All Things Impact.

private capital & the public good

All Things Impact for March 17: why do foundations give so much money to Wall Street?

Brian Walsh1 Comment

Here are four items worth your time:

1. Responsible Investing: $5 trillion asset manager BlackRock vows new pressure on climate change & board diversity

Larry Fink, CEO of the world's largest asset manager, the $5.1 trillion (with a 't') BlackRock, wrote an open letter back in January to the companies in which it invests (which is nearly every publicly-listed company):

"BlackRock engages with companies from the perspective of a long-term shareholder. Since many of our clients’ holdings result from index-linked investments – which we cannot sell as long as those securities remain in an index – our clients are the definitive long-term investors. As a fiduciary acting on behalf of these clients, BlackRock takes corporate governance particularly seriously and engages with our voice, and with our vote, on matters that can influence the long-term value of firms. With the continued growth of index investing, including the use of ETFs by active managers, advocacy and engagement have become even more important for protecting the long-term interests of investors.

As we seek to build long-term value for our clients through engagement, our aim is not to micromanage a company’s operations. Instead, our primary focus is to ensure board accountability for creating long-term value....

Environmental, social, and governance (ESG) factors relevant to a company’s business can provide essential insights into management effectiveness and thus a company’s long-term prospects."

This week, BlackRock announced that it will "put new pressure on companies to explain themselves on issues including how climate change could affect their business as well as boardroom diversity," as Ross Kerber reports in Reuters

"Michelle Edkins, set to oversee the outreach effort as head of a 30-person team, said BlackRock might want to hear from companies about how they are assessing the risk that climate change may pose to their operations...

BlackRock stopped short of pledging to vote more often against companies' management. It said it still prefers private meetings with executives and casts critical proxy votes only as a last straw.

"We can't micromanage," Edkins said...

BlackRock also said it will look to understand how companies are working to increase boardroom diversity, such as adding more women. 

"Diverse boards, including but not limited to diversity of expertise, experience, age, race and gender, make better decisions," BlackRock said in the documents...

"A guy from Yale and a guy from Harvard does not count as diversity," Edkins said.

BlackRock's guidance marks the latest investor call for corporate executives to pay more attention to matters to which they might have given little thought in the past."


2. Impact Investing: Heron Foundation's lessons on aligning 100% of assets to mission

Writing in the Stanford Social Innovation Review, F.B Heron Foundation President Clara Miller reflects on her organization's success in beating their own deadline to align 100% of their assets towards their mission. That means that instead of having a separate team managing the roughly $300 million endowment for maximum financial returns and another team managing an annual payout of 5% from the endowment's returns in the form of grants to nonprofits, there would be one capital deployment team managing the full spectrum of resources - endowment capital and grant capital alike. All of these investments and grants would be aligned to the organization's mission: "to help people and communities help themselves out of poverty." 

Here are a few of Clara's lessons learned:

  • "When we determined to invest our entire endowment in alignment with mission, we chose to take the “enterprise view” of our portfolio. In other words, we looked underneath the traditional “asset allocation” view—equities (stock), debt (bonds), real assets, alternatives, and so on—to get visibility into the enterprises and projects that give these assets value. This practice has been labor intensive, but has sharply improved the integrity of the underwriting and monitoring of our holdings. As a result, we will be more aware of our whole impact picture going forward.
  • We continue to see evidence that the legal form of an organization is relevant to but not determinative of its ability to have a positive social impact. Nonprofits are not always more impactful than for-profits; nor is the opposite true. Performance beats intention every time, whatever the tax status, and that will guide us going forward...
  • We have come to use the concept of “net contribution” of an enterprise as the basis for developing measures of its social and financial performance together, over time. Net Contribution is the idea that enterprises aren’t absolutely “good” or “bad,” but that they extract from and contribute to shared environmental, social, civic, and other forms of societal capital in varying ways over time. From our perspective, we anticipate using these data to evaluate how each enterprise or fund in our holdings contributes to or detracts from our mission of helping people and communities help themselves out of poverty. We believe the net contribution approach allows for comparability to peers, meaningful benchmarking, and variability of results over time. Admittedly, applying this concept to our whole portfolio for monitoring purposes will take some work—not only by us, but also our partners."


3. Effective Philanthropy: why do foundations give so much money to Wall Street?

Wall Street makes money by charging fees. Warren Buffett, perhaps the best living investor, offers sage advice in his most recent annual letter to his investors

"When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds....

Foundations in the US are legally obligated to deploy at least 5% of their assets each year in the form of grants to nonprofit organizations. This comes to about $60 billion in annual giving, and between the Foundation Center and GuideStar, we have some (rough) sense for how this pool of money is deployed.

But we really don't know what is happening to the much larger pool of money that foundations control - the nearly $865 billion in assets in their endowments. After all, it is the income from these assets that generally fund the grantmaking that foundations do. But as Marc Gunther discovers out in this illuminating post in Nonprofit Chronicles, foundations are not required to report on the performance of their endowments, and from what data is available, it appears quite likely that many foundations ignore Warren Buffett's simple advice. They decide to overpay their asset managers for what amounts to mediocre performance. In other words, they give too much money to Wall Street, in the form of fees for managing those large endowment assets.

