Dialogue with Ford Foundation: The MRI Perspective of Philanthropic Foundation's Impact Investing

The Ford Foundation is a global, independent nonprofit grant-making organization committed to reducing inequality around the world. Established in 1936 by Edsel Ford, son of Henry, the founder of the Ford Motor Company, with an initial gift of $25,000, the foundation is headquartered in New York with 10 offices in Latin America, Africa, the Middle East, and Asia, including China. We envision a world in which all people share equitably in the knowledge, wealth, and resources of society and where everyone has the power to shape their own lives. Over the past 80 years we have invested in innovative ideas, visionary individuals, and frontline institutions advancing human dignity around the world. As well, we invest part of our endowment in mission-related investments that both bring a financial return and have positive social impacts.

Interviewee:

Margot Brandenburg

Senior program officer of the Ford Foundation MRI team

What makes you stay in the field of impact investing and what makes you keep going?

I think it makes sense to start by figuring out motivation, because it's at the heart of everything people do. I originally started on this journey motivated by a passion for gender equality. At that time, I was working for a microfinance project outside of the US. By chance, when I was in Mauritania doing a training on shariah-compliant related financial services for local women, Hurricane Katrina happened in the US. I remembered so clearly working with a group of women who had heard on the radio about Hurricane Katrina and how much devastation that had caused. I was asked why I was in Mauritania when my own country was suffering so greatly. It was not asked with any antagonism, but it provoked a bit of an existential crisis in me.

Because of that experience, I went to work at a Community Development Finance Institution (CDFI) in the US called Shore Bank, which at the time was the oldest and largest CDFI. I worked on small business and mission-related banking, and it was what you might describe as hyper-local lending, which was a great counterpoint to this global work I had been doing. Neither was fully satisfying, however. I later joined the Rockefeller Foundation, in part because Rockefeller provided services for a broad range of projects across the U.S. and the world. I also came to Rockefeller at a time when the foundation was preparing for its hundredth anniversary and reflecting on its history. In this process, we realized that charitable grantmaking was not nearly as significant as it had been 75 years earlier. These resources were a drop in the bucket compared to the challenges we cared about and wanted to influence, and we needed to focus not only on charitable giving and government resources leverage, but also on the enormous power of international capital markets.

Therefore, Rockefeller established a team which helped it to explore and drive impact investing and continued to lead the way for its later development. I was a founding member of the team. As more people and institutions participated in the process of impact investing’s development, the market became more and more dynamic, many started looking for better methods for deepening their impact. It was very exciting to be part of this process, and this is why I continue to work in the field of impact investing.

Besides expecting to leverage greater capital power, were there other reasons for the Rockefeller Foundation team to create the new concept of "impact investing"?

There were many other reasons that came together indicating the need and opportunity to create a field called impact investing. Firstly, we realized that people with lots of experiences from various industries share a common cause without their realizing that. For example, it was rare for people in micro-finance or community development finance industry to talk with each other, and let alone with someone in the solar power industry. Hence, there was already a strong desire to bring people with different industry experiences together for a common purpose. By creating a new field called impact investing, it brought together people from different industries to seek commercial solutions while addressing social and environmental problems. It also allowed people to exchange ideas and best practices on shared topics, including non-financial reporting, tax incentives and an enabling policy environment.

Secondly, the social enterprise field had also taken root in the US then. We saw a great deal of innovation and excitement at the enterprise level, which led to new business ideas that can only go far with supportive capital commensurate with their long-term potential.

Another reason was the emergence of value-driven consumptions, be it organic food or electric vehicles. Across the board, we were also seeing individuals aligning their values with their economic choices, such as young people considering employer value a key determinant in their career choices. Hence, the idea that one would do the same with his/her investments seemed right for future development.

Six years have passed since the book The Power of Impact Investing was published, have you gained any new observations during this time?

I would say that the field of impact investing has grown, diversified and matured in a very exciting way. This gives me a lot of hope. GIIN estimates that the impact investment market now has reached the scale of $715 billion, quadrupling that from six years ago.

