Today, I want to introduce readers to Steve Viederman, the former president of the Jessie Smith Noyes Foundation, where he led the integration of the foundation’s grantmaking and asset management activities. His efforts in this process were profiled in the Harvard Business Review in the 1994 article (long before impact investing become a common topic) Social Investing at the Jessie Smith Noyes Foundation.

Today, at Steve’s request, I’d like to share a draft of a paper he’s written with Nick Robins, head of the Climate Change Centre at HSBC and Cary Krosinsky, vice president at Trucost. The paper updates Nick and Cary’s book Sustainable Investing: The Art of Long Term Performance and examines the lessons learned from the financial crises.

The paper makes the case that companies often generate social or environmental costs to society that will likely have to be covered by the company in the future. In essence, they are incurring “off balance sheet” liabilities that may come back onto their financial statements in the future. We can see this idea in action as companies who have long produced carbon in the course of their activities are suddenly seeing a price being set on carbon generation with the cost being shifted from society’s balance sheet back to the company producing the carbon. Sustainable investing is the practice of explicitly accounting for these social and environmental costs in the process of making for-profit investment decisions.

I bring all of this to your attention because it is an example of the way that generating social returns does not imply a reduction of financial returns. Sustainable investors are attempting to enhance financial returns by paying attention to social costs and benefits being generated. Impact investing often is cast as a trade off where investors willingly take a lower financial return in exchange for generating social benefit. That trade off is not set in stone.

Steve has asked that I share this paper (still in draft form) with my readers to solicit your input. In his email he pointed out that while they’ve received lots of feedback, it has been difficult to engage the foundation world in dialog on this topic (which is disturbing, because foundations should be the ones leading this discussion).

So give the paper a read and shoot Steve, Nick and Cary an email with your thoughts.Steve’s work in the early 90’s may have been a decade or so ahead of its time, but a decade from now, working in philanthropy is going to require an understanding of the full spectrum of blended value. You might as well start climbing the learning curve now.

Click here to download the paper.

The Chronicle of Philanthropy has authorized this free link to the first Innovations column so that Tactical Philanthropy readers can check it out.

This is exactly the concept that I explored last October in my post titled “Securitizing Philanthropy” in which I examined the implications of the new investment book When Markets Collide, George Overholser’s presentation at the Social Capital Markets conference and Schwab Charitable’s new program to let their donor advised fund engage in a microfinance loan guarantee program.

Structured finance in philanthropy? As the for-profit financial markets are experiencing cardiac arrest, should philanthropy be looking at ways to leverage sophisticated financial tools? I think it should and I’m glad to see that the Lemelson Foundation agrees.

I’m looking forward to reading the Chronicle of Philanthropy’s new Innovations column on a regular basis. In September of 2007, Cheryl Dahle, a journalist who has written about philanthropy recorded a podcast with me. As a follow up she posted a rant laying out why foundations and philanthropy in generally were rarely worthy of press coverage. I responded with a rebuttal in which I made the case for the idea that the media didn’t understand philanthropy as a story and laid out a whole series of stories that the media should be covering. The crux of my argument was that there should be more columns like Innovations. I’m so glad to see that the Chronicle of Philanthropy has launched this column.

If you have ideas for future column, you send them to editor@philanthropy.com.

Mission related investing (MRI) is the term used to describe investments made by philanthropic entities in the pursuit of both financial and social returns. Unlike traditional socially responsible investing that relies on “negative screening”—the avoidance of public companies that do not pass certain social criteria—MRI implies proactively seeking investment opportunities that produce a blend of financial returns and social impact that are in line with the philanthropy’s mission. Still an emergent issue, MRI is characterized by limited deal flow, especially in deals that have minimums low enough to allow widespread participation. But MRI brings philanthropic advising directly into the domain of the wealth manager.

Today, it appears that the Calvert Giving Fund has taken a significant step towards increased deal flow and lower minimums that should make it much easier for wealth individuals and smaller foundations to participate in a strategy that has largely been the domain of institutional foundations.

The Calvert Giving Fund is a national donor advised fund. Like Schwab Charitable, Fidelity Charitable Gift Fund and the Vanguard Charitable Endowment, Calvert provides low cost donor advised fund administration without providing advice on where to give. While structured as a nonprofit, the group is affiliated with Calvert Investments, a leader in socially responsible investing.

