The general picture of foundations around the world that is given by our cohort of experts is one of an increasing focus on the impact and sustainability of investments, a willingness to spend more in the wake of the pandemic and a desire to take action on climate change.
Larry Kramer is president of the Hewlett Foundation in the US, which has an endowment of around $10bn (£7.5bn) that is managed in house by a team of 13 people. “We generate returns sufficient to maximise impact. There are contemporary debates about positive and negative screening and mission investing, but the overarching philosophy that drives us is whether changing our investment approach will enhance impact relative to the alternative. The reason these things intersect is that we have a small team and a concentrated set of managers which we are confident and comfortable with. We can’t expand this as we can’t manage that many relationships, but it makes our managers super-competitive.”
While the King Baudouin Foundation is based in Brussels, it considers itself to be European, acting on a global level, says Jan Vander Elst, head of investments. With a budget of €100m (£89.3m) and an endowment of €1.2bn (£1.1bn) it seeks to strengthen the capacity of organisations, as an umbrella for thousands of philanthropy initiatives in areas including social justice, poverty, health, heritage, culture, social engagement, international education and development, and climate and the environment.
“Foundations have been struggling with the low interest rate environment so are looking for alternatives, and new worries about Covid-19 will accelerate existing trends. But we try and maintain a long-term approach in volatile markets. Our governance model means we can’t make short-term decisions, which means, on the negative side, we might miss opportunities, but on the positive, allows us to plan and not panic. We are long-term investors taking decisions for the long term.
“Our asset allocation includes equities, bonds and some property. In terms of diversification assets there is a problem of ease of access to other asset classes. However, you have to start somewhere. We complain about access but then don’t enter the market, so it is a bit of a chicken and egg situation.”
Dr. Lynne Guyton is chief executive officer at John Lyon’s Charity, the largest independent funder for children and young people in North and West London. The charity currently spends £10-12m a year, funded by a £365m endowment, and has granted over £140m since 1991. “We seek to maintain the real value of our investment assets while generating stable and sustainable returns to fund our grantmaking.”
Total Portfolio Impact
Having made a career transition from practising tax law in San Francisco to sustainable investing in Hong Kong, Annie Chen is founder and chair of the RS Group. Her family office seeks a “paradigm shift in societal values and priorities so that economic growth does not jeopardise human development and environment sustainability”.
She says: “It was not enough to aspire to be a good steward of our capital. I wanted to ensure it wasn’t contributing to the world’s problems, that it was instead helping to address them. We have a social mission which not only seeks to invest our own capital sustainably, but uses resources including money and time to promote sustainable practices, economics and investing. For example, on top of managing our own portfolio, we undertake lots of advocacy. We invest in the future we want to create.”
Chen talks of her foundation’s “total portfolio” approach to impact. “We want all assets fully applied to advancing our mission while generating returns that meet our needs. All organisations generate a blend of financial, social and environmental performance. It makes more sense to look at how we deploy all of our capital in an integrated way.
“Some family foundations keep a wall between investing and philanthropy, whereas we intentionally integrate the two,” she says. “For the change we want, philanthropy alone is not sufficient to solve big problems. A lot of funders tend to only use returns to fulfil their social mission, for example 5% of assets each year, leaving their 95% capital base. Therefore, they are not necessarily invested in a way that is aligned with their mission. A lot of asset owners pay little attention to what negative social or environmental value their capital is generating.”
Kramer states that although the Hewlett Foundation has made a decision not to invest in natural resources and is committed to fighting climate change through its activities, it doesn’t adopt a fully mission-led approach. “To be blunt, we don’t consider investments in that way,” he says. “We are way too small to have an impact on public equities with our investments. There are moral consequences to investment but no absolute rights and wrongs. Our general assumption is that the best way to have an impact is through our grant programmes rather than twisting and bending investment policy to make a gesture for the sake of it.”
But with that in mind, he says there are unique circumstances that make a compelling case. “With tobacco it is relatively easy, there are only a few companies, the product kills people and all managers pulled out. Fossil fuels are another matter altogether. What does it mean for returns? For us, it didn’t make sense to go any deeper than we did.
“And even then, we were a little nervous about other issues with compelling arguments for divestment. Where do you draw the line? For us, the impact of investments is miniscule compared to that of grantmaking.”
Vander Elst says his foundation’s endowment is not there to simply be maximised in itself, but to maximise impact on society. “The board decided in 2016 to implement a new strategy for the endowment and rolled that out across our donor advice funds. Environmental, social and governance management is as important as financial performance, and we don’t compromise, but are not outspoken on topics. We have considered social impact investments which are in line with our mission. These are currently €10m (£8.9m) so a small but growing part of the endowment. The composition of our board of governance is very pluralistic. We are not a family foundation or one with ideological or religious conviction, so when it asked us to develop an ESG policy we wanted to be pragmatic. We did not want to lose ourselves in lengthy discussions on topics where we could find agreement.”
Kate Rogers, co-head of charities at Cazenove Capital, points out that alignment of investments with mission is a particularly hot topic in the UK in light of a Charity Commission consultation, making it increasingly on the radar of all foundations.
