Unlocking the Entire Endowment for Impact

by Sam Gill, President and CEO, Doris Duke Foundation

 

The growth of activities broadly described as “impact investing” has been one of the most exciting — and important — developments in organized philanthropy in recent history. Not only has impact investing elevated an important conversation about the role the vast majority of private philanthropy’s assets can and should play in serving the public interest, this shift has also put on the table powerful new tools for social change — and not a moment too soon.

 

Foundations exist to foster social innovation, which includes both identifying key social problems worthy of our collective attention and, quite often, experimenting with potential solutions to both new and long-standing social ills.

 

Historically, the grant has been nearly the exclusive tool in the foundation toolbox for supporting and enabling social innovation. While the grant will likely always be the most privileged tool (in finance terms, the grant is wholly concessionary capital), it has become clear that there are other tools that we desperately need to mobilize if we are to tackle the problems of today.

 

Climate change, affordable housing, and inclusive economic opportunity are all challenges that feature high degrees of complexity and interdependence and that are all in some way mediated directly or indirectly through both capital markets and what economists call the “real economy.”

 

While grants often have an important role to play in market-based activity — particularly when markets fail to deliver certain social goods — there are diverse tools of finance available as well, from equity investments, to low-cost debt, to debt guarantees. The value of these instruments is not that they can or should compete with grants, but that the specific characteristics of return-seeking capital are sometimes better suited to a particular facet of a social problem than a grant or they can mobilize more capital toward solving that problem.

 

Based on what we and others have learned over recent years, we’re in the midst of evolving our own approach to impact investing at Doris Duke Foundation.

 

We got started fairly conventionally, setting a percentage target for endowment capital devoted to impact in 2019. The breadth of potential investments was wide, from market-based return instruments all the way to highly concessionary capital. Our goal was as much to learn as to advance our specific areas of focus.

 

Much of what we learned was encouraging. First, in a number of our mission areas, we saw significant growth in impact-oriented investment opportunities. Second, we found that there was far stronger return potential than we expected across investments in several of our mission areas. (This was a reminder to us that, in investing, you tend to find what you’re actively looking for.) Third, however, we did not find that all of our mission areas were represented in equal abundance, nor was the right ratio of impact-to-return uniform across investment opportunities.

 

Impact investing is not just hype. For any range of foundations, there are exciting, effective investments that can drive impact while meeting a range of return objectives. But it requires discernment and diligence to differentiate between impact investments that will work for a specific set of purposes and circumstances and impact investments that constitute mere window dressing.

 

This led us to reconfigure our approach by dividing our impact investing portfolio into two different segments.

 

The first, which we call “program-integrated” impact investing, resembles “conventional” impact investing, such as the use of PRIs and other concessionary vehicles to advance our mission. The second, which we call “endowment-integrated” impact investing, includes positions where we believe the investments will lead to the desired action on issues relevant to our mission as well as market-rate returns.

 

What ties the two prongs of our approach together is a shift away from defining impact investing as its own field with a discrete set of specific investment types (loan, equity, etc.) toward a conception of impact investing as a perspective or a broad outlook: that we should use finance expertise and tools to drive impact whenever it is most salient to the problem at hand.

 

Philanthropy’s great asset is not the size of the endowment, but the universal independence and partiality of the capital. The independence of foundations describes their ability to act without being encumbered by investors, constituents, or other external parties. Their partiality is the privilege of not having to trade off one set of social problems for another through the more narrowly delimited missions and purposes set by the founder (or founders).

 

Putting these assets to their best and highest use in any given epoch requires identifying the right tool for the problem, rather than attempting to fit the problem to the tool.

 

With a little over a decade of sector-wide progress under our belts in identifying how and when endowments can best serve impact, now is the time for our sector to mobilize what we’ve learned through new, more refined approaches to impact investing.