For some time the Calvert Giving Fund has offered social responsible investment options to their donor advised funds, as well as “community investment notes” that pay a below market rate of return and finance community development projects. Now they’ve added a Global Impact Ventures Platform. The platform currently offers access to five mission related investment options:

• Acumen Fund: 10 year Senior Note (debt), 3% interest either paid or compounded into the principal
• LeapFrog Investments: Equity Investment into Limited Partnership with 10 year life
• MicroVest: 7 year equity limited partnership
• Public Radio Fund: Promissory Note, 3 years at 0% or 5 years at 4%
• Root Capital: Promissory Note, 3 years at 3% or 3 years at 0%, senior tranche

The investments all offer social impact in addition to a financial return. You can read summaries of the social impact potential here.

The really big news is that there is a minimum of only $25,000 to invest in each fund. Community foundations and national donor advised funds have a huge opportunity in the MRI space, because they can aggregate their donor/client’s investments into an investment in a fund like those above and count as a single investor. In other words, while a certain investment might have a $250,000 minimum, a community foundation or national donor advised fund can bring 10 of their donor advised funds in at $25,000 each and reach the minimum.

If an investment advisor or individual wants to invest in traditional profit driven investments, they can open an account at Schwab or Fidelity and have access to thousands of mutual funds, every publicly traded stock and bonds. If you buy stock, you don’t have to call the company, you buy it directly on the broker’s platform. Same thing if you buy a mutual fund. Now the Calvert Giving Fund has created a platform for mission related investing that integrates with existing financial markets.

Very cool. I hope that they are successful in marketing the program to advisors and individual philanthropists. I also hope that institutional foundations that care about mission related investing make some investment on the Calvert platform to help them grow.

I really appreciate the way you use the language of investment to talk about philanthropy, and I think the long-term outlook is very important, but I have a question about messaging.

Whenever I use the word “invest” when talking about Wokai, the China microfinance non-profit with which I work, the person’s next question is always, “So, what’s the return?” I’ve answered this question several ways:

1. Highlighting the long-term impact on China’s society

2. Explaining the way in which contributions made to fund loans for entrepreneurs in rural China can be recycled (once the original borrower repays the loan)

These answers rarely seem to satisfy the person I’m speaking with. I think it’s because many of these people either work in finance or are active investors, and the word “invest” activates a completely different part of the brain than a word like “donate” or “contribute.”

I’m wondering if you have experienced a similar cycle of questions in your own work, and how you have approached them. One of my favorite posts of yours was the one about the distinction between spending and investing, but I’m starting to think that this language might be more prevalent among people who talk about philanthropy every day than among the wider population of potential contributors.

Leslie brings up a really good question. Is it appropriate to use the word “invest” when there is no financial return to the investor/donor? Jed Emerson is the person who developed the concept of “blended value”, the idea that all organizations produce a blend of social and financial value. At the World Economic Forum conference that I attended in November, we were talking about whether something was “social investing” or “philanthropy”. Jed just about screamed “It is all just investing!” (Jed has a way with words).

Not all philanthropic giving is “investing”. George Overholser has laid out the difference between philanthropy that seeks to “buy” social good and that which attempts to “build” nonprofit organizations. Only “build” philanthropy is a type of investing.

In my post where I laid out why I was “investing” in FORGE, I didn’t use that word simply because it is the “cool” way to talk about philanthropy these days. I used it because my investment in FORGE was meant specifically to help them build a better organization. I have zero expectations that my donation will be used to serve refugees. I expect my money to be used by FORGE to build their organization so that they can better pursue their mission in the future.

Back to Leslie’s question. The word “investing” is correctly used in philanthropy if a donation is designed to build an organization. It is also appropriate if it is structured as a loan or donation to an individual that is expected create future benefits. Wokai’s donor/investors are making an investment. But the “return” is accruing to the people receiving the loans.

Let’s say I could make a financial investment in which all returns were paid to my child or to a friend of mine and the principal would be repaid to me. Clearly, that investment is producing value. Clearly it is an “investment” even though the returns do not accrue to me.