In addition, I also think the quality of the impact generated by those investments has improved significantly. Meanwhile, investments seeking to address acute issues such as climate change and inequality have accelerated, which is both a cause for hope and a proof of urgency. There are more concerns now than six years ago regarding taking real actions to address issues.

Have you seen sufficient evidence now to prove impact investing as a viable path to provide positive, long-term returns both in finance and impact?

I would say, as the original group of investors has accumulated a lot of experiences, the field has become more diverse, and impact measurement and management has matured, we now know more about both financial and impact aspects than we did six years ago. Even with 12 years or so, it's still a short period of time - probably shorter than the full tenor of some private-equity funds. Many first-time fund managers also need time to accumulate and validate their performance. Six years may not be enough for a big jump, and we still have a long way to go.

Even so, we've seen some notable successes. For example, Leapfrog, a private-equity firm that invests in micro-insurance companies to serve the bottom-of-pyramid (BOP) in emerging markets, has successfully demonstrated positive financial and impact results at the same time. One key successful factor for Leapfrog’s new funds to attract mainstream LPs is a track record. The field of impact investing, while still fairly nascent, is maturing with more opportunities to invest in and more evidence emerging as well.

Why and how was Ford Foundation able to make a pioneering move three years ago, i.e. to commit a significant part of the endowment asset ($1bn) for mission-driven investment, at a time when most foundations were still investing their endowment capital strictly with financial-return goals only?

Ford Foundation made a very pioneering move, and it's one of the reasons that I chose to join Ford Foundation. I was not there at the time, so I can't give you a first-hand perspective. What I do know from talking with colleagues and reading the memos is that when making decisions we asked ourselves several questions: Could the investment offer a financial return that is commensurate with what we looked for throughout our endowment while also generating a meaningful social impact?   Is that universe of investment opportunities efficient enough that we would be able to deploy the money that we had allocated to it?

The assessment at the time was that there were enough opportunities, and I think that's based on the quality and quantity of opportunities that our team had found. We're extremely rigorous in looking for investments, in both financial and impact performance. Our hurdle rate requirement for MRI projects is the same as that for non-MRI projects. We rely on these investments to generate income to support our grant-making activities. Because we know that grant-making activities are critical, we would never compromise that.

In addition, we also look for the best impact performance. We have four core areas when making mission-related investments: quality job, affordable housing, financial inclusion and health care access in developing countries, and diverse managers. We've seen some fantastic opportunities across all four fields.

What kind of investment team has been established to carry out MRI impact investing strategies?

Our group is led by Roy Swan who spent decades working in the private sector, including managing community development investment programs at Morgan Stanley. He brings a depth and breadth of understanding for both US-based community development and mainstream finance. Other colleagues on the team are professionals who spent years managing our program-related investment portfolio.

Ford Foundation was a pioneer in the use of program-related investments (PRI). Therefore, investment has been adopted to drive social impact to achieve the mission of the foundation for more than 50 years. A colleague named Christine Looney had participated in the PRI project for over a decade. Currently, as our PRI projects move toward market-level investment opportunities, we have also recruited two full-time investment officers and several supporting staff.

How does Ford Foundation choose among various asset classes for the MRI portfolio? Would Ford also consider investing in "first time funds"?

We primarily invest in funds, and in a few cases, fund of funds. There is not much direct investment at present. Asset classes that we invest in mainly include PE (private equity) and real estate – partially as a result of Ford Foundation’s history on PRI (program-related investment) with affordable housing. Over time, we do anticipate diversifying into public equities to provide more liquidity to the portfolio, investing across a range of asset classes.

It is interesting that you brought up the topic of investing in first time fund managers. Actually, that is one of the reasons that we set up different capital pools. For our MRI portfolio, because the capital that comes from endowment is quite risk averse, expectations on financial return need to be calibrated for risks. Therefore, we mainly seek to invest in seasoned fund managers. But on our PRI side, as it is a pool of capital that is intentionally catalytic, we can take more risk, say invest in first time fund managers. Frankly, the goal is to include more first fund managers either in our MRI portfolio or in other market portfolios. But at least we have different types of capital that allow us to invest in a broad range of funds.

