Peter A. Nadosy is a pillar of the Wall Street establishment — he spent 27 years at Morgan Stanley, rising to vice chairman. He served a stint managing the endowment at Harvard, his alma mater, and he’s also a life trustee and member of the investment committee at Amherst College. He’s on multiple boards of nonprofit institutions, including the Doris Duke Charitable Foundation and St. Andrew’s Dune Church in Southampton, N.Y.
He is, in short, about the last person you’d expect to throw his support behind an investment strategy that makes fossil-fuel divestment — something Mr. Nadosy opposes — look tame by comparison. Yet, as chairman of the Ford Foundation’s investment committee, which oversees the foundation’s $12 billion-plus endowment, he’s now in the vanguard of an approach to endowment management that breaks with generations of investment orthodoxy.
Last week, the foundation announced that it would commit $1 billion to investments that “earn not only attractive financial returns but concrete social returns as well,” as it said in a news release.
“When we first started talking about this nine months ago, I was very wary,” Mr. Nadosy told me. “I’m on 10 different boards and investment committees. It’s deeply ingrained that your goal is to maximize returns, because that’s how performance is measured.”
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“Everywhere I go, people want to know, ‘What quartile are you in?’” he added. “Like it or not, that’s the world we live in.”
Earning high returns isn’t just a matter of bragging rights — endowment income supports the missions of nonprofit institutions, whether education, as with college and universities, or broader social programs, as at many private foundations. By law, tax-exempt foundations must spend at least 5 percent of their endowment every year on charitable purposes. In Ford’s case, that amounts to over $600 million.
If endowment returns do not exceed the 5 percent annual spending rate, they will gradually wither, and can eventually disappear, which is why many investment committees view protecting endowments as a near-sacred duty. That’s the main reason the student-led movement for fossil-fuel divestment has gotten such a cold shoulder at many large endowments.
But for Darren Walker, the Ford Foundation’s president, it was a source of mounting frustration that, as he told me last week, “we’ve spent the past 50 years trying to maximize the impact of 5 percent of our assets, but what about the other 95 percent.” And some of that was invested in assets that, whatever returns they may have generated, were anathema to the values of the foundation itself.
Mr. Walker decided it was time to bring “fresh eyes” to endowment management and consider not just financial returns, but also social impact, as he wrote last week in “Unleashing the Power of Endowments,” an open letter explaining the foundation’s decision.
“We can responsibly steward our assets while finding a path toward more transformational impact,” he wrote.
Ford hasn’t invested its endowment in any social-impact ventures yet, but said it would focus on affordable housing in the United States and access to financial services in emerging markets.
Ford is not the first to embrace the approach, widely known as mission-related investment, or impact investing. Pioneers in the strategy, albeit on a smaller scale, include the Rockefeller Brothers Fund, the W. K. Kellogg Foundation, the John D. and Catherine T. MacArthur Foundation, the Kresge Foundation, the McKnight Foundation, the F. B. Heron Foundation, the Wallace Global Fund, the Surdna Foundation, Omidyar Network, and the Open Society Foundations.
The movement gained fresh impetus when the Obama administration, in its waning days, said explicitly that trustees would not violate their fiduciary obligations or jeopardize their tax-exempt status if they authorized investments in “mission-related businesses.” (Whether the Trump administration will embrace that interpretation remains to be seen: When I checked this week, that policy statement had been deleted from the White House website.)
A cottage industry has sprung up on Wall Street to accommodate the new approach, with nearly every major bank, investment bank and asset manager now calling attention to its mission-related investment services. (Dina Powell headed Goldman Sachs’s impact investing and environmental markets groups before joining the Trump White House.) Last year, private equity giant TPG created a social impact fund, the Rise Fund.
“Not to malign Wall Street,” Mr. Nadosy said, “but when they smell a profit opportunity, you have to be careful.”
Mr. Walker had his work cut out for him to convince Ford’s own investment staff and board.
Mr. Nadosy said his previous experiences with mission-related investments were disappointing. “I’m on two boards where clean technology and pollution are big issues,” he said. “We invested in some ventures going back five or six years. They’ve been money-losers, by and large. They were good people and good ideas, but they haven’t worked out.”
Nonetheless, as he immersed himself in the issues, he gradually came around to Mr. Walker’s view that the be-all and end-all of a foundation’s work shouldn’t be to increase the endowment. “If we can invest in ways that support the mission and purpose of the foundation, and still earn a decent return, why not try?” he said. He said he expected these mission-related investments to underperform Ford’s more traditional approach, but nonetheless, “the social good should more than offset that.”
He stressed that Ford had built numerous safeguards into the effort, such as investing the $1 billion in phases. “We’re talking about 8 percent of the portfolio over 10 years,” he said. “After Year 2 or 3, if it doesn’t work, we’ll slow down. If it goes well, we can go ahead even faster.”
His support proved critical for mustering board support. It’s “not a hidebound conservative board by any stretch,” Mr. Nadosy said. Still, “this was difficult. We talked a lot and, quite frankly, it took some work.” (The board includes Gabrielle Sulzberger, who is married to Arthur Sulzberger Jr., the publisher of The New York Times.)
Given Ford’s size and prominence, its move is likely to generate a wave of new mission-related investment. In his letter, Mr. Walker called on endowments of all kinds, including pension funds, sovereign-wealth funds and university endowments, to get on the bandwagon and “help capital markets become accelerators of justice.”
“The Ford move is very significant,” said Jessica Matthews, head of mission-related investment at Cambridge Associates, a large investment advisory firm with many foundation and university clients. Last year, Cambridge surveyed its nonprofit clients, and nearly one-third of those who responded said they were using endowments to make mission-related investments. Of that group, 62 percent said they expected to increase their commitment over the next five years.
Ms. Matthews said that it was too soon and the database still too small to produce a reliable measure of returns, but that “the good news we’re seeing is there are bright spots,” with some social impact investments performing very well.
Not everyone is rushing to follow Ford’s example. “I congratulate them and look forward to seeing how they do,” said Vartan Gregorian, president of Carnegie Corporation of New York, but he said the foundation would adhere to its traditional approach, which has served its mission well over its 106-year history.
He noted that the founder, Andrew Carnegie, as a businessman, expected the endowment to earn a profit and exist in perpetuity. With an endowment now over $3 billion, Carnegie Corporation has been better able to serve its mission by increasing its annual philanthropic grant making. Investments, by contrast, generate “financial pressure for returns,” he said.
Still, “we’ll be watching to see if there’s anything we can learn” from Ford’s approach, Mr. Gregorian said.
Mr. Walker said he realized he was breaking with decades of conventional wisdom about endowment management, but felt that impact investing had reached “an inflection point.”
“In time, I fervently believe, we will see a thriving, mature sector in which everyone can make impact investments that produce both sustainable financial returns and substantial social returns,” he wrote. “Maybe it will take decades more to get there. But we’ll never know if we don’t make a start.”
Mr. Nadosy is ready. “I went from very skeptical to very excited,” he said. “So you take a little more risk, and maybe get a slightly lower return. Why not? The goal is to help people.”