In 2019, private US foundations held approximately $880 billion in assets, but most only support their missions with their annual 5 percent payouts required by the Internal Revenue Service; the remaining 95 percent sits in investments. By investing endowment assets toward their missions in the form of mission-related investments (MRIs), private foundations could do more to advance racial equity and racial justice goals. What stands in their way?
No federal policies explicitly promote or prohibit the use of MRIs. But in the absence of public policy barriers to making MRIs for racial equity, internal barriers within foundations exist. Based on recent interviews with foundation fiduciaries, we’ve identified three ways private foundation stakeholders can start to break down internal structural and cultural barriers to using private foundation endowments to advance racial equity goals.
- Align skills, motivations, and incentives among decisionmakers. Many private foundations are hesitant to change the status quo: the strategy of maximizing financial returns from their endowments to increase the amount they pay out in grants in support of their missions each year. In the words of an interviewee, “[Investment committees] are often outside advisors who are brought in solely for their investment capacity, so they're more concerned about financial return than social impact.” Foundations have established relationships with advisors, investment committee members, and other business personnel to help them maximize returns, and switching to a mission-driven model might require changing some of these relationships.
On top of this, compensation structures can disincentivize MRIs by rewarding the highest-earning investments, according to an interviewee. Some interviewees said their board or investment committee members and advisors were “brought along” in the transition prioritizing impact, yet others reported hiring new advisors to support their mission-related investing goals, such as racial equity. Interviewees also said it was necessary to clarify responsibilities for sourcing MRIs for racial equity between team members on the investment side who are more attuned to financial goals and programmatic personnel who are most familiar with these goals.
Foundations can consider alternative compensation, board, or investment committee structures that create the space for committee members to focus on racial equity. They can also ask peers further along on this journey for information about lawyers, advisers, or other personnel who can support foundation fiduciaries in mission-related investing endeavors. - Articulate the impact you want to have. Even foundations that want to use their endowment investments to advance racial equity may diverge in their expectations for impact and financial returns. According to our interviews, decisionmakers may debate how much MRIs should generate financial returns and question how deeply they should focus on racial equity outcomes. Are investments in fund managers of color enough? Should investments and their proceeds make it closer to communities? And when are MRIs the right tool to use to achieve the most impact? Other fiduciaries are uncertain about the ambiguity around what qualifies as “mission related.”
Language or communication barriers between asset owners and advisers can be problematic if asset managers don’t clearly articulate their impact theses. Foundations can be clearer in statements about what racial equity advancements the foundation hopes to achieve with their capital to ensure fiduciaries are confident in their investment decisions. And since most existing racial equity–focused MRIs don’t heavily target outcomes at the community level, foundations can think more intentionally about how their investments can benefit communities. - Develop new methods to assess investment opportunities, including measuring and reporting impact. Traditional due diligence and risk assessment processes center on track records of funds managed, which reinforces existing inequities against people of color who’ve been locked out of markets. And data show investors evaluate high-performing, Black-led funds more harshly than high-performing, white-led ones.
Some foundations have committed to Due Diligence 2.0, which urges evaluators to look outside of investment management track records for proof of capabilities of investment team members. Others are more closely scrutinizing the racial equity policies and impact potential of their investees. For example, those investing in funds might look at whether the fund itself invests in businesses owned by or directly benefiting people of color. In the public equities sphere, investors look for intentionality around how companies handle issues of race internally and might ask questions like, “Does this company have internal pay equity policies?”
Impact measurement starts with rigorous upfront evaluations of investment opportunities, but according to an interviewee, investment firms still tend to center their underwriting on financial risk rather than rigorously examining each investment’sthesis and considering the likelihood of desired impacts. Fortunately, some tools exist to help foundations examine the potential impacts of investments. For example, they can use Urban’s Capital for Communities Scorecard to assess how investment opportunities align with community priorities and how they can better deliver benefits for community wealth building, housing, jobs, environment, health, and transportation. And foundations could be more transparent about their endowment investments by sharing them on their websites (like the Russell Family Foundation does). To go even further, they could measure and publish the community benefits of their entire endowments and could collaborate on structures for reporting and information sharing.
With so much money in their endowments, private foundations are well positioned to use MRIs to advance racial equity and racial justice goals. As the Winthrop Rockefeller Foundation’s (WRF’s) president and CEO Sherece Y. West-Scantlebury said, it takes commitment and collaboration: “Over the years, many people have asked me why more foundations aren’t using their endowments to advance racial equity and how WRF has come so far.… Our journey started with a simple choice to align mission and investments, along with discipline, courage, and collaboration between board members and investment advisors.”
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