As foundations across the region look for ways to combat climate change, reduce rural poverty, or improve access to healthy fresh food, they are increasingly focusing on local food systems as an investment opportunity. Traditionally, a foundation’s mission strategy would be accomplished solely through its grant-making capacity. Today, there are many options for a foundation to utilize it’s endowment strength for impact in this sector.
The potential for impact in directing a portion of a foundation’s endowment around a core mission strategy can be significant. Aligning 1% of an endowment’s investment corpus a year to a mission strategy could provide a 20% boost to the annual 5% qualifying distribution. For example, committing 1% per year of a $100 million endowment translates to $1 million of investment capital per year. This would have added impact on top of a $5 million annual qualifying distribution.
Increasingly, endowments are employing sustainable or responsible investment strategies. They are committing to using their investment capacity to align with their mission goals, while maintaining their primary fiduciary obligation. At a broad level, these can include both public and private company investments or other impact investments, and can be termed program related investments (PRIs) or mission related investments (MRIs). According to a recent USSIF report Unleashing the Potential of US Foundation Endowments, more than 100 foundations currently utilize some form of socially responsible investment strategy, with some thinking the number is closer to 300 (the report also defines the various strategies foundations are currently using). Whatever the number, interest in the space has grown, and questions arise as to how to most effectively build a manage a portfolio of such investments.
So what options are available to a foundation? Here are some of the questions we hear:
To meet our mission goal of supporting the local food system, should we focus on investments in public or private companies? What is the impact of each?
Since a significant portion of a foundation’s endowment is typically invested in public companies, many foundations use either positive screening (incorporating environmental, social, and governance - ESG - factors) to determine which companies best support their mission goals. In addition, ongoing shareholder advocacy is another important tool to engage with companies on their sustainability efforts. However, food companies are typically a very small portion of an overall portfolio. While private companies are small in nature, their potential for impact on a regional level can be significant. How can we compare the impact of a public vs. private company on the local food system? How do these companies tend to behave, and who is influencing that behavior?
If we invest in private companies, should it be equity or debt?
Questions about structuring often come up with private companies, and each situation is as unique as each company. Some things to consider are:
How is this investment going to affect the ownership structure of this company? Am I aligned with that change, if any?
What are my expectations and targets in terms of percentages and timing of returns? How does the financing instrument align with those expectations?
What other investors are involved in this company? What are their expectations for returns, and where does my investment fit in relative to theirs?
Should the investment be made as a PRI or an MRI?
Program related investments (PRIs) have been used for a while now, and allow foundations to leverage grant-making capacity beyond the 5% standard. While these investments generally yield lower returns, the potential return can vary greatly. What are appropriate expectations for returns for a PRI investment? How is that separate and distinct from the return expectations of a mission related investment, which typically comes out of the endowment corpus? What opportunities for PRIs and MRIs are there currently in the local food system? Can a foundation have both a PRI and MRI strategy, and what would that look like?
In future postings we will go into detail on these topics and explore current markets and what we’re seeing in the field… we hope you continue reading!