Tactical Philanthropy Podcast: Mark Kramer

Today’s post cast is with Mark Kramer of FSG Social Advisors. Mark and I talk about mission aligned investing, information sharing in philanthropy and whether achieving social impact means limiting financial returns. My favorite line from the interview, “I’ve actually talked to a couple foundation CEOs who, when I’ve said what was your greatest achievement, said putting a nonprofit out of business that just wasn’t doing a good job.”

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.