Endowment investing

Jewish foundations and nonprofits: Align your investments with your philanthropic goals

In Short

The next time your foundation or nonprofit undergoes a portfolio review of endowment holdings — a standard component of the due diligence process — consider not just how much money your investments are generating, but how you are managing them and the extent to which they align with your mission.

Endowment investments are the lifeblood of private and community foundations, providing the financial returns that enable foundations to make grants to nonprofits. Unfortunately, these investments are often managed in a way that actually undermines the foundation’s philanthropic work.

Endowment investment managers, usually appointed by the foundation’s board, tend to focus solely on maximizing financial returns and in doing so rarely make the active choice of screening out investments that are entirely antithetical to the foundation’s mission, or to consider investing in for-profit enterprises that help further the foundation’s goals. Guiding this behavior has been the assumption that unconstrained investing leads to higher returns, which then allows for more grantmaking. This assumption is not always accurate, and it comes at the expense of potentially schizophrenic inconsistency, such as when a public health-minded foundation invests in Big Tobacco or an environmental funder owns shares in the very oil companies its grantees are fighting.

Not only do few foundations and endowment-holding nonprofits work to align their investments with their philanthropic goals, some actively discourage doing so. A number of years ago, when I attempted to steer a mission-aligned Israeli investment to a large Jewish nonprofit on whose board I served, I was told outright that the asset managers had been instructed not to give consideration to Israel-related investments. The investment that I was proposing for the charity’s endowment had a very large Israel-related component coupled with elements of Tikkun Olam and Chesed, and it was wrapped with some unique guarantees from an extremely sound international financial institution, making it highly safe. Essentially it “ticked all the boxes,” both as an investment for an endowment and in providing some needed hasbarah/public relations for the State of Israel.

The organization was spending considerable resources in Israel, doing an enormous amount of good there and achieving meaningful impact in a multitude of areas, yet its investing was completely segregated from its grantmaking work. Essentially the endowment was meat while the allocations were milk, and the organization wanted to maintain a very strict level of kashrut by keeping them entirely separate. I am hoping that this policy has changed in the years since, because the fact is that a foundation will maximize its productivity only when its endowment is managed with consideration to its mission — and tax laws actually enable foundations to do so. The IRS allows for program-related investments (PRIs), essentially investments in highly mission-aligned ventures where the investment returns are likely lower than alternatives, to count toward the 5 percent minimum distribution required for private foundations. Mission-related investments (MRIs) may also be made, aiming for mission-alignment while also passing a “prudence test” for market-level returns. MRIs highlight the advantages of an investment achieving synergy with the organization’s mission.  

Although it is not always possible to find a true MRI, at minimum it makes logical sense for an endowment to avoid investments that run counter to the foundation or organization’s mission. Within the Jewish/Israel-focused domain, aligned investment alternatives, such as JLens, ISRA, EIS (and others) can help one avoid investments counter to your mission, such as those in bad-actor countries or companies participating in BDS campaigns, which broad index funds often include.

I discovered impact investing by chance soon after retiring from a 25-year career as a portfolio manager in a large asset management business. Just as I was ramping up my own philanthropic work, I was offered a private investment in a company that happened to have the combination of strong environmental impact and community support/empowerment for a disadvantaged population as part of its core business goals, in addition to the general aim of making a healthy profit. That pitch opened my eyes to the fact that investments could serve a similar purpose as direct philanthropy, oftentimes doing so in a more fiscally efficient manner. 

The next time your foundation or nonprofit undergoes a portfolio review of endowment holdings — a standard component of the due diligence process — consider not just how much money your investments are generating, but how you are managing them and the extent to which they align with your mission. Shifting from traditional to impact investing can seem overwhelming, but a growing number of resources are now available for Jewish funders exploring this option, many through Jewish Funders Network (JFN), an organization where I am a member. Those resources include a Certificate Course in Jewish Impact Investing that is being offered through a special partnership between JFN and NYU Bronfman’s Institute for Impact and Intrapreneurship, JFN’s “Guide to Jewish Impact Investing,” and a monthly roundtable series facilitated by Vanessa Bartram, an impact investor who serves on JFN’s board. 

In addition, there is a lot to learn from the Jewish foundations already making strong moves in this direction, like The Nathan Cummings Foundation (NCF), which recently committed to invest its half-billion-dollar endowment in a mission-aligned manner, nicely describing it as a means to have “every dollar work to further our mission.” In another exciting development, the Leichtag Foundation announced this year that it is actively planning for its endowment to be 100 percent mission-aligned by 2025, and it is well over halfway there, including investments in Israeli venture capital and Jlens. On a more “retail” level, the Jewish Communal Fund of New York (and several other Jewish donor-advised funds platforms) have added a variety of “Jewish Impact Investment” options to their platforms.

May the rest of the world follow these impressive leads!

The author of “A Guide to Jewish Impact Investing,” Michael Lustig retired after a 25-year career on Wall Street, and now devotes the majority of his time and energies toward nonprofit and impact-related enterprises, as well as teaching at NYU’s Stern School of Business and the College for Management Academic Studies in Rishon LeZion.