In April, Darren Walker, president of the Ford Foundation, the second largest foundation in the United States and one of the most influential in the world, announced a billion-dollar commitment over the next decade to mission-related investments (MRIs). In making the announcement, Walker expressed a belief widely shared within his organization that "MRIs have the potential to become the next great innovation for advancing social good." Walker further suggested that foundations needed to expand their imaginations and tools if they hoped to successfully address "the large-scale problems facing the world today" and added that they shouldn't "neglect the tremendous power of markets, including the capital markets, to contribute."
Ford isn't the first foundation to commit itself in a significant way to mission-related investing, although its commitment would appear to be the largest by a foundation to date. Since the late 1990s, the in New York City has distinguished itself as a pioneer , and under the leadership of its president, Clara Miller, has become increasingly willing to others "to jettison outdated operating models that leave resources untapped in the face of systemic social ills." Foundations such as Kresge, Packard, and Surdna have followed suit.
Shortly after Walker's announcement, PND spoke with Xavier de Souza Briggs, vice president for economic opportunity and markets at the Ford Foundation, about the foundation's decision, how and where the funds will be allocated, and what the move means for the field of impact investing.
De Souza Briggs joined the foundation from the Massachusetts Institute of Technology, where he was a professor of sociology and urban planning in the Department of Urban Studies and Planning. An award-winning author, commentator, and educator, he served from January 2009 to August 2011 as associate director of the Office of Management and Budget in the Obama White House. His most recent book, , was published by Oxford University Press in 2010.
Philanthropy News Digest: Let's start with a question I'm sure many of our readers are asking. What are mission-related investments?
Xavier de Souza Briggs: MRIs are investments that pursue both attractive financial returns and social impact, also known as social returns, and they are made from a foundation's endowment, rather than counted against its program payout. That's the IRS definition, not ours, and private foundations have been making them for a while, albeit not on the scale of a billion dollars.
PND: Why did Ford decide that this was the right time to allocate a billion dollars to MRIs?
XSB: Well, first of all, we felt it was important, at this particular moment, to align as many of our assets as possible with our mission. That includes our grantmaking, of course, and our program-related investments, which, again as defined by the IRS, is the other kind of impact investment that foundations can make. Our building in Manhattan, where we've convened changemakers and social sector leaders for many years, is an important asset, too. But we've never made investments toward our mission out of our endowment, and we felt that, at this moment, the impact investment market was ready for us to take this step. And the board agreed, which is why it approved MRIs of up to a billion dollars over ten years. Now, we're going to be careful and gradual about how we put those funds to work, but we're quite excited about the opportunity.
Ultimately [the board] concluded...that we were ready and the market was ready, and that by stepping up now we could help catalyze a broader movement in the impact investing field....
PND: Did the board have any reservations?
XSB: The board had a set of smart questions. Are the investable opportunities really there? Are we confident that we can generate social return in addition to financial return, which is better understood and more easily measured? They were good, smart questions, and the board was very prudent in its approach to oversight. But ultimately it concluded, based on the foundation's many years of experience with impact investing, that we were ready and the market was ready, and that by stepping up now we could help catalyze a broader movement in the impact investing field, which includes not only foundations but other major institutional investors such as pension funds, sovereign wealth funds, and university endowments. That's where the really big pools of investable capital are, and that's where the larger promise lies.
PND: As you noted, Ford has a long history of making program-related investments. In fact, it pioneered the use of PRIs in the 1960s. Instead of allocating a billion over ten years to MRIs, something new, why not, as some have suggested, allocate those funds to a ramped-up PRI program?
XSB: There are two main reasons. The first is legal. You can't invest in certain things with PRIs; they have to meet a charitable-purpose test. Say, for example, a third-generation impact investing fund comes along, that is, the fund is managed by people with a track record who have managed other funds and performed well, people who really know what they are doing. And say they offer you a compelling investment proposition, in terms of both the social and financial return sides. Now, there are some investments that are too attractive for a PRI from a financial return standpoint, in that they would be disqualified under the charitability standard, but that might qualify for an MRI, which uses a different standard. For an MRI, you're trying to meet what's called the "prudent investor rule," which requires a fiduciary to invest endowment or trust assets as if they were his or her own. In other words, would a prudent investor who's seeking a financial return and is interested in social return as well consider it to be a good investment? As opposed to, Does it meet a charitable standard, and if you make your money back, great, if you make it back with some interest, even better, and if you lose a little of your principal, that's okay, too.
