or, more broadly, economic development. And, they add, momentum is growing, slowly but surely.⁸ Thus, while the standard perception of these markets may be that they carry high risk, in reality they have strong potential for attractive returns – both financial and social.

The extraordinary accomplishments of CalPERS were made possible in large part by the determination and creativity of Phil Angelides, the State Treasurer at the time. Had he not championed these shifts in policies and programs, they may have never happened. For other institutions – such as philanthropic foundations – to have similar success, they must overcome organizational barriers between the program and investment sides. This can only be accomplished with the strong support – indeed, agitation – from the top, by the CEO, board of directors, and other key leadership.

Limited capacity and half-hearted implementation
In addition to fears of fiduciary breach, foundations have had other reasons to balk at implementing genuine mission investing. Some of these may have been well-founded at one time but are now resolved for the most part.

To begin with, some philanthropies may feel that they just don’t have the capacity to manage investments that are outside their historic comfort zone. Chances are that this concern is justified. Many of us are apprehensive about change in any part of our lives, even more so for large institutions with long-established ways of operating that they may be highly invested in. And transforming an entire system to accommodate a way of thinking that is still evolving can further increase that apprehension.

But to make the most of the extraordinary opportunities offered by mission investing, philanthropies must change the way they do business. They need a staff that can assess the “double-bottom-line” soundness of their investments – the complex interplay of fiscal and social risks and returns. It’s not enough to have staff members who are experts in investment strategies and others who are experts in programmatic strategies. The ability to integrate, analyze, and balance both of these factors, and make solid recommendations based on this analysis, requires an entirely different set of skills – a third form of expertise that is qualitatively different. While outside investment advisers might help address this concern, they are not up to speed yet, in part because mission investing is so new as a discipline and in part because there just hasn’t been a demand.

Some resistance may be related to the fact that mission investing does not get the credit it deserves because it has rarely been carefully and systematically implemented. In the words of Kramer and Cooch, “most mission investing remains haphazard and inconsequential.”⁹ In fact, this incomplete implementation is a phenomenon that ails all the models that seek to “do good by doing well”, such as socially responsible investing and corporate social responsibility. Half-hearted implementation of a model is no implementation at all.

Making the necessary shift will require nothing less than a transformation in organizational culture, a full commitment by both individual foundations and the philanthropy field as a whole. It will require investments of time, energy, and funds in recruiting, training, and retaining highly skilled staff and management who know their way around the investment world as well as the programmatic world. While this process will be slow as the field finds its way, the payoff will be tremendous.

Regardless of where this resistance springs from, it continues to plague the foundation world. In recent years, some of our country’s most brilliant, iconoclastic entrepreneurs have worked to bring their spirit of innovation and creativity to philanthropy, crafting new models that meet today’s challenges.

Those of us who support mission investing had hoped that the launch of these major new foundations would start to change the face of philanthropy. It appears, however, that they are instead recreating the foundation and staffing models of the 20th century. I suspect that these founders and benefactors are also disappointed and, perhaps, puzzled that they are not effecting the change they envisioned.

This discouraging lack of progress can be attributed to a failure to step up and redefine the rules of the game. For the most part, management and staff have been recruited from the traditional worlds of philanthropic and endowment investment management, who bring with them the old systems and attitudes that make up the status quo. Layers of bureaucracy and highly siloed structures continue to block the interaction and exposure that support innovation and creativity. Despite their best intentions and substantial investments, these new philanthropists have yet to create a much-needed new paradigm of philanthropy for the 21st century.

Obstacle: lack of measurable outcomes
A major obstacle to the spread of mission investing is the lack of hard data on its societal benefits. While it’s easy to quantify the returns on conventional investments, the field is still struggling to document social returns. This is especially critical because effective mission investing is often conducted on a smaller scale; we must document substantial social returns to enhance the financial payoff and justify the increased effort often entailed in a smaller investment – especially for institutional investors with their need for economies of scale.

In their landmark study for FSG, Cooch and Kramer found that “many of the foundations in [the] study had difficulty providing the full financial results of their mission investments. Moreover, because their investments were not tied to grantmaking strategies hardly any foundations were able to report on the social impact of their investments”.¹⁰ It seems that most foundations have no well-thought-out strategy – so their objections to mission investing are specious.

Falling short: Socially responsible investing
The public image of mission investing may be tainted by the half-hearted implementation and fuzzy outcome measures of its relative socially responsible investing (SRI). Mission investing is a tighter, more focused (and more effective) version of SRI, the strategy of considering social and environmental factors in making investment decisions. SRI has developed a long, established track record of growth and maturation in financial markets in the U.S. and abroad over the last three decades. SRI strategies include screening investments to reject tobacco and defense companies, for example, as well as shareholder activism and community investing.¹¹

SRI may satisfy demands for “corporate social responsibility”. Philanthropic foundations, however, must be held to a higher standard because of the singular focus of their charge to use their funds to further their mission.

