Building a Portfolio

Ford Foundation: 5 Takeaways from Its Big Move into Impact Investing

The Ford Foundation, a nonprofit devoted to social and economic justice, has announced plans to invest $1 billion from its endowment into mission-related investments. The pledge represents the largest-ever commitment from a private foundation. “My conviction is that this moment offers us an opportunity to be accelerators of justice,” Ford Foundation president Darren Walker told Forbes. “And my hope is that, before long, many more foundations will find ways to tap into the power of their own endowments.”

At the very least, the move will drum up awareness of impact investing as a viable tool among institutional investors and the investment community as a whole. For current impact investors and those curious about the space, the announcement offers several key takeaways.

1. The Tipping Point Has Arrived

Impact investing can no longer be dismissed as a fad. Global sustainable investment assets totaled nearly $23 trillion last year, up 25% from 2014, according to the Forum for Sustainable and Responsible Investment.

While the foundation has made the largest investment from a philanthropy, it wasn’t the first. In recent years, several high-profile foundations, including the Rockefeller Brothers Fund, the MacArthur Foundation, and the Bill & Melinda Gates Foundation have all made like commitments with a portion of their funds.

In an article for the Stanford Social Innovation Review, Walker wrote that he hoped the move would inspire others to do the same, ultimately producing a sector open to more investors.

2. It’s a Long-Term Plan

While the $1 billion investment is large, the foundation plans to ease into it gradually over the next decade. Finding and vetting investment opportunities will require a wholly new type of evaluation, and the organization hopes to carefully hire a team dedicated specifically to this initiative. It may make sense for individual investors to follow a similar course, shifting assets into impact investing slowly over time and making adjustments as necessary.

3. Big Data Has Made It Easier to Move Forward

Just as big data has transformed massive industries like healthcare and tech, it has created new ways to measure and understand social impact. Institutions such as the Sustainability Accounting Standards Board and the Global Impact Investing Ratings System now make it feasible to gauge the social impact of an investment as well as its ROI.

4. The Shift Allows for More Portfolio Diversification

Foundations have been bound by law for decades to pay out a minimum of 5% of their total assets each year for mission-related programming. The other 95% can remain in the investment market (tax advantaged) with the aim of earning a large enough return to be self-sustaining.

As endowments, in general, have been struggling with returns in recent years amid a volatile equity market and low interest rates, they’re continuing to look to alternative asset classes. If done successfully, allocating a portion of a portfolio to impact investing can serve as additional diversification while also furthering the mission of a philanthropy.

5. The Initial Focus Is on Causes the Foundation Knows Well

The term “impact investing” applies to so many activism issues and financial strategies that it can feel overwhelming to select and evaluate specific investments. While the Ford Foundation hasn’t yet announced which specific social funds it will invest in, it will start in the areas of affordable housing in the United States and access to financial services in emerging markets. In addition to seeing growth potential in both areas, the foundation has prior experience with them and views them as in alignment with its core mission.

While the Ford Foundation’s $1 billion pledge is currently the largest, don’t expect it to stay the largest for long. Foundations are increasingly moving toward mission-related investments. However, this isn’t just a game for big endowments. Smaller institutions, high-net-worth individuals, and family offices can do the same, investing in funds that align with their experience, personal values, and passions.

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