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Double Duty

How Mission-related investing not only furthers your mission, but also provides desirable financial returns
Monday, September 1, 2008
by Paul Lagasse


September ι October 2008
Advancing Philanthrophy

Suppose you work for a foundation that is focused on healthcare for inner-city kids. The organization gives 5 percent away as traditional grants to start a reading center or to hire teachers to work after-school hours. That is admirable, but it could do more. The foundation could put the rest of its portfolio to work by lending part of it out to fund the building of a literary center or invest in textbook publishers.

"The important question is, how can you shape your investment policy to support and further your mission?" asks Don Cummings, principal of Blue Haven Capital LLC in Geneva, Ill. (www.bluehavencapital.com). "Intuitively, if you can grant away 5 percent of the portfolio and make a difference, just think of what you can accomplish with the other 95 percent. I'd like to see the investment policy support the mission side so that the mission impact is even greater. That way you're killing two birds with one stone."

This is an important question that many nonprofit organizations are asking. However, is mission-related investing (MRI) right for your nonprofit? Does it require you to take unreasonable risks with the money that your donors entrust to you? How do you make sure that the "good" thing to do does not come at the expense of what is really best for your organization?

Mission's Active Driver

Mission-related investing was in the spotlight not too long ago in the wake of a Los Angeles Times series on the controversial investment strategies of the Bill & Melinda Gates Foundation ("Dark Cloud Over Good Works of Gates Foundation" by Charles Piller, Edmund Sanders, Robyn Dixon and Times staff writers, Jan. 7, 2007). MRI is an investment strategy where foundations and nonprofits invest a percentage of their funds in stocks, bonds, securities and other investment vehicles in order to generate positive social or environmental outcomes, and then recover the principal or even earn a return on the original investment. Proponents say that, if done well, MRI can turn your investment portfolio into an active driver of your mission.

"MRI is a vehicle that helps explore where it's appropriate to bring the marketplace into the equation to solve social or environmental problems," says Douglas Bauer, senior vice president at Rockefeller Philanthropy Advisors in New York (www.rockpa.org). Bauer describes MRI as an effective leveraging tool for foundations and nonprofits, and believes that there will be an increasing need for MRI in the next 15 years as federal funding for social and environmental programs falls off.

"The traditional model, in which philanthropy funds a social issue, finds a solution, measures the impact and then hands it over to the government to make it available to everyone, won't work anymore," he says. "At the federal level, with long-term debt, annual deficits, entitlement programs scaling up and military budgets growing, discretionary funding is the only place left to cut."

While the concepts of MRI have been in practice for years, many foundation and nonprofit executives and board members are unfamiliar with its tenets and uncomfortable with the idea of risking more than what they distribute annually in grants. Bauer likens it to the cliché about how, to a hammer, everything looks like a nail. To a nonprofit, he says, every solution looks like a grant.

"This is just an additional component of what your organization can and should be," Bauer explains. "It is a game-changing idea, but the world is a different place and it requires different solutions. I think that the foundations that get into MRI develop a deeper understanding of what the problems are and how they can be solved."

Furthermore, he adds, "It shifts the thinking to ask how this capital can be used."

Dispelling the Myths of MRI

Nevertheless, many nonprofit executives and board members are ambivalent about MRI. They think it is a synonym for socially responsible investing, or SRI, which they associate with below-market-rate returns and seemingly futile boycotts of "sin stocks." While the two investment philosophies are related, they have distinct differences.

Cummings describes the relationship visually: "I go back to the Venn diagrams from my school days. Draw a large circle and label that socially responsible investing. Within that circle is another, smaller, circle. Label that one mission-related investing.

"In other words, all mission-related investing is socially responsible, but not all socially responsible investing is related to the mission."
Another prevailing myth about MRI is that it provides returns that fall below standard market benchmarks. In his book Profitable Socially Responsible Investing?: An Institutional Investor's Guide (Institutional Investor Books, 2005), Marc J. Lane, a Chicago-based investment strategist specializing in providing mission-related equity and fixed-income portfolios (www.advocacyinvesting.com), measured the performance of MRI stocks against the Russell 3000, a basket of 3,000 common stocks representing the U.S. economy at large, over an eight-year period in two categories, social justice and respect for the environment.

Scoring the companies' performance in overlapping three-year periods at three different levels of rigorousness, Lane found that the best performers outperformed the benchmark stocks at all three levels. Companies that ranked high on the social justice scale returned 14.62 percent, while those that scored high on environmental respect returned 15.58 percent. The Russell 3000's best performers during that time returned 13.05 percent.

"When you invest in exemplary companies," Lane concludes, "you're not likely to suffer from underperformance."

Positive Screening, Proxies and Prudence

According to Lane, the MRI approach to screening investments differs from the broader SRI approach-it is "positive" or "inclusionary" (identifying companies to invest in) rather than "negative" or "exclusionary" (identifying companies to exclude from the portfolio). While it might appear reasonable to avoid investing in the alcohol, weapons, tobacco and gaming industries, negative screening does not guarantee a healthy portfolio and market-rate returns, Lane says. In fact, the risk-adjusted returns of negatively screened portfolios typically fall below market rate, and that means money lost.

"Fiduciaries are obliged to achieve market-based returns on the assets in your care," Lane cautions. "So you don't want to be making these decisions lightly. If you have fewer industries in your portfolio, you're going to have less diversity and therefore greater volatility. And that's a proxy for risk."

MRI focuses instead on identifying investment opportunities by comparing a nonprofit's mission to corporate practices. If your foundation supports environmental initiatives, Lane says, it is not necessarily a conflict to invest in a cigarette manufacturer that relies on renewable energy sources and carefully monitors emissions.

