08/05/2010 01:27 pm ET | Updated May 25, 2011

The Other 95%: Foundations Can Do More With Less

Foundations have been really good to both of us, so a recent report from the Foundation Center on trends in philanthropic giving caught our eye:

The recent economic crisis caused the nation's more than 75,000 grant making foundations to cut their 2009 giving by an estimated 8.4 percent -- by far the largest decline ever tracked by the Foundation Center. Grant dollars fell from $46.8 billion to $42.9 billion. Yet according to Foundation Growth and Giving Estimates (2010 Edition), released today by the Foundation Center, this cutback totaled less than half the 17 percent loss in foundation assets recorded in the prior year.

Most foundation endowments earn money in a traditionally "conservative" way. The assets are invested by money managers that rarely have ties to the charitable missions which the foundations' grants support and are focused solely on generating the highest returns possible. There's often even a firewall between the people who manage the investments and the people who manage the grants.

But since many foundations lost 30% or 40% of their endowments during the capital crisis, that "conservative" strategy actually seems pretty risky. They would have been better served investing in such "risky" things as micro finance bonds (which returned 7% during that time) or other fixed notes. Instead, they succumbed to the "grow at all costs" approach, a strategy fairly disconnected from why any of these institutions were granted nonprofit status to begin with -- not to become privately held investment trusts, but rather to advance some measure of social good.

Foundations typically give away 5% of their total assets each year (the legal minimum to maintain their tax status), so the other 95% of their assets do nothing to advance their social mission. In some cases, the investments are even working at cross purposes to the foundation's mission, as described in good detail in a Stanford Innovation Review article from 2004.

A recent report by the Monitor Institute called Investing for Social and Environmental Impact argues that "using profit-seeking investment to generate social and environmental good is moving from a periphery of activist investors to the core of mainstream financial institutions...No one can know for sure how much money has been invested or is seeking investment that generates both social and environmental value as well as financial return. But a good guess is that the total size of the market could be as big as $500 billion within the next decade."

Venture Capital and Private Equity Groups are leading the way, but foundations continue to lag behind. Jed Emerson, one of the long-time advocates and thought-leaders of the movement towards Mission-Related Investing (MRI), notes that less than 15% of foundations use social or other screens on their investments, and "an even smaller number of foundations make use of program related investments or other strategies in attempts to leverage the long-term value of their philanthropic capital." He provocatively compares annual grant-making to horse manure and the foundation endowments to the horse, saying most of us are focused on the wrong end.

Like most businesses right now, mission-driven businesses are struggling to find working and growth capital. This difficulty was confirmed for us by a recent 5-city listening tour we conducted with over 100 young green entrepreneurs who named "financing" as the primary barrier they faced.

What if more of the $583 billion in foundation assets (along with the $170 billion held by the 25 best-endowed universities, which also have explicitly pro-social missions) went to support these businesses? Why aren't they already doing it?