The disruption from the global pandemic has led some foundations to rethink the needs for liquidity in their investment portfolios. Was there similar liquidity pressure for Ford Foundation?

To my knowledge, we have not faced liquidity constraints as a result of making investment. Our $1 billion MRI commitment represents only 8 percent of the endowment, leaving 92 percent available for meeting the foundation's daily liquidity requirements. That is to say, it was not necessary for the MRI portfolio to generate liquidity for grant making. But as the capital is committed, there are definitely liquidity concerns that come into play. Inclusion of public equity investment to enhance liquidity for instance, is part of a motivation to diversify the portfolio in the long run.

Moreover, the nonprofit sector in the United States and around the world is truly facing an unprecedented crisis in the wake of COVID-19. Along with several leading U.S. foundations, we have made a pioneering move to issue bonds. We issued $1 billion 30-year or 50-year bonds to cover, in our case, nearly a doubling of our grant making over the next two years. We believe that it is a creative and efficient way to dramatically expand our grant making scale at a time when the sector really needs it. In addition, it is well noted that this bond provides a market-level yield and is oversold at issuance mainly to large ESG investors. Rating agencies include both S&P and Sustainalytics. This is also a great example of an ESG fixed income product with increasing demands.

Ford Foundation currently targets an overall 8% return on MRI investments. How has your portfolio financial performance been over the last three years and what are the expectations for the future?

Three years are short to make any definitive pronouncement of financial performance. From what we know, our MRI portfolio has been outperforming the market. In other words, we are not sacrificing financial return in pursuit of the impact that we seek. Admittedly, the portfolio has liquid asset classes whose value is marked to market. That isn't definitive. But the early indications are very strong.

Take the real estate industry as an example, there is a lot of concern about default in traditional real estate investments in the United States right now due to terrible unemployment rate and numerous failed businesses. For Ford Foundation, we invest in great real estate managers who develop Section 8 Housing projects that receive government subsidies. Therefore, our investment is much more resilient in a period of significant volatilities. In addition, those managers also continue to invest in residents' health and safety, going the extra mile to connect their residences to services and making the underlying conditions of the residents much better than what one would see in a comparable real estate project. This shows how managing our investments with social considerations helps us both achieve our mission and protect our investments from a financial standpoint.

How does Ford Foundation measure the impact of MRI portfolio?

Ford Foundation is fortunate to have its own team to manage its investments. We have a full-time portfolio manager who tracks both the financial and the impact performance of our portfolio, which allows us to create and track investment-specific impact metrics. Wherever possible we love to see our investees adopt global standards, whether it’s IRIS+ or B-rating system, because that contributes to the field apart from allowing us to track investments on an individual basis. We also have a specific impact thesis alongside or as part of our overall investment thesis, with which we also develop and apply our own valuation models to track and measure relevant indicators.

On the field building side, we realize that not all investors can establish their own impact measurement and management team. Therefore, some off-the-shelf tools are going to be critical for those investors to investigate investment opportunities and to manage the impact of their portfolios. Because of this, we've supported a set of industry initiatives to create tools for the growing impact investing market, which not only meets our own needs as an investor but also expands beyond foundations.

How do you see the current progress of foundation committing to impact investing in the form of MRI?

Our commitment at that time was the biggest in dollar amount, but we were not the first. There are other pioneer foundations in the United States, such as the Heron Foundation, which has deployed their investments fully in the service of their mission over time. McKnight Foundation in Minnesota, as another example of adopting MRI, is also a leader in impact investment. We were, in many ways, standing on the shoulders of pioneers who had come before us. We hoped to lead by examples and to begin to shift the paradigm of how foundations utilize the totality of their assets to serve their missions.

From an external perspective, the Internal Revenue Services (IRS) had provided clearer guidance on how foundation endowments invest, providing foundations with greater comfort and flexibility in their MRI and PRI investments. Overall, I think the current environment for foundations to make impact investment is much more hospitable, but there are still a lot of headwinds as MRI is not yet the norm and there are many more PRIs than MRI. We still have a long way to go.