Any form of SRI is a step in the right direction, to be sure. For philanthropic foundations and their huge resources, however, this approach falls short of meeting their fiduciary responsibilities. For example, screening doesn’t go far enough. Too often, foundations, pension funds, and other investors coast on screening – especially the “negative screening” of excluding politically incorrect investments such as tobacco companies. Even positive screening – proactive selection of investments in socially responsible companies – will never create change on the scale needed to make significant progress on our biggest problems. We need to shift our strategies from avoidance to adding value.

More of the same: Corporate Social Responsibility
Corporate social responsibility (CSR) is another promising model that is often confused with mission investing, to the detriment of the latter. As originally conceived, the CSR model seemed to offer a for-profit version of mission investing: an opportunity to tap the business and social advantages of aligning corporate and consumer interests. It is not a form of philanthropy, but a radical change in perspective that recognizes these advantages.

Despite this worthy model, the CSR movement suffers from ailments similar to those of today’s philanthropy sector. CSR’s results have been disappointing, to say the least – unless we count as “results” the thousands of reports, white papers, websites, strategies, five-year plans, blogs, scorecards, stakeholder conferences, and a seemingly endless flow of other material. Ultimately, all this talk obscures the serious deficit of meaningful movement toward meaningful goals.

However, CSR has rarely been fully implemented without reservation or compromise. Like mission investing, to be effective CSR must permeate the entire organization, becoming part of its DNA, not just a series of initiatives. The CSR model, as designed, cannot work without strong, intelligent, creative leadership. As with other strategic missteps, the disappointing showing of CSR can be laid at the feet of corporate management.

Some corporate leaders take the easy way out, kowtowing to activists and their agendas rather than standing up for changes they know will make a real, sustainable difference. Others implement changes that are minor in impact and scale, squandering the opportunity for real impact. This pattern drags on because the CSR movement has historically suffered from the “emperor’s new clothes” syndrome – that is, the reluctance to call attention to CSR’s widespread ineffectiveness as currently implemented. One who offers criticism of today’s CSR – even constructive criticism – is likely to be accused of pessimism, sabotage, political incorrectness, or worse. The resulting chilling effect has long limited genuine dialog about CSR.

In their seminal Harvard Business Review piece last year, Michael Porter and Mark Kramer made the case for strategic CSR. In this business model, CSR serves as a strategy that provides a competitive advantage rather than superimposing artificial “do-gooder” values.¹² Socially responsible businesses can reap competitive advantages by connecting with their shareholders, creating useful products, managing their supply chains more effectively, limiting their exposure to social and environmental risks, and recruiting and retaining qualified staff with supportive, diverse workplaces and responsible employee-benefit programs.¹³

Today’s CSR is qualitatively distinct from mission investing and, in fact, from its original model. But as with mission investing, experts and business leaders are crafting an effective model that is available to promote genuine, sustainable change if implemented carefully and creatively.

A challenge: Take the next step
Grantmaking cannot be the only tool that foundations use to effect social change. Grantmaking has its place, but grants alone will never solve our country’s problems because they don’t go to their roots, such as poverty, unemployment, and homelessness. Risk is not the issue here – as noted above, philanthropies risk billions of dollars on an ongoing basis when they invest in hedge funds and overseas markets. In fact, given that foundations are mandated to be change agents, and that grantmaking is but a tiny fraction of how they use their money, mission investing can further the fulfillment of fiduciary duties in the deepest sense, maximizing the impact of foundation assets.

The evidence is conclusive: skilled, responsible mission investing does not jeopardize a foundation’s endowment, nor does it compromise fiduciary duties.

Yet the pace of movement toward mission investing is glacial. Kramer and Cooch are, ultimately, upbeat about its progress and optimistic about its prospects, but the major participants in mission investing today are small foundations, with rare exceptions. The larger, more influential foundations are holding back, their mission-investing allocations minuscule against their asset pool.

As a creative, contemporary model, Next Street is committed to offering investors the opportunity to bring their investment strategies into the 21st century, aligning business and social interests. We have developed a business model with tools and strategies that maximize the chances of social and financial returns equivalent to “conventional” investments. Nonetheless, potential investors have continued to cling to longstanding doubts about the viability of investing in the inner city – despite the reassuring analysis and data to the contrary and despite their mandate to pursue their mission with total commitment.

As a nation, we’re at a crossroads. We’ve seen conclusively that old-fashioned charity is not up to the demands of today’s global problems. The advantages to full-scale mission investing have been clearly demonstrated. The concerns about and objections to mission investing have been addressed at length. The corporate social responsibility model has been refined. For those who are ready to demonstrate creativity and leadership, the tools and solutions are readily available.

All of us – individuals, businesses, philanthropies – we all need to acknowledge that our dollars can be used much more effectively. The scene is set for us to step forward and bring our visions to life. If that doesn’t happen, we can blame only ourselves for the lingering status quo.