"Trustees of the organization have a responsibility to drive the mission of that organization, not to solve some other societal challenge," Lane adds. "If they start being concerned with other social issues, it will dilute the effect of their mission."

Besides, he says, negative screening does not convey your organization's message as effectively as positive engagement. "If you don't invest in Altria [Altria Group, the parent company of Philip Morris USA], they're still going to make cigarettes. Maybe you're salving your conscience, but you're not really driving change."

On the other hand, MRI encourages investors to use their shareholder proxies to galvanize voting blocs to influence management decisions. "This enables you to show management that it's in their best interest to be sensitive to the stakeholders," Lane explains, pointing to studies that suggest the companies that perform the best financially also tend to have more socially and environmentally attuned policies. "We find that the managers who are sensitive to the needs of stakeholders tend to be the best managers."

The Bottom Lines for Mission and Financial Results

Suppose you are convinced that your nonprofit can achieve significant results by putting the corpus to work using MRI. How do you convince your donors, board members and directors that the relationship between financial performance and mission objectives need not be a tug-of-war?

"Being able to speak about MRI with donors really hits a chord," admits Robert Noack, managing director of Aequitas Capital Management Inc. (www.aequitascapital.com), an alternative investment management firm in Lake Oswego, Ore., specializing in the middle-market, healthcare and energy sectors. "So many people are focused on the social and environmental aspects of how the organization will use their money. They're really interested in providing grants, but if they realized that not just the interest off their donations, but also the core investment could directly help people, they would be excited about the increased impact and reach of their money. MRI provides incredible leverage."

As an example, Noack cites the Aequitas's CarePayment® program that provides patients at hospitals nationwide with finance cards to pay their medical bills over time with no interest. Since the cards were introduced, hospitals have seen a triple and even a quadruple improvement in their patient-pay portfolio yields.

"We're keeping the patients out of financial hardship and providing unprecedented collection yields to our hospital clients," Noack says. "Patients win, hospitals win and investors win."

In addition, Noack points out that some organizations also decide to make investments with little or no hope of financial return rather than make a grant, such as buying stands of old-growth forests and transferring the land to conservancies to protect the trees from being harvested. In such cases, a nonprofit might receive transferable tax credits or other marketable benefits, but would not recoup the initial investment.

MRI also enables nonprofits to plug the gap for renewable-energy projects that might require more capital than a grant, but that fall below the radar of large investors such as GE Capital. "If you're not getting a financial return, then give a grant," Noack advises. "If there's an opportunity to make a return, and positively affect the environment, then take some money out of the corpus and make an investment instead."

Metrics, Mission and the Double Bottom Line

MRI requires nonprofits to face their double bottom line-accounting for financial and mission objectives. This should not be seen as a compromise, however, Noack emphasizes. "I don't think an organization should change its mission in order to capture a return. The mission is the key. The strategy might change, but the mission should be part of your DNA."

Just use different metrics to measure both sets of activities, he suggests. Standards of performance are beginning to emerge, although there is no standard yet for the entire nonprofit sector.

"Like the S&P 500 as an absolute benchmark for large stocks, we've tried to create relative metrics such as 'How many renewable kilowatts have you produced?' 'How many individuals have you kept out of financial hot water?'" he explains. "We have to use the relative measure until benchmarks are produced in some of these areas. That's going to take more time, but I think they're coming.

"Relative benchmarks let you say, 'This is what I did.' Absolute benchmarks let you say, 'What could I have done?' This will also help fiduciaries who are getting judged by how they invest."

Noack foresees a time when nonprofits will be able to judge their performance against environmental and social indexes. Until then, he recommends asking investment vendors to explain the metrics they use and to make it clear how they are suited to a particular nonprofit's mission.

MRI doubles more than just your bottom line, however. When used in conjunction with grants, MRI enables nonprofits to double their impact on society, proponents say. "It is more complex, and it requires getting the accounting side together with the mission-side people," says Blue Haven Capital's Cummings. "It also involves getting rid of some old ghosts that MRI can't do as well as traditional investment."

Another ghost that needs to be dispelled in many organizations is the perception that investment functions are unrelated to the mission. "People think of the mission as where the heart is. It's warm," Cummings explains. "The investment side, on the other hand, is cold and all business, and no one wants to deal with it. It may even be at odds with, or oblivious to, the mission."

While the investment side is necessarily isolated from the granting side, t his does not mean that the investment side should also be isolated from the mission. The incorporation of mission values into the investment policy statement through MRI is a relatively new concept for directors and officers, Cummings says.

Even with all its benefits, however, MRI is not necessarily for everyone.

"If you're having a hard time making the connection between your mission and your investment options, then don't do it," Cummings advises. Until you are sure one way or another, Cummings and other advisers recommend that nonprofits dip their toes into the MRI waters first before deciding to jump in.

There are some low-hanging fruit," he adds. "For example, putting some of your liquidity into a CD with a community-based fund that has a similar interest rate as a regular bank, but that invests your money in underserved communities. That's low-risk MRI right there."

MRI involves more work on the part of directors and officers to educate themselves, but that can lead to a better understanding of their organization's capabilities and mission.

"I think that foundations that get into MRI develop a deeper understanding of what the problems are and how they can be solved," Cummings says. "MRI is an educational process. It is absolutely not exciting, and in fact it can be plain boring a times. Nonetheless, the furtherance of the mission is exciting."

He likens the impact of MRI to the butterfly effect-a small change in one location leads to much larger effects farther away.

"With MRI, we have more effect on things than we think we do."


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