But these sorts of investments are not well understood. I do think that the shifting language can be confusing to donors. The best way to illustrate the concept to donors is to show them what the return is and point out that if that return accrued to them, they would clearly be making an investment. The fact that the return accrues to someone else does not change the nature of the transaction as an investment.

The Next Wave: Part Three
By Sean Stannard-Stockton
Originally Appeared: Wealth Manager Magazine, November 2008

This is Part 3 of 3. Please read part 1 and part 2.

The world of traditional finance is mature and well mapped. Clients do not expect their lawyer to file their taxes nor their CPA to provide legal advice. The finance discipline has been sliced and diced into numerous areas of expertise and for the most part, clients understand the role of each advisor and can identify their own needs and match them to the appropriate advisor. To the extent that clients need help identifying domain experts, they are accustomed to their wealth advisor helping them navigate the map of financial service providers. Within philanthropy and the world of social investing, this map has yet to be drawn.

To whom will your clients turn for advice on which philanthropic vehicle to create? Who will help a client family define its philanthropic mission statement? Who will analyze the financial characteristics of a MRI opportunity? Will the same person consider the social implications of such an investment? Philanthropy is still an immature industry. Philanthropy-minded clients need a concierge who understands the philanthropic landscape and can point them to the appropriate people and resources.

Just as a traditional client might ask their wealth manager for assistance in evaluating a mortgage or learning more about alternative investments, philanthropic clients’ needs are not limited to the management of their investment portfolio. The wealth manager who strives to become a philanthropic concierge must build a broad network of contacts within philanthropy and know where to turn when their client asks for help.

Philanthropic investing has another characteristic that makes the role of philanthropic concierge even more important than its counterpart in traditional wealth management. In philanthropy, the social return that giving creates accrues to society at large and not just to the individual client. This means that true philanthropic concierges will benefit their clients by connecting them with similar clients and be able to identify co-funding or collaborative opportunities across their client base and ultimately throughout the philanthropic ecosystem.

The Second Great Wave of Philanthropy is going to transform both wealth management and traditional philanthropy. We must be aware that as much as financial professionals can add tremendous value to philanthropic clients, philanthropy requires much more than business knowledge. Wealth managers who recognize the value they can provide to philanthropic clients will discover a whole new frontier to explore. Like any frontier, the landscape is difficult, but the adventure is worth it.

This is Part 3 of 3. Please read part 1 and part 2.

This is Part 2 of 3. Please read part 1 and part 3.

The Next Wave: Part Two
By Sean Stannard-Stockton
Originally Appeared: Wealth Manager Magazine, November 2008

Mission  related investing (MRI) is the term used to describe investments made by philanthropic entities in the pursuit of both financial and social returns. Unlike traditional socially responsible investing that relies on “negative screening”—the avoidance of public companies that do not pass certain social criteria—MRI implies proactively seeking investment opportunities that produce a blend of financial returns and social impact that are in line with the philanthropy’s mission. Still an emergent issue, MRI is characterized by limited deal flow, especially in deals that have minimums low enough to allow widespread participation. But MRI brings philanthropic advising directly into the domain of the wealth manager.

In the late 1990s, the board of the F.B. Heron Foundation posed the question, “Should a private foundation be more than a private investment company that uses some of its excess cash flow for charitable purposes?” Traditionally, foundations have erected a firewall between the investment side of the house and the program side. F.B. Heron was asking, “What about the 95% of our assets that are not given away each year?” The answer they found was mission-related investing, toward which they now dedicate 24% of their endowment.

MRI opportunities have been available in the debt arena for some time. Community reinvestment bonds are debt backed by loans made to build affordable housing or other community development projects. Banks have been required to make these sorts of loans since the Community Reinvestment Act of 1977. However, philanthropists are now exploring the full range of MRI, including equity investments. Heron makes grants to nonprofits seeking to revitalize inner city and rural communities. But according to the foundation, they also “invest in private equity funds that provide needed equity for commercial real estate projects in these communities (often in cooperation with community-based groups) and financing for businesses seeking to expand in or relocate to these communities.”