Guyton agrees, saying that this is an area of increasing importance to John Lyon’s Charity. “We accentuate the positive,” she explains. “All investment has an impact so it depends what impact you want it to have. Instead of exclusion, we get fund managers to focus on areas we would like to invest in. They have to show us how and why they are socially responsible as part of the selection process.
“It’s been a gradual process because it is a big shift for trustees. They may say that surely, as a grantmaker, we are doing good anyway, and that’s enough, we don’t need to do anything else. But we can wield our influence through investment in line with our initial founding principles. For long-term alignment to be successful it’s about making sure you really build up rapport and relationship between trustees and advisers.”
Rogers muses that we are currently living through a challenging time. “It is difficult for foundations to decide how to respond, where to prioritise, and how to balance their spending decisions, in terms of how much to spend now and how much to save and invest for the future,” she says.
Vander Elst says his foundation’s endowment was hit by the short-term downturn in the markets as the pandemic took hold. “We lost 11% but despite that, our board decided in March to spend €5m (£4.5m) more because we thought there was an immediate need to be active and to focus on poverty and primary care. And new money from donors meant we actually spent an additional €20m (£17.9m). But humanitarian intervention is not the core business of the foundation, which is more long-term focused. So, we are now looking at helping organisations facing the long-term consequence of the pandemic.”
Kramer says that the Hewlett Foundation’s spending operates in a range of 4.75-5.75% of the value of the endowment. “Typically, we target 5.1%. There is this myth that the 5% figure was an arbitrary number, but if you look at returns, that figure seems about right to maintain spending power over time. We will stick to this as the problems we work on are long-term. They can’t be significantly addressed by throwing more money at them now.
“Our assessment is that more progress will be made by chipping away over time with smaller amounts, and having the capacity to be there for the long run. But if there is a unique opportunity to achieve more by spending now we will do that.
He says that his foundation would respond directly to short-term pandemic related need if it thought it would make a difference. “But we avoid symbolic moves. After the 2008 crash when the endowment started to grow again, we kept a balance of unallocated funds to deal with specific and new problems. This now stands at c.$75m a year. It means that if there is a big drop in asset values, then we can dedicate these funds without affecting our ability to help in the long term. Therefore, during the Covid-19 crisis, we can deploy funds. “There are bottomless needs during the pandemic but then there are anyway. We have to think about long-term consequences. Our assessment in the early stages is that we would be spitting in the ocean. We could spend more but it won’t make a difference to today’s problems relative to what we can do long term.” Guyton states that John Lyon’s Charity’s endowment is for perpetuity, so the approach is about looking after assets today for tomorrow’s needs. “We use a 3.5% spending approach smoothed over four years. We did a retrospective look back and found that we weren’t spending everything that was available, and were instead reinvesting back into the endowment.
“But this has become an interesting and pertinent discussion in light of Covid-19. If ever there was a time to increase spend it is now. Therefore, we are considering a radical change in strategy that looks at designating around £20m of the endowment to respond to needs at this difficult time. We are increasing spending as now is the rainy day.
“Trustees come and go but ours have a breadth of experience, and all appreciate the balance required between maintaining value and fulfilling mission. We are quite lucky that we have a number of properties ripe for redevelopment, which will help us respond to this short-term need while maintaining future value of the endowment. But to be able to respond properly we need a long-term approach, rather than just short-term emergency grantmaking.”
Chen states that the RS Group’s priority has always been, and remains, sustainability.
“This is not just about the environment but a realisation that humans are not masters of the universe. To thrive we need a healthy planet. I was already quite depressed over the state of the world pre-Covid. Sometimes it really feels that the dystopian future awaits. Therefore, we counter negativity and despair by focusing on what we can do. Through action that is in our control we can maintain hope. It isn’t just the physical environment but political and social challenges.” When considering her organisation’s time horizon, Chen says: “A couple of years ago I would have struggled to answer, but since then I have made a decision. I don’t want to leave my children, who are in their 20s, a world in crisis. So, we are accelerating our investments and spending over the next two years to heavily focus on climate change.”
She considers that there are different ways of assessing impact. “For example, when we make grants, we don’t seek financial return but are looking for positive outcomes. Commercial investments, however, have a different weighting in expectations. We want strong financial performance, but we need to look at what else that money is doing, both positive and negative.”
Chen suggests that often impact is in the eye of the beholder. “We have seen different standards come onto the market, but it will take time to standardise impact measurement,” she says.
Kramer agrees that it is very difficult to measure the impact of investments. “In terms of grantmaking and being a strategic grantmaker, firstly you need a clearly articulated goal and to ask how the grant will achieve that goal. You can then measure whether you are moving in the right direction and achieving that.
“In terms of measurement, we think about what is reasonable under the circumstances. It needs to be quantifiable.
If there is no way to measure progress then we probably won’t fund that project in the first place as it doesn’t make sense. But we will accept different measures as long as they are sufficiently qualitative, and quantitative if possible. The key is to identify things you are going to measure at the front end and build them into the processes before you know the outcomes.” Rogers concludes: “We see impact measurement and management as the third dimension of endowment and foundation investment management; alongside risk and return. We believe in intentional investing, that all charities should think about the impact of their investments; and seek to align with their objectives where possible. We are measuring the carbon footprint of all of our portfolios, as well as the social impact.”
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.