Aligning Interests Is The Most Important Investment Trend
Everything we do at the Collaborative Fund is based around the belief that the world is moving toward a place where businesses that do the best for themselves are those that do the best for the world.
The good news is, we’re not the only ones who view the world this way.
We’re excited to see the Ford Foundation’s recent announcement that it’s committing over $1 billion to invest in “bridging the gap between impact and investments” by investing in assets that both earn a market return and push the world forward.
Until now, most foundations and endowments viewed their social good and money-making efforts as separate endeavors.
This is in part due to how foundations and endowments are structured for legal and tax requirements. The Ford Foundation writes:
Since 1969, US tax law has mandated that foundations pay out a minimum of five percent of their total assets each year.
For the Ford Foundation, which has more than $10 billion in assets, this means granting about $500 million annually to nonprofits with the goal of doing good, and investing the remaining $9.5 billion of “principal assets” with the singular goal of producing greater than 5% annual returns (void of any impact-related goals) so it can meet its federally mandated grant-making threshold in perpetuity.
As you can imagine — these two activities sometimes contradict each other.
For example, the grant-making side of the organization may give money to a non-profit working on renewable energy, while the principal asset side of the house invests in an oil and gas company.
People call this “two-pocket thinking.” It’s understandable, but highly unfortunate.
Solving the two-pocket problem been a hot topic of debate within the foundation and endowment world in recent years. Those in power increasingly yearn to the align the interest across their organization — into a single pocket.
To date, mostly small and progressive foundations and endowments have started to mesh the two. But having the Ford Foundation come out with a strong commitment to align its efforts marks a shift that will inevitably have significant positive ripple effects with other major institutions.
Just like VCs, once one of the top firms commits to something bold, it becomes OK for everyone else to follow :-)
The most important part of this trend is that investing in companies doing good does not have to sacrifice returns. No need to look further than Tesla overtaking Ford and GM as the most valuable U.S.-based auto manufacturer. As consumer access to information proliferates, we see the most promising companies of the next several decades as those putting transparency, ethics, and sustainability at the core of how they operate. Merging two pockets into one has never been easy, but we’re at a turning point where consumers, investors, and NGOs are increasingly demanding it.
This is a big trend. And it’s not just venture capital. Private equity and public markets are being impacted just as much. Far more money will be made in the coming years moving the world forward than exploiting the world’s vulnerabilities.
It’s the core of our mission, and we look forward to seeing others get involved.