The interest in MRI is spurring product creation that over time should make MRI investing more accessible to private investors. San Francisco’s Good Capital is a venture capital fund that invests in nonprofits and for-profit entities with a social mission. Their goal is to provide positive but below market-rate financial returns and strong social impact. The Bay Area Equity Fund, managed by JPMorgan, is a venture capital fund that strives for full market-rate returns while investing in companies that generate high quality jobs in low and middle-income neighborhoods of the San Francisco Bay Area.

One of the problems of MRI’s equity side is the fact that a donor/investor cannot take a true equity stake in a nonprofit. Since nonprofit accounting has no entry equivalent to equity, all incoming money must be booked as revenue. But an effort is underway to change this. Nonprofit Finance Fund, which has long financed nonprofits via debt products, has recently launched NFF Capital Partners. This project, run by Capital One founding executive George Overholser, has developed the SEGUE accounting system, which “provides philanthropic investors with a clear and auditable record of the organization’s progress towards self-sustaining operations, along with a clear record of how much growth capital is consumed along the way.” SEGUE units are often referred to as “philanthropic equity.”

Just as today’s wealth manager creates portfolios of assets that fit the financial risk and return goals of their clients, philanthropic wealth managers will need to help their clients navigate the rapidly evolving MRI field. Matching financial and social risk/return expectations to each client will be a necessary role for wealth advisors hoping to provide clients with best-in-class service.

This is Part 2 of 3. Please read part 1 and part 3.

The session after mine was about Mission Related Investing. I thought the session was excellent and it was interesting to hear from the KL Felicitas foundation (a leader in MRI) talk about their experience. KL Felicitas is a relatively small foundation so they have a different sort of story to tell than the multi-billion dollar foundations who are starting to get into MRI. Click here to view the video.

You can find a listing of all SoCap08 videos, including the keynote address by Matthew Bishop (who coined the word Philanthrocapitalism) by clicking here.

Prior to the session I ran into an acquaintence who works for the The Institute for the Future. She was explaining to me that trends take 30-50 years to play out. So the Internet was first developed in the 1960′s, but it took 30 years for the internet to go mainstream and yet we’re still likely 10+ years from the Internet being fully “mature” in its growth cycle. I think the same is true in social investing. The first socially responsible investment fund was launched in the 1970′s, so we’re now 30 years into the trend. I have the sense (and the panel today was a nice affirmation) that we’re hitting the “knee in the curve” of growth in social investing. But that means that if you compared our industries to the growth path of the Internet, we’re probably sitting at around 1995.

The fun thing about the panel was that we didn’t have to explain why social investing was important. The crowd got that. So we got to surface some core disagreements between the panelists. Is there a trade off between social returns and financial returns? Is there enough deal flow for everyone who wants to invest with social impact to be able to find opportunities?

This is going to be a good conference. You can follow along with the blog team via the official SoCap blog.

You can find conference info here and the registration form here. Just enter the special discount code for Tactical Philanthropy readers: “TP30″. The discount is valid until September 8.

• Matthew Bishop | THE ECONOMIST
• Jed Emerson | BLENDED VALUE
• Doug Bauer | ROCKEFELLER PHILANTHROPY ADVISORS
• Carla Javits | REDF
• Jim Fruchterman | BENETECH

In addition, there will be representatives from:

• ROOT CAPITAL
• GOOD CAPITAL
• SKOLL FOUNDATION
• IDEO
• B-LAB
• CALVERT
• MILKEN INSTITUTE
• KIVA.ORG
• ACUMEN
• GRAMEEN FOUNDATION
• GOOGLE.ORG

Here’s the official overview:

Social capital. Doing well by doing good. Making money make change. Philanthrocapitalism. Whatever you call it, its the emerging approach of harnessing the power of capital to support a new breed of smart, innovative entrepreneurs committed to changing the world in big, meaningful ways.

The Social Capital Markets Conference 2008 (SoCap08) will bring together the entrepreneurs who want to change the world and the capital that wants to make it happen. SoCap08 is a new event designed to bring together all of the people and organizations with a similar deep passion to change the world through sustainable businesses. Investors and entrepreneurs will find themselves helping to build a new community, gaining encouragement as they realize that they are not alone, but are a part of something big, important – and rapidly growing. Participating organizations include Good Capital, The Economist, REDF, HIP Investors, Citibank, Stanford Social Innovation Review, Living Cities, The United Nations Development Programme and Google.org, among many others.