At its core, this orthodoxy about the way how foundation assets are structured leads to a separation of goals. That is to say, the single job of endowments as a pool of money is to maximize financial return, and then to turn the profits over to a team of grant makers whose job is to maximize social good. Therefore, at the core of the change is the need to break free from deeply ingrained notions about the way foundations organize their resources in the service of their missions. This is not just a legal issue. There are also norms and systems that need to be transformed. As foundations, we need to keep digging a little deeper into issues like personnel structure, incentive mechanisms, and impact management. And on the question of how to combine best-in-class social change work with best-in-class financial and investment expertise, the answer is not obvious, and in many cases messy. In reality, there's a range of reasons why this transformation is hard, but it is already underway. I'm optimistic that in 10 years, things will look very different.

What role do you think foundations shall play in impact investing field building?

Foundations can play a catalytic role both by setting an example and by creating a healthy ecosystem. We can do that in different ways.

In our PRI projects, for example, we often invest alongside commercial investors in a sort of a multi-tranche facility where we de-risk a market rate investor with our PRI capital to attract larger and more commercial sources of capital. For example, we've invested alongside Citibank in a working capital facility for social enterprises in the global south. In this case, Ford Foundation joined DFIs in providing a guarantee facility for the earning of 1% return, which enabled Citibank to provide 100 million local currency working capital to social enterprises. Without Ford's participation, Citibank would not have been able to fund the project. Therefore, the leverage that we create is critical to our theory of change, helping us to attract more commercial investors.

Equally on the grant making side, we invest in research, networks and reporting standards – things that reduce the transaction cost and increase the integrity and quality of investments. I think that ecosystem field building work is really important and is something that foundations are uniquely suited to contribute to.

Do you think impact investment is a universal investment approach across different social governing structures and economic conditions?

The basic premise that money should be invested in accordance with our values is a consensus that has global relevance, while how it looks and is organized varies significantly.

For example, cooperative structures have achieved scale in Spain, Italy and parts of west Africa. It is one example of an enterprise creating shared prosperity for workers, growers and other co-participants. Though there's a lot of interest in co-ops in the US, we haven't seen any of them really scale up yet.

The overall principle of impact investments will look very different depending on the operating environment. But I think that's exciting because the proliferation of activities and the differences in how this is unfolding across countries create an opportunity for all of us to learn from one another, and to be able to draw upon a much more dynamic and diverse ecosystem that ultimately will make us all stronger. Thus, I wouldn't wish for uniformity. It is more exciting to see things unfolding in different ways.

How do you see the opportunities and challenges in the Chinese impact investment market?

In fact, I also want to know about Chinese opportunities and challenges, which is why I participated in this interview. I look forward to learning about Chinese impact investing market through our communications and your upcoming report.

On challenges, I think language is one. The understanding of certain concepts, such as social enterprise, differs from the definition in Western markets, which leads to confusion and misunderstanding due to bad translation. Some more clarity in definitions would be helpful.

In addition, I know there's a very robust universe of high net worth and ultra-high net worth individuals throughout China. But I don't know whether this community in China is able and willing to access impact investment opportunities, so there can be industry associations and infrastructures in place to allow marketplace to function, letting transparency and efficiency serve everyone's needs. There is still a long way to go, but the reports you're working on can really help advance that.

What is the one question that you mostly want to get answers for regarding impact investing in the China market?

I have so many questions.   But if I have to pick one specific question that is timely, it's related to the role of China’s development finance overseas, specifically the ways in which social impact and beneficiary voices are reflected on those investment decisions and structures. I would like to ask this question because development finance institutions around the world have often been pioneers on impact investing, and China’s overseas finance is such a significant part of overseas development finance, for example in South Africa and Southeast Asia. Understanding where the impacts are and where the opportunities for progress are is important to our colleagues in Beijing as we're actively trying to learn about that.