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Impact Investing – Relevant to Foundations?

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90 percent of all foundations pursue a charitable purpose. Founders particularly want to have a positive impact on society with their assets. More than 50 percent of foundations in Germany are dedicated to this goal. A foundation purpose that endangers the common good is even prohibited. In order to finance foundation activities, socially or ecologically effective investments (impact investments) therefore appear to be an obvious option. But do foundations actually use this option? Is impact investing a suitable investment approach to finance foundation activities? What are the arguments in favour? What is against it? Let's classify these aspects.

Article by Dr Lukas Adams, Head of Asset Management at GLS Bank

Relevance of sustainability low among foundations

It may come as a surprise to outsiders, but sustainability in capital investment has not been of great importance to foundations in the past. The primary goals of foundations when investing money are to preserve the substance of their assets and to be able to pay out dividends. This focus, along with a paucity of sustainable investment offerings, a lack of standardization, or a lack of knowledge and resources to implement them, have contributed to a focus primarily on economic factors.

It is hardly surprising that data is thin. In 2020, the German federal initiative Impact Investing found that foundations are the most important investor group in sustainable investments in the broadest sense, with a share of 75 percent (total volume of 6.5 billion euros). However, when it comes to dedicated impact investing strategies, the picture looks different. In finance-first strategies, where investors seek both a positive impact and a market return, foundations are represented by only 20% (total volume EUR 2.8 billion). Impact-first strategies are hardly present on the market (EUR 62 million).  Questions about liability and returns slow down willingness to invest in impact.

Why is there so little interest in impact investments? In our experience, foundations often shy away from impact investments. One reason is the common assumption that sustainable investments in general are less profitable or, in the case of impact investments, even more risky than conventional investments. Mainly because of the high risk, quite a few foundation bodies are afraid of being held liable in case of losses. This is very relevant for impact investments, as they are traditionally realized through alternative assets - private equity, and private debt.

While the first argument is considered scientifically refuted (e.g., study by Bassen/Friede), the second argument is controversial. It is important to point out that the reform of foundation law, which came into force on July 1, 2023, offers greater liability security with the so-called "business judgment" rule. It states that foundation bodies are not liable for investment missteps, provided they have complied with the law and their articles of association and acted in the best interests of the foundation. The decisive factor here is documentation. Articles of association alone are not enough. Separate investment guidelines are also necessary. More than 70 percent of foundations have already adopted a guideline. In them, foundations can specify the asset classes in which they invest and how they diversify their assets. They can also define whether they are aiming for socially and ecologically effective investments that are in line with the foundation's activities.

Foundations are (still) conservative in their asset allocation

Foundations often show conservatism in their asset allocation, even if there are no regulatory investment restrictions. On average, more than half of endowment portfolios are allocated to fixed-income securities, according to 2019 GAC data. Twenty percent of portfolios consist of equity positions, with equity allocations ranging from 0 to well over 40 percent. Real estate is also popular, as it promises value preservation and current income. More than one in three foundations invest at least one-fifth of their assets in this asset class. Alternative investments are also gaining in importance, but they account for only a small share of the portfolio mix. In addition to a private equity allocation, portfolios also include infrastructure and microfinance investments.

US universities show the way: Alternative investments as a source of return

Alternative investments can certainly pay off in the long term, as the example of elite U.S. universities shows, which often finance themselves through their foundations. Over the years, these foundations have gradually reduced their exposure to equities and bonds and channelled more capital into alternative investments such as private equity or real assets - in the period 2002-2021, the corresponding investment ratio rose from 32 percent to 59 percent. In 2021, they performed at 30.6 percent, according to the analysis by the National Association of College and University Business Offers (Nacubo). By comparison, the MSCI World rose "only" 20 percent over the same period. Of course, the investment approach cannot be transferred 1:1 to German foundations, but it does show the potential of alternative investments. After all, they are less exposed to the fluctuations of the capital markets. Particularly in times of very dynamic interest rate movements, this is an important feature that also enables foundations to achieve healthy diversification in their portfolios. For further risk diversification, private equity fund of funds concepts would also be worth considering.

Reputation protection and regulation as further drivers

Credible implementation of sustainability and impact investing is also worthwhile in order not to risk bad press. The more important the topic of impact investing becomes, the more NGOs such as Facing Finance scrutinize the investment policies of foundations. Due to increasing transparency, this poses a high reputational risk for foundations. In 2022, Facing Finance concluded that more than half of the 38 largest German foundations do not take sustainability criteria into account. The NGO complained that it found hardly any information on sustainability on the websites and concluded that controversial foundation investments could not be ruled out. It published a guide on how foundations could approach sustainability. Properly applied, it concluded, foundations can use impact investing to support the foundation's purpose even as they invest their assets.

Finally, a look through the lens of sustainable finance: Even if not directly affected at present, the EU Action Plan on Sustainable Finance also has an indirect impact on foundations. In particular, large foundations with professional investment management will have to provide answers as to how they integrate sustainability risks in order to preserve the foundation's assets (and are not affected by stranded assets), to what extent they invest in a taxonomy-compliant manner, and how they implement sustainability strategies in general. The more consideration of sustainability is enshrined as an integral part of fiduciary duty, the greater the pressure on foundations to address it.


Reinvestment and impact investing are not mutually exclusive. On the contrary, traditional forms of impact investing such as private equity or private debt offer themselves as complementary portfolio components, as the example of American elite universities shows. In addition to the impact of the capital invested, i.e. a social-ecological return, the diversification of the portfolio, the reputational gain and the ability to distribute profits are the main arguments in favor of these impact investments.

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