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Transformative CapitalHow mission-related investingcan deepen foundations’ impact

At its core, MRI investingmeans we are puttingmore of our moneywhere our mission is.ANNOUNCING THE FORD FOUNDATION’S MRI PROGRAM“I no longer find it defensible to say that our investment strategy is only tomaximize the value of our endowment—just as it’s no longer defensible for acorporation to say its only responsibility is to maximize shareholder value.”—Darren Walker, Ford Foundation PresidentAt Ford, we believe the next great tool of social transformation isMission-Related Investments.At its core, MRI investing means we are putting more of our moneywhere our mission is. Until recently, Ford did what most philanthropiesdo: We spent five percent of our endowment annually on grantmakingto combat injustice and inequality and we left the remaining 95 percentin investments. While those investments ensured the long-term viabilityof our philanthropy, social impact was not explicitly part of the calculus.Yet, upon reflection, this left too much untapped potential on the table.The fact is we won’t solve the big challenges without market mechanisms. Yes, markets can create inequalities, but we believe that they canalso be harnessed to drive inclusive social outcomes and achieve strongreturns at the same time.So we decided that it was time to deliberately leverage the power ofour endowment to further our mission. Specifically, this means we arecommitting to using eight percent of our core assets, or 1 billion, fordouble bottom-line investing. We are looking for investments that havebeneficial yields for society and still secure financial well-being. To takejust some examples, we’ve allocated to funds that support affordablehousing, financial inclusion and diversity in management.There are many historical disincentives to participating in MRI investing.For starters, it wasn’t until very recently that the government madeclear that MRIs are a legal form of foundation investing. More importantly, most not-for-profit boards are, understandably, concerned withtheir fiduciary duty to make sure their institutions can continue theirwork over time, which steers them away from uncharted territory.To help overcome these legacy concerns, we will make results andlessons from our MRI program transparent in order to help the marketplace advance and mature. As part of that larger goal, the foundationwill continue to make programmatic grants that enrich the evidencebase and market standards for impact investing.Our hope is that with more information, more foundations will findways to tap into the power of their own endowments. If all U.S. foundations were to allocate eight percent of their assets to MRI investing,together we would have 72 billion to pressure corporations to broadentheir focus from shareholders to include all stakeholders. Think of howpotent that could be.

Social ImpactTHE FORD FOUNDATION’SMRI JOURNEYWhat are mission-related investments?Since different foundations have different reasons for being, definitionsof MRI are subjective and idiosyncratic. The Ford Foundation’s missionis to advance social justice, with a focus on reducing inequality in all itsforms. So our mission-related investments are dedicated to addressingboth the causes and consequences of inequality.With just 1 billion in capital to deploy over ten years, our board thoughtit was important, at least initially, to narrow our focus to ensure effectiveness. Working with consultants Imprint, Tideline, and Veris, weconducted a broad scan of the impact investment market that fit ourmission, our geographic footprint, and our staff’s skill set and expertise.That initial screen generated over 30 possible investment themes.We winnowed that list down to two: affordable housing in the US andfinancial inclusion in the global south.We recently approved two new investment themes: diversity in fundmanagement, and quality job creation. And throughout the global south,we plan to conduct regional scans to identify opportunities in specificcountries and regions.In line with our commitment to promoting diversity and inclusion, andas part of our traditional due diligence evaluation, we closely examinethe makeup of all prospective fund management teams.How did you persuade trustees that MRIs wouldnot compromise the endowment’s grant makingand long-term sustainability?MRIsThe notion of diverting capital from traditional endowment activitytoward double-bottom line activity speaks directly to a director’sfiduciary duty to preserve a perpetual foundation. As such, the boarddebated this topic vigorously.Although the impact investment market is relatively new, with limitedperformance data available, we knew that high-performing managersin certain sectors are successfully delivering attractive social impactand financial returns. We provided trustees with several case studies ofimpact investment opportunities that produced the financial returnssufficient to maintain an endowment’s purchasing power.Ultimately, the trustees felt that with strong underwriting guidelinesand careful risk management, an MRI program of up to 1 billion—approximately 8 percent of the foundation’s total capital at the timeof the approval—would not compromise our endowment’s health andsustainability. We had explored a range of potential investment vehicles,from public equities to private equity, and were confident that we couldsource high-quality, financially competitive products that aligned withthe foundation’s mission.AttractiveReturnsHigh-performing managersin certain sectors aresuccessfully deliveringattractive social impactand financial returns.