"America’s big foundations spend vast sums of money to buy investment advice. They’re getting little, if anything, of value in return.

Their own investment offices, and the Wall Street banks, hedge funds, private equity firms and consultants they hire, when taken together, deliver investment returns that lag behind market indexes, all evidence indicates.

These foundations would do better to call an 800 number at Vanguard or Schwab and buy a diversified set of low-cost index funds... foundations continue to pay high salaries and high fees in the pursuit of market-beating returns, when so many fail?

They should know better. It’s no secret that passive approaches to investing outperform most active money managers, once fees and trading costs are taking into account....

The bottom line: America’s foundations, as a group, are taking money that could be devoted to their programs – to alleviate global poverty, to improve education, to support medical research or promote the arts — and transferring it to wealthy asset managers. They should know better, and they do."


4. Wildcard: history has lessons on how to combat inequality, but they aren't pretty

The Economist reviewed Stanford historian Walter Scheidel's latest book, The Great Leveller: Violence and the History of Inequality from the Stone Age to the Twenty-First Century:

"Having assembled a huge range of scholarly literature to produce a survey that starts in the Stone Age, [Scheidel finds that inequality within countries is almost always either high or rising, thanks to the ways that political and economic power buttress each other and both pass down generations. It does not, as some have suggested, carry within it the seeds of its own demise.

Only four things, Mr Scheidel argues, cause large-scale levelling. Epidemics and pandemics can do it, as the Black Death did when it changed the relative values of land and labour in late medieval Europe. So can the complete collapse of whole states and economic systems, as at the end of the Tang dynasty in China and the disintegration of the western Roman Empire. When everyone is pauperised, the rich lose most. Total revolution, of the Russian or Chinese sort, fits the bill. So does the 20th-century sibling of such revolutions: the war of mass-mobilisation.

And that is about it. Financial crises increase inequality as often as they decrease it. Political reforms are mostly ineffectual, in part because they are often aimed at the balance of power between the straightforwardly wealthy and the politically powerful, rather than the lot of the have-nots. Land reform, debt relief and the emancipation of slaves will not necessarily buck the trend much, though their chances of doing so a bit increase if they are violent. But violence does not in itself lead to greater equality, except on a massive scale. “Most popular unrest in history”, Mr Scheidel writes, “failed to equalise at all.”


 Items of Note

  • ImpactAlpha's daily newsletter (now coming out in the mornings), has fast become a must-read for those in the space. (Disclosure: Liquidnet is an investor in ImpactAlpha through our Liquidnet Impact Fund, a donor advised fund managed by ImpactAssets. I'm an advisor to the company and co-host its ROI podcast. So I'm biased. But it's still a really good newsletter!)
  • Missed The Economist's conference on mainstreaming impact investing? Most of the videos from the sessions have been posted here
  • Open Philanthropy Project offers giving recommendations in response to Trump actions
  • ImpactAssets50 updated with new impact investing funds
  • Lucy Bernholz's must-read annual industry forecast "Blueprint 2017: Philanthropy & the Social Economy
  • The Stanford Social Innovation Review's Winter Issue has a full debate on how investors can (and cannot) create social value


Job Postings 

Upcoming Events 

March 21-22 Impact Summit Europe (The Hague, Netherlands) Impact Investing
March 23-24 Impact Investing World Forum (London) Impact Investing
March 30 Impact 2 (Paris) Impact Investing
April 4-6 Center for Effective Philanthropy (Boston) Effective Philanthropy
April 7 Wharton Social Impact Conference (Philadelphia) Impact Investing
April 8 MIINT: MBA Impact Investing Network & Training finals at Wharton (Philadelphia) Impact Investing
April 18-20 Conscious Capitalism Conference (Philadelphia) CSR
April 19-20 Step Into Impact - Kellogg Executive Education (Evanston, IL) Impact Investing
April 25-26 Impact Capitalism Summit (Chicago) Impact Investing
May 9-10 Shared Value Summit (NYC) CSR
May 10-12 US SIF Annual Conference (Chicago) Impact Investing
May 23-24 CECP Summit (NYC) Effective Philanthropy
May 31 - June 1 Grantmakers for Effective Organizations (Chicago) CSR
June 5 (NYC), June 13 (SF), Sept 12 (DC) Series of events as Nonprofit Finance Fund & Federal Reserve Bank of San Francisco launch new book on Investing in Results
Sept 19-21 CHANGE Philanthropy Unity Summit (New Orleans) Effective Philanthropy
Setp 28-29 TBLI Nordic 2017 (Stockholm) Responsible Investing
Oct 10-13 SOCAP17 (SF) Impact Investing
Oct 15-17 Exponoent Philanthropy CONNECT Conference (Denver) Effective Philanthropy
Oct 24-26 BSR Conference (Huntington Beach, CA) CSR

That’s it for this week. Please also send me any job postings, items of note, upcoming events, or compelling links you discover in your own journeys across the web (even things like this dog, which just needs a little push).  

Until next time, thanks for reading!

Brian Walsh
Head of Impact at LiquidnetFull Bio.