When: October 13-15, 2008
Where: Fort Mason, San Francisco, California
Who: Hundreds of leading social entrepreneurs and investors from around the world
What: Bringing together the people who are accelerating the flow of capital to good
For more information go to: www.socialcapitalmarkets.net or contact info@xigimedia.net.

I’ll be speaking as well as moderator of the New Wealth Management panel:

Social investing is a wave that’s growing. Wealth managers are finding their clients want to explore and get involved in all these new alternative investment opportunities that mix social mission and impact with financial return. How do you manage your fiduciary responsibility while responding to client demand? From the client perspective, how do you explain these new things you want to get involved in to your financial advisor? Learn from some wealth managers how they and their clients who are navigating this new territory in a session designed for both the investor and the financial professional.

It should be a really interesting conference. I’d love to see a contingent of Tactical Philanthropy readers in attendance!

1. When donors view giving as an investment category, they view it as a positive aspect of their financial picture rather than a negative cost. For example, if the cost of your grocery shopping goes up, it negatively impacts your budget. But if the amount you are saving goes up, this is a positive change to your financial picture.
2. Donors can begin thinking about giving as a percentage of their assets rather than a percentage of their income. Wealthy donors in particular have far more assets than income and so thinking about giving as a percentage of assets would dramatically increase giving. This is the argument put forth by investment manager and philanthropists Claude Rosenberg in Wealthy & Wise. The book demonstrates mathematically that donors can give far more to charity without jeopardizing their financial well being if they think about giving as a percentage of assets.
3. Donors can begin thinking about nonprofits as organizations they want to support rather than “sellers” of “goods” whose costs they do not want to support. When you buy something from Target, you don’t care about their operating costs, you just want the lowest price. But when you invest in Target you recognize that quality organizations take money to run and you are supportive of well spent operational costs.
4. The value that donors expect shifts from a short term perspective (such as “buying” the right to feel like you helped someone) to a long term perspective (such as “investing” in the continued success of a high impact nonprofit).
5. Nonprofits stop seeing donors are “customers” who they must separate from their cash (or even fight a war over) and start seeing them as investors; literally stakeholders of the organization.
6. Corporate donors also see a shift where “corporate social responsibility” moves from being a cost that they attempt to reduce to an investment in the community from which they derive their profits.
7. More mission related investment opportunities open up as people become comfortable with blended investments that offer financial and social returns.
8. The field of philanthropy becomes more focused on building a philanthropic market place as the importance of functioning financial markets becomes more clear.
9. Wealth managers begin serving the philanthropic needs of their clients as they begin to recognize that giving is not a cost for their client (that should be minimized) but is instead an asset allocation question that is directly intertwined with their clients’ broader wealth management needs.

Click To Play

Sean Stannard-Stockton: Hello, and welcome to the Tactical Philanthropy podcast. I’m Sean Stannard-Stockton, author of the Tactical Philanthropy blog, and principal and director of Tactical Philanthropy at Ensemble Capital. My guest today is Mark Kramer. Mark is the founder of FSG Social Impact Advisors. FSG is a nonprofit organization that seeks to advance the practice of philanthropy via consulting with foundations, corporations, and nonprofits to increase their effectiveness and their impact. They publish research on philanthropic value creation and evaluation and create tools and best practices within philanthropy. Mark, I really appreciate you joining us today.

Mark Kramer: Thank you, Sean. I’m delighted to be here.

Sean Stannard-Stockton: Mark, FSG recently published a report called “Compounding Impact”, about mission-related investing. Would you start off just by defining what MRI means and maybe talk a little bit about the difference between SRI, PRI, and MRI?

Mark Kramer: Sure, and as that alphabet soup suggests, terminology is actually a huge problem in this field. I would not say that there are consistent definitions for any of those terms out there. But in the broadest sense, what we’ve seen is foundations increasingly taking into account their mission and the social impact of their investments when they think about investing their endowment funds. And there really are a couple different ways to think about the social dimension of your investments. One is simply to screen your portfolio. In other words, to avoid stocks and companies that you think do bad things, like tobacco companies. Or to have a positive screen, where you put more of your assets in companies that are doing what you think of as good things, like, perhaps, alternative energy, green energy.

