Wealth Management & Philanthropy

This article appears in the November issue of Wealth Manager magazine.
It chronicles the way that I think the wealth management industry is
currently underserving their clients when it comes to philanthropy and
social investing.

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.


  1. Steve Viederman says:

    The Heron Foundation has perhaps the most seamless program of MRI, using PRI’s (from their grant budget) through a wide variety of instruments through the “other 95%.” They are a leader and a model.

    But historically, the Jessie Smith Noyes Foundation, of which I was president, preceded Heron, by a few years. In addition to equity investments and a mission-related venture capital fund, Noyes also was the first foundation to file a shareowner resolution in support of one of its grantees–with Intel concerning the needs of the SouthWest Organizing Project

    MRI today has gone beyond screening to best-in-sector investing, and beyond that into Sustainable Investing, that is not a new name for an old process, but an emerging conceptual framework recognizing that environmental and social and governance factors are an essential aspect of financial decision making, neither “extra”-financial, nor “intangible,”but financial and tangible, i.e. climate risk

    Anyone seeking additional information on the Noyes experience or Sustainable Investing should contact me at s.viederman@mac.com

  2. Sarah Ewing says:

    This is an interesting concept. I am ShoreBank’s Online Channel Manager and we offer an online high yield savings account (3.50% *APY) which usually attracts mission based investors rather than SRI. However, we like to think that our investors want at or above market returns in addition to mission investment. Are mission related investors different? Or are our investors really SRI?

  3. Thanks for the info Steve. The KL Felicitas Foundation is also heavily focused on MRI. Readers should feel free to add other examples via comments to this post.

  4. Sarah,
    I think the best way to think about market rate vs below market rate returns is with an understanding of Jed Emerson’s Blended Value thesis. All activity produces a blend of social and financial returns. Different investors will seek a different blends of returns. We should be seeking to produced the highest possibly blended return.

    For instance, if I felt that the social impact of an investment was quite large, I don’t see why I wouldn’t settle for a below market financial rate of return. I don’t think there is a right answer when it comes to market rate vs below market rate. I think it is all about investor preference. Much like there is no correct asset allocation in financial markets, it is all about matching client preferences.

    Your comment got caught in my spam filter, I’m sorry that it was just posted today.