If you participated in a conversation about philanthropy in the past couple of years, you probably heard the term impact investing. This once niche subsector is quickly moving towards the mainstream of the philanthropic world, with prominent foundations such as the Gates, Rockefeller, Kellogg, and others, publicly voicing their support.
Conspicuously missing from this mix, are large Jewish institutions. These institutions have chosen to remain on the sidelines of impact investing, foregoing powerful opportunities to significantly increase their impact in their core giving areas and engage the next generation. This is especially surprising given the Jewish community’s social consciousness and financial savviness. In the immortal words of my second grade teacher, it seems that Jewish foundations and federations are not achieving their full potential. How can we turn Jewish institutions from stragglers to leaders of the impact investing movement?
Impact Investing VS Traditional Philanthropy
To better understand impact investing, we must first understand how foundations work. In a conventional foundation, a sum of money, the endowment, is invested for maximum profitability. A small percent of the total assets, a min of 5% annually is required by law, is then distributed through grants, in pursuit of the foundation’s mission.
The separation of the endowment from the mission can create absurd situations such as foundations devoted to climate change investing in fossil fuels, or organizations fighting poverty simultaneously profiting from abusive labor practices. However, historically, foundations had little flexibility regarding how their endowments were invested. Few value-aligned financial products existed, and many feared that these would underperform traditional assets. This is quickly changing.
Impact investing, or investing for financial returns and social or environmental impact, has been steadily gaining traction since the term was coined nearly a decade ago. The progress is evident in the growing number of large financial institutions, such as BlackRock, JP Morgan, Goldman Sachs, Bain Capital, and others, who are launching impact investing platforms.
Is Impact Investing Reaching its Tipping Point?
Several developments over the past few years have propelled the impact investing sector into the mainstream financial and philanthropic worlds and have demonstrated its viability as an investment approach:
- Impact as a lens, and not an asset class: impact investing is no longer associated with below market-rate, private market investments, but is instead perceived as an approach to deploying capital across asset classes, including public equities, fixed income, real assets, etc.
- Debunking the tradeoff myth: a growing body of research suggests that a tradeoff between financial returns and social impact is not inevitable, and that the impact approach may even reduce volatility in the public markets. In the private markets, a groundbreaking 2015 study found that on average, impact investing funds outperformed traditional funds.
- Changes in regulation: in September of 2015 the IRS announced that foundation managers may make prudent investments that further their charitable purposes even if they do not offer the highest rate of return, or lowest risk. These types of investments, made from the foundation’s endowment, are known as Mission Related Investments, or MRIs.
- Emergence of new measurement tools and financial products: new data and reporting platforms are improving the ability to monitor and demonstrate impact. Improved reporting coupled with a growing track record are helping drive impact investing products out of the sidelines and into traditional investing.
In a bold attempt to get more foundations thinking about how their assets are deployed, the F.B. Heron Foundation announced in 2015 that it will go ‘all in’ on impact, and aim to deploy 100% of its capital into impact investments by 2017. The Foundation has made all its impact investments, includes investments in education, healthcare, financial services for underserved communities, and more, available on their website.
And Where are the Jews?
The F.B. Heron Foundation is not alone in this transition. In 2014, members of Mission Investors Exchange, a network of over 250 foundations including Gates, Dell, Omidyar, Rockefeller, and other prominent foundations, reported over $1.2 billion in impact investments. Still, not a single large Jewish foundation has publicly committed a significant percentage of its portfolio to impact investing.
This lukewarm reception of values-based investing is curious given the Jewish community’s financial savviness and commitment to social change. Are Jewish investment committees, many of whom are made up of men working in the financial industry, uniquely conservative? Are Jewish institutions that are finally recovering from the blow delivered by Bernie Madoff and the 2008 financial crisis loath to take unnecessary risks? Perhaps it the fear of inadvertently strengthening the BDS movement that is causing the Jewish community to bury its head in the sand.
The last few years have seen the creation of impact investment opportunities catering specifically to a Jewish audience. In a brave action spearheaded by lay leader and former BlackRock Managing Director Michael Lustig, the UJA-Federation of New York invested $1 million from its endowment in two Israeli social impact funds, Israel Venture Network (IVN) and Dualis. These are but two of the many impact investing funds that have popped up in Israel in the last few years looking to capitalize on Israel’s booming startup scene, especially in sectors like water, agriculture, mobile health, and disabilities.
In the US public markets, the San Francisco based JLens is creating a US investment strategy dedicated to serving the Jewish community. The strategy not only prioritizes companies based on their environmental, social, and governance practices, but it uses shareholder rights to advocate for the Jewish community, especially around economic warfare against Israel and the BDS movement. The organization has gained support from a number of foundations and federations, including the Jewish Community Foundation of Los Angeles.
The Breadth of Opportunity
While the products above are a good start, they cannot, and for purposes of diversity should not, make up an entire portfolio. However, it would be a mistake to limit the conversation to Israeli or Jewish-focused products. Just as Jewish philanthropy often supports non-sectarian challenges and initiatives, so should Jewish investing advance the values of Tikkun Olam (repair the world), Tzedek (justice), and Bal Tashchit (do not destroy).
The Jewish community, with its long history of supporting social change, and incredible resource of lay leaders, many of whom come from a finance background, has the potential to play a leadership role in the impact investing world. The shift must be made slowly and prudently, but imagine Jewish foundations providing fixed income financing for Jewish day schools, loans to eldercare facilities, microfinance for underserved communities in the Former Soviet Union, venture capital for Israeli impact startups, etc.
There is one additional advantage to adopting impact investing: engaging the next generation. A 2014 U.S. Trust survey found that 67% of millennials believe that their investment decisions are a way to express their values. Jewish institutions can harness this interest to engage the next generation by inviting them to join the conversation on Jewish values and investing, encourage them to sit on investment committees, and allow them to influence how the institution’s assets are deployed.
It’s only a matter of time before Jewish institutions come under pressure from their constituents to align their assets with their values. Instead of making reactionary decisions, Jewish institutions should proactively begin the conversation, establish tangible goals, and engage the next generation in the process. Jewish institutions need to make a choice: will be they be impact investing leaders or laggards?