Wednesday, October 26, 2022

Private Foundations and Impact Investing - Social Issuance Bonds

The U.S. Impact Investing Alliance is an organization dedicated to raising awareness of impact investing in the United States, increasing deployment of impact capital, and collaborating with stakeholders to help build the impact investing ecosystem.  Recently, the Alliance released a study regarding impact investing tools and private foundations.

The authors conclude that foundations can and should more effectively use their balance sheets, even if the tools they are using have different degrees of mission alignment.

For example, the authors argue for greater use of guarantees by foundations.  At the same time, they note that a recent innovation is to combine an investment grade credit rating with a guarantee project. RWJF is one example of a foundation securing a AAA credit rating from S&P and Moody’s in 2021 that in turn allowed it to provide investment grade guarantees.

They also the address social bond issuances. This tool was used to increase several foundations’ programmatic activity in the face of COVID-19, the economic crisis, and increasing racial unrest in the United States. While use of a bond is not new, use of bonds by foundations is new, especially in terms of grantmaking activity.  For example, the Ford Foundation was an early user of bonds, having a $273 million bond issuance in 2017 that was used to finance renovations of its New York City headquarters.  Since 2020, even more foundations have issued social bonds, which include some of the most notable ones, such as the MacArthur Foundation, the W. K. Kellogg Foundation, the Andrew W. Mellon Foundation and others.

The set of three crises--- COVID-19 pandemic, economic downturn, and racial injustice--- was a catalyst for many foundations to utilize social bonds in order to quickly provide a response. However, some foundations specifically issued longer-term bonds, such as the Ford Foundation, and acknowledged this was a “once in a lifetime” event. Others, such as the MacArthur Foundation, issued only ten-year bonds, which suggests they may use bonds as a funding source again in the near future.

Also, the authors note the effect of stock market performance on endowment annual giving. They note that during troubling times, endowments decrease in value as the stock market plummets, which in turn decreases payouts at a time of crisis when they are needed most. This was apparent in early 2020 even though the stock market rebounded relatively soon. Foundation executives anticipated a tightening of their grant budgets in early 2020, so they searched for other ways to increase giving while leaving their endowments untouched.

Finally, the authors address the importance of a strong credit rating. They note that a precondition to fully utilizing the capital market is a strong credit rating which allows an issuer to attract low-cost debt. Notably, the Ford Foundation, Rockefeller Foundation, and W. K. Kellogg Foundation all received AAA ratings from S&P and Moody’s. Because their balance sheets were so strong and given the low levels of leverage and social bond designation, their bond issuances were oversubscribed by both impact and traditional investors. As of now, foundations ranging from 1.6 billion to 17.8 billion have been have issued investment-grade bonds.

Also, interestingly social bond issuance was combined with a decision to hire minority-led underwriting firms in addition to more traditional actors. Some foundations, such as the MacArthur Foundation, engaged minority-led firms like Loop Capital and Seibert Williams Shank. This was an outstanding example of extending the impact of social bond issuance from serving as a mere tool to the social processes as well.

The authors urge foundations to do more with more. By this, they mean to implement new strategies that increase the use of balance sheets for mission as well as to modify existing tools to promote risk-taking, innovation, and field building. They provide examples of many foundations that are already engaging in these steps as a way of encouraging other foundations to expand their breath and for foundations as a whole to more greatly utilize these tools on a regular basis and on a greater scale in the future.


Khrista McCarden

Hoffman Fuller Associate Professor of Tax

Tulane Law School

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