Ecosystem

Community Foundations Go All-In on Place-Based Investing

Sarah Trent | January 29, 2018

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Two years ago, Baltimore Community Foundation was working to build race equity into its selection process for investment managers when a question was raised. “We asked, ‘Why are we not considering local impact investing that could specifically address race equity and lack of access to capital for communities that have been shut out of wealth opportunities for years?’” recalls Patti Chandler, the foundation’s VP of finance and administration. In a city where the 63% African American population struggles with low income, unemployment, and a lack of wealth, race equity is a primary and urgent focus of the foundation.

The question sent them in a new direction. “Maybe there was a way to address this within our portfolio itself, and not just by choosing investment managers with an equity lens,” says Chandler.

After much research and deliberation, the foundation’s board last June gave the greenlight to shifting 4% of its $125 million in endowment into impact investing. It’s now preparing to make its first three loans.

Baltimore Community Foundation is part of a growing wave of community foundations that are looking to shift part of their endowments away from Wall Street and into local businesses, affordable housing, and projects aligned with their place-based missions.

Community Foundations
Baltimore Community Foundation’s Patti Chandler

There are 750 community foundations across the U.S., each dedicated to improving the lives of people in their own defined geographic area. These place-based institutions play a vital role in their communities, making grants and supporting local projects in ways that few other financial institutions can. With their community-based missions, deep local relationships, and assets ranging from $3 million to $8 billion, community foundations are uniquely poised as catalysts for transformative local solutions.

However, as with the broader philanthropic world, community foundation assets are not always aligned with their missions. In fact, sometimes their dollars are actively working against them.

Rethinking Investments

Community foundations manage the philanthropic gifts of individuals, families, and businesses to meet a place-based mission. Typically, these gifts form a pool of permanent assets—an endowment—which is invested with an eye toward preserving and growing the pool over time. A small portion of these assets, on average about 10% annually for community foundations, is used for programs and grant-making.

Meanwhile, the other 90% of community foundation assets – an estimated $76 billion – sits mostly on Wall Street.

Community foundation leaders, like their peers at other types of foundations, have begun to realize that their endowments are invested in ways that may actually undermine their missions—for example, by funding the same payday loan companies that prevent their constituents from rising out of poverty, or extractive industries that impact their health.

The returns on those investments increase the capacity of a foundation to make grants now and in perpetuity, but at what cost? What might be possible if a foundation managed all—or even some—of its endowment to align with its philanthropic mission and magnify its impact?

As these questions have reverberated through the philanthropic world, community foundations from Arkansas to Minnesota have begun retooling their resources for more local impact.

Moving Their Money

A 2015 study by the Center for Effective Philanthropy found that around four in ten foundations were moving into program related or mission-aligned investing. The survey of 64 private foundations found that 39% were using some of their program and grant budgets for impact investing, with 36% using a portion of their endowments—although the overall amounts were still small.

“This is a movement,” says Lisa Pinckney of Footprint Foundation

In 2017, the Ford Foundation—not a community foundation but a leader in philanthropy—committed $1 billion of its $12 billion endowment to mission-aligned investing, declaring: “This move sends a signal to other foundation and institutional investors that perhaps the time has come to consider the potential of impact investing.”

A growing number of place-based foundations are heeding the call. “This is a movement,” says Lisa Pinckney, executive director of Footprint Foundation, a small, locally-focused family foundation in Chattanooga, TN, that has begun to align its assets with its mission. “More and more people are thinking very differently about how they use their money and how to use it for good. We want to make sure we’re using every dollar we have to make an impact in our community.”

A Supportive Ecosystem

Community foundations have had help along the way. The Democracy Collaborative’s 2014 report, “A New Anchor Mission for a New Century,” shared case studies, tools, and strategies that 30 leading community foundations are deploying as they call on all their assets to build community wealth. Organizations including Mission Investors Exchange and the Business Alliance for Local Living Economies (BALLE) have launched initiatives to convene and support foundations exploring this work.

When the Baltimore Community Foundation set out to understand what was possible, it ran focus groups with donors and investment advisors and spoke with 25 community foundations around the country that were already doing similar work. Staff attended the annual conference and a series of local convenings hosted by Mission Investors Exchange, which brought together local grant-makers to learn, work, and even invest together.

Related: PRIs: An Underused Funding Tool for Family Foundations and Social Enterprises

Community Foundations Embrace Impact Investing

Baltimore Community Foundation’s Chandler joined BALLE’s Local Economy Foundation Circle, a cohort of community, private, and health foundations that offers a network of like-minded peers on the leading edge of place-based impact investing (members of the 2016 cohort are pictured above). In addition to a curriculum that explores how to work through common barriers to foundation impact investing, Circle members share the tools, resources, and connections they’ve found or developed along the way, enabling each to accelerate their own work.

Foundations participating in the BALLE circle to date have shifted about 10% of their collective assets toward impact investing.

A Growing Movement

Dozens of other foundations have committed to mission-aligned impact investing and more are just beginning to explore what’s possible. Some use their program and grant budgets to make program-related investments, which may or may not expect a market rate return. Many are using 2% to 5% of their endowments. Others have gone all in, committing 100% of assets toward impact investing.

Some, including Baltimore Community Foundation, invite donors who control non-endowed donor advised funds to co-invest, which can both grow the local impact fund and create loan loss reserves.

Patrick Shumaker and Lori McMillan of Pine Bluff, AR-based SmartCool received a loan from Communities Unlimited

Each foundation invests in different ways, depending on its culture, capacity, strategy and local deal-flow. Some hire investment firms that specialize in impact investing, while others partner with locally-focused community development financial institutions (CDFIs) and community banks to invest in or guarantee loans made by those organizations. Some make direct investments via their own investment committees.

For example, Southwest Initiative Foundation, a community foundation in Hutchinson, MN, just made its thousandth direct loan from a program fund that makes up about 15% of the foundation’s assets. The foundation works closely with other local groups, which feed the foundation referrals. “The best table in the world has a community banker, an economic developer, and us, arm in arm helping an entrepreneur,” says foundation VP Scott Marquardt.

Southwest Initiative investments in rural Minnesota have helped Latina restauranteurs expand their businesses, enabled a family in Kerkhoven, MN, to buy a rural hardware store and convert half of it to a much-needed grocery store, and participated with a community bank in an ownership-transition loan to a woman-led company that makes fire trucks.

All these investments boost community vitality, create jobs, and address other challenges in rural Minnesota, says Marquardt. The default rate is extremely low, he adds, which brings financial returns in addition to social impact.

A thousand miles south in Little Rock, the Arkansas Community Foundation made the first impact investment from their endowment in 2016, putting $1 million into a loan fund for rural and low-income entrepreneurs administered by local CDFI Communities Unlimited. The spark for this first go at impact investing came largely because of a donor’s interest, said Chief Program Officer Sarah Kinser. “It is so helpful for us to have donors who are leading us forward,” she said.

Footprint Foundation in Chattanooga is working to make good on its recent commitment to shift 100% of its $20 million endowment to an impact investing firm. Over time, that will include direct local investments to impact the Chattanooga region, says Pinckney, the foundation’s executive director. In the meantime, ensuring that the foundation’s assets aren’t working against its values is a first step.

“We want to be active in knowing how our money is being used, rather than just parking it in markets like we’ve been accustomed to doing,” says Pinckney. “Getting on a track where we can do more with our assets to impact our community above and beyond our grant-making is exciting to everybody here.”

Sarah Trent is a freelance writer based in the San Francisco Bay Area.

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