And number two, you will never have the full demonstration effect in the impact investing marketplace if you are only making PRIs. You know, pension funds don't make charitable investments. Nor do university endowments, as a general rule. They rely on endowment income to fund their operations, to fund scholarships, to fund all the other things universities do. So you're never going to build out a fully mature impact investing marketplace unless foundations are making these other kind of impact investments, mission-related investments, which have a more demanding risk profile.
PND: How will the billion dollars be put to work?
XSB: Instead of putting it directly into investable assets, we'll deploy the capital through fund managers who, in turn, will invest it in things like real estate, affordable housing, or portfolio companies. That's important to understand. The target sectors for us initially will be affordable housing in the U.S., where we see very significant investable opportunity, on attractive terms, and where we have lots of expertise based on many years in the field; and, number two, financial inclusion and access in emerging markets — and for exactly the same reasons: we've got the expertise, we think there are investable opportunities there, and groups have developed some very exciting business models, largely driven by technology, that are bringing down the cost of financial services and expanding access to things like credit for very low-income consumers. So those two areas are attractive to us, and they both align, to a significant degree, with our larger organizational efforts to combat inequality, including economic inequality.
PND: How will the team responsible for overseeing these investments decide what constitutes an acceptable rate of return? Given that it's money coming out of the endowment, should we assume you'll be looking for returns of 5 percent or more?
We're not going to apply a formulaic approach to the financial returns on our MRIs. Our trustees have instructed us to find the very best investment opportunities we can and to seek the strongest combination of financial return and social return....
XSB: Well, normally, that rate, five percent, or five-plus, if you want to protect against inflation and make your IRS-mandated program payout every year, would be called the hurdle rate. And an investor might establish a hurdle rate on a broad port-folio basis, meaning the most important thing is whether your pool of investments, in the aggregate, clear the hurdle. Now while acknowledging that that is an important concept, I think the answer to your question is no. We're not going to apply a formulaic approach to the financial returns on our MRIs. Instead, our trustees have instructed us to find the very best investment opportunities we can and to seek the strongest combination of financial return and social return. One reason we're excited about the two sectors I mentioned is that we see opportunities for both attractive financial return and clear and demonstrable social returns in both. That's one of the things that makes them so appealing. But they're not the only sectors that meet our criteria, and there are sectors in which other investors are finding terrific opportunities on both dimensions, financial and social, as well.
So, again, the short answer is no. Five percent will not be a formulaic target for us, although it will be a consideration. We are investing endowment assets. Our job, as fiduciaries, is to steward those investments. The endowment, after all, is what makes all our grantmaking, and all of the recruiting of talent we do in our eleven offices around the world, possible. Endowment assets are a part of sustaining all that for future generations and to address problems we can't foresee or name right now. So we plan to invest prudently, and that's one of the reasons we're not only being careful about the sectors in which we invest initially, but also why we plan to take our time and ramp this up gradually over the next ten years. But five percent is not a target.
PND: Foundations — Ford prominently among them — have been investing in affordable housing for a long time. Will your mission-related investments in this area be different from the grantmaking you've done in support of affordable housing in the past? Or will you be looking for your MRI fund managers to invest in different things and different approaches than maybe Ford has supported in the past?
XSB: Well, there are two key things to note. One is that we're going to be seeking outcomes that are closely related to the affordable housing work we have done for a long time. That is, affordability in rental housing, and also things like access to affordable home ownership, since home ownership is such a key to building assets — not only in America, but in other parts of the world. Over time, we've pursued a range of outcomes backed by the best evidence and informed by leaders in the field we've known for decades, and I think the field can count on us going forward to pursue the same kinds of outcomes.
MRIs are not grants, and grants are not PRIs — they are different instruments. And for the first time ever, the Ford Foundation is going to have three tools in the toolbox....
Having said that, MRIs are not grants, and grants are not PRIs — they are different instruments. And for the first time ever, the Ford Foundation is going to have three tools in the toolbox. One of the things we feel we learned over many years of impact investing is that we're often at our best when we can deploy more than one tool, and that's because different tools are meant to do different things. There are certain approaches that really demand grants that don't require repayment but that are important to the world and help grow the field. And then there are certain things you want to scale that you can't scale if grants are the only tool at your disposal. That's why program-related investments were invented in the first place. So, we will not be making identical investments — MRIs have a different role from grants, and grants have a different role from PRIs — but we will be pursuing the kinds of affordable housing outcomes, and working with players that are reputable, and innovative and that are not just serving particular groups of people in the developments they already operate.
PND: In a strange way, philanthropic support for affordable housing in the U.S. is a victim of its own success, in that it has helped stabilize a lot of urban communities, making them more attractive for private-sector investment and opening the door to gentrification. Do you worry that your new commitment to MRIs in the area of affordable housing will contribute to or accelerate that phenomenon?