A second way to have impact with your investments is through your vote of the proxy that you have as a shareholder. And there’s some very interesting work that Rockefeller Philanthropy Advisors, and some other organizations, have done around the role that foundations can play by influencing corporate behavior through their proxy votes. The third area, and the area that…

…we concentrated most on, is what we called proactive mission investing, where you’re actually putting your money into an enterprise, which could either be for-profit or nonprofit, that is achieving social benefits and that couldn’t deliver those social benefits without your investment.

And in that area we see tremendous growth. We see that foundations, over the last – oh, I would say over the 30 years from 1969 to just around 2000 – the amount of money going into these proactive mission investments was growing at about three percent a year. In the last five years, it’s actually been growing at about six percent a year. And we think in just the last two years, the amount of new money going in has almost tripled. So there’s just tremendous momentum around foundations moving into this space.

Sean Stannard-Stockton: Could you give us an example of an MRI opportunity in the nonprofit space and one in the for-profit space?

Mark Kramer: Sure. I think that – let me start with one in the for-profit space, which is one of my favorite examples. It’s a for-profit company called Waste Concern, based in Dhaka in Bangladesh. And the problem is in the slums in Bangladesh the government doesn’t regularly collect garbage. And so it rots in the streets. It’s a tremendous health hazard. It actually creates greenhouse gases and carbon emissions. And two engineers got together and said, “Maybe we could hire some of the unemployed people in the slums to collect garbage. We could recycle what could be recycled, and we could create organic fertilizer from the rest and sell that.”

And they had a terrible time raising money to start up. And ultimately the Lion’s Club and the UN environmental program gave them the money to first set up their operation about six years ago, handling two or three tons of garbage a day. It’s proved immensely successful. They’re actually able to sell carbon credits in addition to the fertilizer. They’re now employing thousands of people. They’re handling 700 tons of garbage a day. It’s the waste from three million people. They’ve branched out to other cities in Bangladesh, and they’re beginning to franchise it in Vietnam and Sri Lanka. It’s reducing carbon emissions. It’s increasing crop yields with organic fertilizer. It’s employing people who haven’t been employed. And it’s making money. And it’s able to grow at the tremendous rate at which it’s growing because it’s able to tap into the for-profit capital markets.

And I think that it’s much harder to grow a nonprofit rapidly than it is to grow a for-profit, if you have an economic model that works. So to our minds, part of the beauty of mission investing in for-profit enterprises is the ability to tap into these capital markets. A nonprofit one is an example, perhaps, in affordable housing. Meyer Memorial Trust, a foundation out in Oregon, is – has one of its focus areas around affordable housing. And as they went out and talked with nonprofit developers who build affordable housing, they found that they could get commercial financing to actually build the housing once they owned the property and had the plans and had the zoning permits and so on. But there was a considerable amount of money that was needed to get to that point, to find property, to go through all of the various permit requirements, to engage with the community and get their permission. And there was no financing available for them to do that. And so Meyer put together a loan fund that enables them to borrow money at very low interest rates for this initial stage of development. And then once they have the approvals in place, and can get the bank financing, they can repay this money back to Meyer.

Sean Stannard-Stockton: And so Meyer both got their capital returned as well as some degree of interest?

Mark Kramer: Yes. Exactly.

Sean Stannard-Stockton: So it seems to me that many people view “doing good” versus “doing bad” as laying on the same spectrum as negative financial returns or positive financial returns. So the implication is that maximizing financial returns means not pursuing social good, and vice versa. Is this trade-off real, or do social returns and financial returns really lay on spectrums that are uncorrelated with each other?

Mark Kramer: Sean, that’s a great question. And that really does go to the core of the issue. And what I would say is the biggest barrier to promoting more social investment out there. And I would say that three years ago, when we first began to look into this, I would have agreed 100 percent with the idea that there’s a trade-off. But the fact is, there is not. And you look at the Heron Foundation in New York – FB Heron – which is a real leader in mission-related and program-related investing. Almost a third of their endowment is in mission-related investments. They track very carefully each investment against the comparable index for its asset class. And they have consistently equaled or beaten the market returns for similar assets with their mission-related investments.

