Where is the impact investing in the time of COVID-19?
Originally published at Inside Philanthropy on June 4, 2020
The coronavirus pandemic and resulting economic crisis have generated calls for, and some action by, philanthropy to support grantees by relaxing funding and other requirements, and in some cases, increasing grant dollars during this time of need. Is the same true with foundations’ impact investing?
Impact investing is an umbrella term for “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” For philanthropy, these investments usually take the form of loans such as program-related investments (PRIs) or mission-related investments (MRIs) from foundation endowments.
Foundations in the United States provide over $80 billion a year in grants, but hold about $1 trillion in assets, funding that is invested and managed largely in the stock market and other investments. The impact investing movement calls for foundations to use their full financial capacity to advance their programmatic missions, and a number have made large commitments. The most prominent is the Ford Foundation, which committed $1 billion from its endowment toward MRIs. The Heron Foundation announced a few years ago that all of its $270 million endowment would go into impact investments.
Impact investing is by nature a long-term endeavor, but how have proponents of impact investing responded to the current crisis and the deep disparities it has highlighted? For Antony Bugg-Levine, who helped develop the impact investing field when he was at the Rockefeller Foundation and in his current role as CEO of Nonprofit Finance Fund (NFF), it’s been a wake-up call: “I look at what’s happening with COVID as a stark reminder of how much work we have to do as impact investors.”
At the Mission Investors Exchange National Conference in May, there was a lot of discussion by leaders from foundations such as the Annie E. Casey Foundation, the California Endowment and the W.K. Kellogg Foundation about better aligning their 95% investments with goals to create a more just and equitable society in recovery from COVID-19.
In mid-May, Global Impact Investing Network (GIIN) announced the formation of the R3 Coalition to promote impact investments to aid in response, recovery and resilience in the face of the pandemic. The coalition is supported by leading philanthropic impact investors such as David and Lucile Packard, Ford, John D. and Catherine T. MacArthur, Open Society, Rockefeller, and Sorenson Impact foundations.
The financial needs resulting from the pandemic are particularly acute for nonprofit organizations dependent on government contracts and reimbursement, and philanthropy can help to stave off collapse by using impact investing tools. Laura Tomasko of the Urban Institute implores foundations to look beyond traditional grants: “Recoverable grants, credit enhancement tools (like guarantees), and loans could help bridge the gap until government funding arrives, or they could provide essential capital to institutions that can’t access public dollars.”
Just as foundations are relaxing grant requirements, impact investors can delay interest payments and postpone loan maturities to provide the “patient capital” that organizations need to get through this time. For example, Kresge Foundation recently suspended interest payments on its PRIs for six months, saving loan recipients about $1 million. The Mary Reynolds Babcock Foundation suspended interest payments and extended maturity dates of PRIs and converted some loans to grants. MacArthur Foundation’s president said recently that the foundation plans to forgive or defer as much as $25 million in its PRI program.
So far, foundations haven’t made too many new impact investments designed to address the economic challenges facing organizations due to COVID-19. This is probably because impact investments tend to require a higher level of due diligence and documentation than regular grantmaking, and foundations haven’t prioritized streamlining those processes as much as they have in getting emergency funding out the door.
One exception is the interest-free loan component of the NYC COVID-19 Response & Impact Fund. Antony Bugg-Levine of NFF shared in a recent interview that he got a call from Ford CEO Darren Walker about a fund philanthropy was putting together to meet emergency needs of nonprofit organizations, and that they were thinking about an impact investing fund alongside a grant fund. Ford invested $29 million (its second-largest PRI ever) — matched with $8 million from other donors — in the loan fund that is managed by NFF (New York Community Trust manages the grant fund). Ford and NFF managed to process the PRI in just nine days, an extraordinary feat for any foundation funding, let alone an impact investment.
Bugg-Levine acknowledges that flexible grant dollars are most needed by organizations, but that loans can be a bridge when there are funding delays. “We don’t believe it’s appropriate to lend into losses, but it is very appropriate and helpful to lend into organizations that have delayed revenues,” he said. The loans can provide working capital to help organizations pay rent, meet payroll and cover unanticipated needs in technology and personal protective equipment.
Beyond meeting immediate needs brought on by the economic crisis, advocates for social justice philanthropy argue that the current experience should impress on funders that they can use their investments to rectify the disparities that the pandemic has laid bare: “Endowments can be invested in local and regional efforts that replenish community wealth and build community assets, like worker cooperatives and community land trusts.”
One example of this approach comes from the Surdna Foundation, a social justice and racial equity funder that made a $100 million commitment to impact investing in 2017. It deploys PRIs to help entrepreneurs in communities of color build wealth, and its MRIs are investments in funds and companies producing a social good, such as boosting access to healthcare and a green economy.
“Given the disproportionate harms that the pandemic has had on African Americans, Latinos and Native Americans, we believe our commitment to impact investments is more important than ever,” Surdna President Don Chen said. “The inequities revealed by COVID require us to use our capital to rebuild wealth among people of color, and to continue to foster just and sustainable communities.”
These approaches take on new meaning in the face of protests against police violence against African Americans over the past week. With increased calls for philanthropy to support racial justice efforts and a number of foundations making statements in support, the role of impact investing in aiding recovery from the pandemic will likely intersect with racial equity and justice goals. We’ve seen that government efforts like the Paycheck Protection Program disadvantage small businesses owned by people of color, and philanthropy could provide vital support for community wealth-building through impact investing. Grantees and advocates will increasingly call on foundations to use the entirety of their tools and resources to help our communities and society recover toward a more just future.
