When Felix Oldenburg shifted his career from social entrepreneurship to philanthropy, he had high hopes for the role of foundations in financing social ventures. After three years leading a network of 4,500 foundations, those hopes are yet to materialise. But, he writes, it’s not time to give up yet: foundations can become serious impact investors by innovating with their endowments, not just their grant money. The third in our Impact Papers series, in partnership with EVPA, asking honest questions about investing for impact
If you’re reading this, there’s a good chance you are not only interested in impact investing, but you also think it has a great future.
You’re in good company: most people in the impact investing space believe this, myself included. I have long believed the tipping point was near and that it would set impact investing on a course to overtake conventional investing – as it has to, if we want to reach climate goals and reduce global inequality. Today, many of the planet’s leading economists and investors agree with this, even if confusing terminology and ‘greenwashing’ make it hard to agree on anything.
And yet: regardless of the definition you choose, at the current rate of growth of assets invested for impact, I very much doubt I will live to see the day when finance becomes a net contributor to a sustainable and equitable world.
A snail’s pace
It was partly my commitment to impact investment that prompted my decision to move from social enterprise into the philanthropy sector. Foundations, I had learned from my work with hundreds of social entrepreneurs in Germany and across Europe, could be the missing link in the finance ecosystem for social and environmental solutions. After all, they typically have truly patient capital, as well as access to and expertise in working with leading changemakers in their field. And what could be a better time for the transition to impact investing than a historically low interest environment that forces foundations to rethink how to generate impact from their endowments?
What could be a better time for foundations to rethink how to generate impact from their endowments?
Quantitative evidence of the role foundations play in impact investing is scarce to non-existent. But it’s clear that they are far from being a significant force. My estimate is that their combined annual investment in Germany is in the in the low millions, and does not even typically come from the endowments, but are actually funds from the budget. The difference is significant, since these funds are more flexible in terms of financial returns, but also far smaller than the endowments. As a result, it is possible that impact investing is not driving an overall increase in resources geared towards impact, but actually reduces the grant funding available – which is equally important as a source of early stage and seed funding for social innovation.
After three years at the helm of a large and diverse network of foundations of various sizes and missions, I have to admit to at least three miscalculations I made when first joining the philanthropy sector.
First, I assumed low interest rates would drive foundations to seek alternative returns. The opposite is happening: most foundations prioritise the financial returns even more than before. According to our data, around half of Germany’s foundations are not beating the inflation rate. And even the larger ones feel the pressure from years of low interest rates and increasingly volatile equity markets. This environment could trigger a rethink, but in many cases it seems to solidify conservative investment strategies.
Second, I hoped foundations would be more interested in and embrace financial innovation. Wrong again: while most foundations are – for better or worse – chasing innovation on the programme end, they are highly reluctant to experiment on the management end.
Third, I assumed foundations would have a privileged connection to deal flow from their operational or grant making expertise in the field. After all, they often know hundreds of social projects and ventures operating within their thematic or regional networks. Again, no luck. The truth is that most grant makers know little about finance, and can as much recognise an investment opportunity as they can distinguish equity from loans.
New engagement strategies
Are we barking up the wrong tree? After all, one could argue the sum of institutional philanthropy is small compared to private or corporate wealth. Would chasing the venture capital community or promoting corporate impact investing vehicles mobilise more funding?