XSB: First, let me say, we are supporting efforts right now to reduce displacement, to deal with so-called hot housing markets that have become expensive. And that includes neighborhoods that, as you note, have been revitalized over the years, neighborhoods that, at one point not too many decades ago, were deeply distressed. We work very hard at that, with a host of tools, including grants, PRIs, networking experts, our convening power, and so on. That is enormously important to us.
But, you know, markets come in various shapes and sizes, and if you look across the country, we still have affordable housing challenges in markets that are deeply distressed and need investment badly. We have affordable housing challenges in other markets that have become hot and expensive, where displacement is more of an issue, and where investments are needed for the preservation and expansion of affordable housing. And we have affordable housing challenges in communities that have not traditionally been locations for workforce housing or housing for people of various income levels. So those are three kinds of markets, and in each of them we need to think differently about how we invest and use the tools at our disposal.
What your readers should know is that we will continue to work hard to reduce displacement and to support efforts to preserve housing affordability. We will not be passive investors in things like real estate speculation, things that accelerate the pricing out of low-income families and workers. At the same time, it's important to keep in mind that real estate markets are large, and foundations, typically, are pretty small players relative to the size of those markets. Affordable housing investment and community revitalization are good things. Yes, as markets are revitalized, you have to be attentive to affordability, but good housing in good neighborhoods is a good thing. And that's how we engage leaders in the private, public, and nonprofit sectors — as opposed to saying, "You know what, let's not invest in these distressed neighborhoods because there's a danger that one day they'll become expensive and people will be displaced."
Yes, as markets are revitalized, you have to be attentive to affordability, but good housing in good neighborhoods is a good thing....
PND: What kinds of things will Ford be doing to promote and help build the impact investing ecosystem in the U.S.?
XSB: For starters, we want to continue to build on our recent efforts, including our support for research, convening different voices in the field, and articulating the importance of public policy as a catalyst for the growth of the field. We also want to invest in market infrastructure in ways that help investment capital meet investment opportunity. That doesn't happen automatically. Often, it takes intermediaries and new technologies that improve information flow. It takes things like improved tools for measurement and standards-setting. We've supported all those things, and it's gratifying to see other foundations and leading for-profit companies do so as well. We look forward to continuing to work in partnership with them. As you said, the impact investing ecosystem, the impact investing marketplace as a whole, is the right way to think about it. MRIs are one tool available to one kind of actor in that marketplace, namely foundations. So we'll be encouraging and learning along with other foundations that make MRIs or want to explore making MRIs. But the marketplace as a whole is much, much bigger than just foundations, and that's important for people to understand.
PND: A final question. Given the difficulties inherent in measuring anything with a social component, is there an opportunity here for you and your colleagues to commit some of Ford's financial and intellectual resources to the problem of impact measurement in our sector?
XSB: Here again, we've been doing it, and we plan to do more of it. On one level, as grantmakers and PRI-makers over the years, impact measurement has been very important to us. It's really the only way you can gauge the impact of what you support, and help others do the same. I'll give you an example. The Ford Foundation helped grow the microfinance field starting in the mid-1970s. We were among the seed investors in Mohammed Yunus's original idea, which today is known as micro-credit or micro-lending, and we helped his Grameen Bank — and other institutions, including some here in the U.S. — get off the ground and grow. And over time, we've worked with others in the industry to develop what are known as social performance standards. That took grant money, by the way, not just PRIs. That was straight social subsidy. But we did it to benefit the field as a whole.
Of course, Ford didn't sit in a room and dream up what these standards should be. We convened stakeholders, who drew on the very best analysis, considered multiple points of view, and then developed the standards that microfinance institutions had to adopt and conform to, standards that required them to do things like target the poor, target the consumer groups they were founded to serve, and so on.
We've also supported efforts to improve the measurement of impact in the affordable housing space, whether it's rehousing the homeless, serving people with special needs, or creating work force housing. I could go on. So, yes, we're going to build on those efforts. With MRIs, we're learning already. This is a global consultation, by the way, and we've reached out broadly across the world, not just to partners and leaders in the space here in the U.S. But, ultimately, like every other institution involved in this effort, we will need to settle on a framework that is right for us. So you can expect that we'll be adapting the best of what we learn to our needs and efforts, and that we'll be sharing those learnings transparently with others. That's really important to us, to help the field learn from both our successes and our failures.
Mitch Nauffts spoke with de Souza Briggs in April. The transcript of their conversation has been edited for length and clarity. For information on the Newsmakers series, contact Mitch at [email protected].