If we make the right choices,our capital will help advanceour social justice mission.What is the financial performance requirementfor Ford Foundation MRIs?Our Board of Trustees has not set a specific financial return target.Instead, the board’s mandate for the MRI program is (i) to achieve atotal return consistent with prudent risk while taking into account therelationship between particular investments and the foundation’scharitable purposes, and (ii) to eventually contribute to foundationspending over time. Although the board has not set a minimum financialreturn target, staff recognizes that performance below the IRS-requiredspend rate plus inflation (7 percent today) will create an added burdenon our CIO to generate excess returns elsewhere. Thus, without beinga formal requirement, the 7 percent hurdle rate is an importantconsideration in our portfolio construction.The MRI program’s purpose is to make investments that generatepositive social returns and commercially appropriate risk-adjustedreturns on capital. For high-impact investments in which we maynot be fully compensated for the level of risk we assume, we willuse program-related investment (PRI) capital.How do you measure MRIs’ social impact?Impact can be measured in so many ways that dozens of metrics andbenchmarks have been designed—enough to confuse potential investors. Our approach is to emphasize due diligence in selecting our fundmanagers, with the goal of choosing top managers whose priorities fitour own. If we make the right choices, our capital will help advance oursocial justice mission.We expect fund managers to explain how their investments will makea positive social impact and report on how they achieve it, so we cantrack performance. Where we believe processes can be improved, weshare best practices. We also evaluate our fund managers’ ownershipstructure, investment committees, and staff for diversity, equity, andinclusion.We are aware that taking a non-prescriptive approach, and relying onmanagers’ integrity, introduces risk. We believe our due diligence isrigorous enough for us to move forward, and we will evaluate andadjust our approach as necessary over time.

The MRI portfolio hasalready generatedmeasurable socialreturns.What asset classes are your MRIs in, and howhave they performed to date?Are your MRIs managed in-house or outsourced?Our board concluded that the private equity market offers the mosteffective way to achieve positive social impact and produce commercialfinancial returns, since we can work closely with fund managers who candrive impact directly through their portfolio companies and projects.We will continue to study ways we can make mission-related impactinvestments through other asset classes, like public equities.We decided to form an in-house team for MRI, a structure that allowsthe foundation to control manager diligence and provides greaterassurance that investments align with our values. The foundation’sexisting program-related investment (PRI) initiative enabled thisdecision, as it includes an experienced investment team and aback-office infrastructure—in place for decades—supporting both thePRI fund and the traditional endowment. In fact, the PRI team initiallyconstituted the MRI team; a new director was hired in January 2018.The MRI portfolio has already generated measurable social returns.Since private equity funds invest over 10- to 12-year time horizons,financial performance may not be discernible until the end of thatperiod. However, because a significant portion of our portfolio is infunds that invest in affordable housing opportunities, which generatecash flow, some of our investments have already yielded cash returns.How is the MRI program staffed, and whatgovernance and compliance structures haveyou put in place?The core Mission Investments team is part of the foundation’s programstrategy, and manages all MRI and PRI activity. The team includes fourinvestment professionals, a senior program officer—who does grantmaking to build the field—and one professional dedicated to portfoliomanagement. Team members’ backgrounds include investments,corporate finance, investment banking, law, general management, SECreporting, information technology, and real estate.We have established a new board committee that enforces tight riskmanagement guardrails for MRI activities and approves all investments.The MRI Committee also monitors social and financial returns performance, and it has set criteria, including trigger events, that allow it tosuspend MRI investment activity if the foundation’s objectives are notmet, or if material adverse conditions affect our overall endowment.