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MISSION-BASED INVESTING COMES OF AGE: Embracing Investments With A Double Bottom Line

How and why college and universities have begun to do this with their endowments
University Business, May 2008

A leading environmentalist who happens to be our former vice president, Al Gore, said, "Holding a 'feel-good' investment may appeal to the heart, but it's of no real use if it doesn't produce a healthy financial return." The investment behavior of university and college endowments appears to confirm Gore's comments. Over the past five years, market-rate, mission-based investments made by all nonprofit organizations, including educational institutions' endowments, trusts and foundations, have grown three times faster than the below-market segment.

Not surprisingly, during the same time, the options available for university and college endowments to engage in market-rate mission-based investing have increased as well. This special investment approach that seeks to create measurable, positive change in our world while earning healthy financial returns has solidified its place as a viable investment approach - demonstrated by increasing dollars flowing into mission-based investments and by the increasing sophistication of the types of investments available.

Students at many universities and colleges have formed coalitions to pressure board members and endowment administrators to align their investments with the institution's teachings and missions. However, as you might expect, student activists frequently face staunch resistance to their calls for mission-furthering investment practices. That resistance often stems from an absence of understanding or false predispositions about mission-based investing.

From my first-hand experience, many university board members shudder when they hear a term like "mission-based investing" because they assume - though incorrectly - that it is synonymous with socially responsible investing. More specifically, they think of shareholder activism or avoiding stock issued by certain companies based on industry type or objectionable corporate practices (also called negative screening).

To clarify, a university who bought an interest bearing bond issued by a municipality to finance construction of a community center would have made a mission-based investment. By contrast, an endowment that avoids purchasing shares of Altria Group, the parent company of cigarette maker Phillip Morris, would be engaged in negative screening.

In addition to misunderstanding what constitutes a mission-based investment, another factor that has obfuscated the more rapid adoption of mission-based investment approaches by university and college endowments has been the faulty premise, still held by many managers of endowment assets, that mission-related investing requires sacrificing fiscal responsibility for social benefit.

"As the universe of mission-based investments has expanded, and as the managers specializing in this sector have developed the necessary track records to be properly evaluated, mission-based investing has become more desirable for consultants like me," said Tom Dodd, President of Stratford Advisory Group, an institutional investment consulting firm that advises clients with selection of money mangers, among other services. "We now see examples of mission-based asset managers outperforming their non-mission-based peers."

Mission-based investing is defined as the practice of using financial investments to 1) achieve a specific mission and 2) recover the investment principal and/or earn financial return. In addition, the impact of a mission-based investment can often be measured by how many jobs it creates, how many acres of land it restores, how many mortgages it provides to low-income families, how many affordable healthcare beds it generates, etc.

Again, mission-based investing is not synonymous with socially responsible investing (SRI).

It may help to think of them as distant cousins. The essential difference is that mission-based investing stems from the investor's objective - from its mission - while socially responsible investing often stems from a set of social policies and values that may or may not reflect or advance the mission of the investor.

The category can be broken down further into two general types: market-rate mission investments and below market-rate mission investments. As the name implies, the market-rate types seek financial returns that match or exceed the risk-adjusted returns of analogous investments that fail to advance any particular mission. Conversely, below market-rate types seek financial returns below the returns offered by their market-rate counterparts.

In general, mission-based assets fall into the following asset classes:

Bonds: Mission-based bonds include mortgage backed securities, taxable and tax-exempt municipal bonds, as well as bonds that finance small business loans and other mission-based enterprises;

Loans or loan guarantees: Mission-based loans or loan guarantees provide for capital to companies or non-profit organizations that advance social or environmental benefits. This category also includes micro-loans to individuals;

Private equity and venture capital: Mission-based private equity and venture capital investments consist of debt or equity investments in small or early-stage companies that generate social or environmental benefits, or similarly structured investments that support development in emerging markets;

Certificates of deposits in Community Development Financial Institutions (CDFIs): By providing targeted populations with much-needed access to capital, CDFIs promote economic development in areas that are underserved by traditional financial institutions.

Your endowment can take advantage of these investment categories in a number of ways. You can go through an intermediary such as a loan fund, mutual fund, or CDFI (community development financial institution). To invest in private equity funds, an endowment can participate as a limited partner. Or endowment administrators can engage money managers, like my firm, that specialize in assembling portfolios of market-rate mission-based investments.

Finally, mission-based investing among university and college endowments has gained momentum, and we're seeing increases in dollars invested. Growth of mission-based assets has averaged 16.2% over the past five years, compared to less than 3% during the preceding 32 years. Further, over the past decade the number of organizations utilizing mission-based investing has doubled, and capital inflow invested on an annual basis has tripled.

Perhaps most significant, from my vantage point, market-rate mission-based investments have grown more rapidly - three times as fast - than below-market mission-based investments. This tells us that more and more endowments have come to recognize the double-bottom line: that you can make a dramatic impact toward advancing your university endowment's mission without taking excessive risk, without incurring significant cost, and without sacrificing market-rate returns.

The mission-based investment marketplace has come-of-age with more sophisticated products. These offerings not only deliver returns that meet financial criteria, but they also provide universities with the ability to be highly specific in terms of the missions they wish to support.

In addition, prospective mission-based investors have realized the areas where capital usually gets invested - underserved, depressed, inner cities - are also the areas with the greatest potential for economic growth. In turn, investments in these markets represent great value. They have enormous potential for ROI as well as significant social impact. As an added incentive, many educational institutions reap alternative rewards from investing in their communities.

For example, St. Louis University recently initiated "Hometown SLU," a program to create affordable housing for university employees in underdeveloped neighborhoods close to campus. The program augments the University's existing $10 million loan fund that has earned competitive interest rates to date. In addition to the financial and social benefits of this investment, the university has an added benefit to "sell" to prospective employees by providing housing close to work.

When it comes to mission-based investing, look to pioneering institutions like the Columbia University, Williams College, and Great Britain's University of St. Andrews to learn "best practices" for mission-related investing. These schools created advisory committees to ensure that their financial goals mirror their social goals. Their success and the corresponding proliferation of similar committees at many colleges and universities demonstrate how mission-based investing can produce the competitive financial returns that university boards demand.

For instance, the University of St. Andrews has spearheaded an investment approach for its endowment that parallels its mission of sustainability. Through investments that promote human rights, environmental sustainability, international cooperation and community development, its endowment's assets grew by a net 1.6 million in the academic year 2006-2007.

For starters, it means you can take positive steps toward advancing your school's mission in ways other than funding research, faculty development, and scholarships. In fact, by applying a rigorous set of financial criteria, your endowment can actually make money while advancing its mission.

<em>Todd Cohen is president and chief investment officer of Community Capital Management, one of the nation's largest money managers that exclusively manages fixed income, mission-based portfolios. Under his direction, the company seeks to earn competitive returns while promoting economic and community development activities.</em>

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