Most recently they’ve put together a fund that’s a positive screen of public equities of companies that are doing good things in inner city around the country. And one of things they’ve found is that in the last couple years, this socially screened portfolio has outperformed the market because one of the screens they’ve looked at in terms of good company behavior screened out predatory lending. And the whole sub-prime mortgage crisis, they bypassed completely, not because they knew it was coming, but because their social screens eliminated those candidates. So they actually outperformed the market, merely because they were trying to achieve positive social impact.

Sean Stannard-Stockton: Okay. You know, at the recent Council on Foundations conference there were no less than three sessions with the words “mission-related investing” in the title. And there were a couple more which weren’t titled that way, but at their core were really about this issue. But I wonder if the interest in MRI far outstrips the actual deal flow in this area? In other words, there’s a lot more talk about MRI than there’s actual investment opportunities. And this seems especially true, to me, for foundations that are smaller, say under $50 million dollars in assets, where a single bite of a deal might be just too large for them to put that much of their endowment into. But your report does state that foundations with less than $200 million dollars are doing a lot of the MRI work. So for foundations who want to engage in MRI, are there sufficient investment opportunities for them to do it?

Mark Kramer: Well, there are kind of two parts to that question. You’re right. We’re seeing a lot of growth and a lot of innovation among smaller foundations. The larger foundations that have been doing mission-related investing for years are typically doing low interest loans to grantees, program-related investments. And they haven’t changed their formula, by and large, in a long time. And so a lot of the innovation we’re seeing is with the smaller foundations. But I think it is very hard to find deals. I think deals are out there, but the people who come talk to a foundation every day are grantees and grant seekers. They’re not people – entrepreneurs, venture capitalists, people doing business deals. And the program staff often don’t have expertise in that area. And the financing staff often don’t have expertise in the social issues that are being addressed.

So this split that most foundations have between the business side and the grant-making side is a real barrier here. I think one solution we’ve seen is the use of intermediary organizations – community development finance institutions, venture capital funds, other kinds of organizations that pool investments in – investment capital – in order to make investments in social enterprises. And we actually did a report more recently called “Aggregating Impact,” which was funded by the Surdna Foundation, it is on our website. And we found 1,000 mission-investment intermediaries in the United States working in different regions, working on different topics. And we made that list available online. But there really are tremendous resources and tremendous advantages to working through intermediaries, rather than trying to simply place the investment capital yourself.

Sean Stannard-Stockton: Sure. Well, let’s shift gears for a minute and talk about a report that you published last year called “From Insight to Action”, about trends and best practices in foundation evaluation. With my background in investing in the stock market, I’ve been frustrated that foundations do not spend more time evaluating nonprofits directly and then releasing those reports to the public. Now, if you’ve read my blog, you know we’ve discussed some of the problems with this idea, but would you comment on whether you think information sharing would be a benefit to the field? And if it would, why it’s not a more common practice?

Mark Kramer: I think it would be an immense benefit to the field, and I think it’s a very, very hard cultural barrier to overcome. There is a strong sense, still in the field, that philanthropy is about caring, is about the emotion, the concern, the effort even more than it is about a hard-nosed look at the results. And I think that that view is less strong than it was five years ago, but I think it’s still out there in the field to a significant degree. I think there’s also a real hesitation of foundations to say anything bad about a grantee, or to in any way harm a grantee’s chances to raise funds from others by putting forth what they see as negative results.

And I think this is tremendously unfortunate. I’ve actually talked to a couple foundation CEOs who, on their retirement, when I’ve said what was your greatest achievement, two of them have said putting a nonprofit out of business that just wasn’t doing a good job. And yet that’s so rare. That’s so rare, and yet, if you think about how valuable the philanthropic dollars we have are, and how scarce they are, and how big the problems are that we’re trying to deal with, of course if you can help others use their money more effectively and avoid what might be very compelling-looking nonprofits that actually aren’t very effective, you’re doing a great thing for the world. But it’s just such a big cultural barrier.

Sean Stannard-Stockton: I agree. It seems to me that it would absolutely revolutionize the way that smaller donors could fund high-performing nonprofits, and that foundations would truly leverage their impact from all the good work that they’re doing in terms of the research and evaluations. Given what you’ve learned in preparing that report, what advice would you give to individual donors or smaller foundations who want to evaluate their giving? An organization or a person who really doesn’t have a full staff and hasn’t necessarily thought about evaluation, but says, “I do want to be more hard-nosed about how I give?”

Mark Kramer: Well, there’s no way around the fact that it takes some time. We found a number of examples in the report of quite small foundations that might have only one or two staff members who were doing what we thought was a great job of evaluation because they really were focused enough in their giving that they were able to go out to the sites and really understand what was going on in the programs they were funding. And I think that the short answer is if you want to do good grant making and you want to be able to evaluate progress with very limited staff, you need to be very, very focused. You can’t do it if you’re giving 50 grants in 50 different areas. But if you’re working in one area, you probably can be knowledgeable enough to really be effective.

Sean Stannard-Stockton: Well, Mark, I really appreciate your time. And I look forward to speaking some time in the future.

Mark Kramer: Well, thank you very much, Sean. It was my pleasure.

Sean Stannard-Stockton: This has been the Tactical Philanthropy podcast. You can visit us at tacticalphilanthropy.com. And you can learn more about Mark Kramer and FSG Social Impact Advisors at fsg-impact.org. Thank you so much for listening.

From the Boston Globe, “Drug Makers Turning to Nonprofits for Cash”:

In addition to raising venture capital and launching stock offerings, Massachusetts biotech companies are increasingly turning to another source of funding to support early drug research: nonprofit foundations dedicated to fighting serious diseases.

For instance, the Cystic Fibrosis Foundation, said it has awarded more than $300 million to for-profit companies over the past decade to help develop cutting-edge therapies for the debilitating disease, including $192 million in the Boston area. Cystic fibrosis, which ravages the lungs and digestive system, affects roughly 30,000 people in the United States.

Epix Pharmaceuticals Inc. plans to say today that the foundation will give it as much as $37.7 million, in addition to about $12 million it has already received, to help the Lexington company discover new cystic fibrosis drugs. The money is contingent on Epix’s meeting certain goals.

Other foundations are following suit…

Click here to read the rest of the article.

So, we now have a term – antitrust – unrelated to any contemporary experience or practice. Its meaninglessness inhibits public debate on the two concepts underlying it that continue to roil American economic life.

We lack the words to debate whether we should continue the policy of the last 30 years of attempting to regulate (or deregulate) large economic entities, or should return to the rule that they should be limited in scale and scope.

The need for new words is urgent.

KLD is an interesting organization. Go check out their blog.

But what about the Social Return on Investment? If a donor makes a gift to a nonprofit, what is the “return” on that gift? How much “good” was achieved? The dollar amount given is easy, but “calculating” the “good” done is tough. First because knowing what “good” means is hard, secondly because relating “good” to dollars is like translating a symphony into organic chemistry, and third because identifying cause and effect is tough (did your grant create more jobs, or did the economy just happen to get better?).

I don’t think we’ll ever be able to honestly make statements like “My $10,000 donation achieved a 9.2% SROI”. That would be like calculating that The Great Gatsby was a better investment of your time than Freakonomics. However, humans constantly make decisions about what works and what doesn’t. We confidently make decisions about whether we should spend our Sunday afternoon rock climbing, volunteering, playing with the kids or going to the office without any sort of numerical framework to help us. That’s because we use a narrative context.

Kevin Jones, blogging at Xigi.net is working on a project he calls StoryIndex:

Social value is best understood in narrative form. Financial value is best understood in numerical form. Both are valid ways of encapsulating fungible value. Our StoryIndex project is trying to create a way to quantify narrative to accelerate the flow of capital to good.

In another post, he writes:

Here is what we are doing: mapping the new nascent exchanges, composing a glossary and translation table of how they define value in other than monetary terms

He’s got a great slide show about StoryIndex that you can find here and a map of the Blended Value Market Place here.