Unveiling the Landscape (#3): Values and priorities shaping foundation operations

This four-part blog series is a deep dive into the 2024 Landscape Report, which offers a comprehensive view of Canada’s philanthropic landscape. The blog series summarizes the key findings and provides additional narratives and reflections from presentations we made about the research and feedback received from a range of stakeholders. The Landscape Report is a crucial starting point for philanthropic research conversations, and we invite you to be part of this discourse.

Fostering open discussions of foundation investments and operations

In this third blog, we look at the values and priorities which shape foundation investments and operations. Specific attention is paid to impact investing, fund managers, and the roles of foundation CEOs.

The philanthropic landscape in Canada is evolving. This evolution is seen through both investment priorities and within foundation operations. As foundations report their assets through the T3010 form, there is an increasing focus on how these assets are managed and deployed, as overseen by boards, senior leadership, and investment committees. There is also increasing interest in how and where foundations distribute their assets, which is much more difficult to discern from regulatory data. This blog post explores the priorities of foundation investments, the gradual shift toward impact investing, the role of fund managers, and the CEO’s role in navigating foundation complexities.

Investment Priorities and Values

Historically, Canadian foundations have prioritized charitable disbursement and the preservation of capital’s real value. Recent data from PFC surveys highlight that investment strategies vary widely, influenced by market conditions, available products, disbursement quotas, and the objectives of perpetuity or spend-down approaches. While some foundations aim for steady growth and low risk, others are beginning to intentionally align their investments with their values, focusing on environmental, social, and governance (ESG) criteria and impact investments.

Foundations as a sector face scrutiny for the perception of hoarding wealth, especially when looking at asset growth over time. From 2008 to 2021, foundation assets in Canada grew by approximately $100 billion CAD, a noticeable growth in an era of general wealth disparity which has generated calls for greater transparency in disbursement strategies. To address these concerns, some foundations share detailed investment reports with members, the public, and other stakeholders, beyond what is requirement by the government.

The Gradual Move to Impact Investing

Despite growing interest, impact investing is gradually being adopted more and more among Canadian foundations. Data is fragmented, and terminology is not consistent. ‘Mission-related’, ‘mission-based’, ‘socially responsible’, and ‘impact investment’ are among common terms that have been used. Moreover, survey methodologies are inconsistent, with some conflating terms and others asking about policies but not implementation.

Barriers to participation include concerns over returns, lack of data, perceived risks, and limited opportunities. Smaller foundations, in particular, struggle with this shift due to resource constraints and social impact expertise focused more on grant allocation than investment management.

Nonetheless, foundations increasingly integrate ESG considerations into their investment processes, such as negative screening and proxy voting. Larger foundations are leading the way by hiring dedicated investment managers to bring an impact investing lens to their entire portfolios. However, the majority are still in the early phases, seeking knowledgeable fund managers and educating their boards about the potential of impact investments. Skilled fund managers, better evaluation tools, and diversified and appropriate investment opportunities are crucial to overcoming these challenges. Additionally, some participants suggested that the government could provide more clarity and support for innovative philanthropic tools and models.

The Role of Fund Managers

Fund managers must balance the risk tolerance and return expectations of the foundations they serve. This balance is influenced by the foundation’s goals and the culture of the boards that oversee them. As one participant noted, their family foundation board’s support for a particular charitable area was independent of their investment strategy, which was instead focused on managing risk tolerance and return. The fund manager’s expertise facilitates this balance, tailoring investment strategies to meet the specific needs and objectives of the foundation.

The global pandemic has catalyzed significant changes in foundation operations, prompting many to increase their disbursements and rethink their asset growth and longevity values. These shifts have translated into investment management changes, with board directors reconsidering their strategies. Several PFC member Investment Committee members have expressed a desire to change fund managers to those who offer more options for aligning investments with their values. This transition requires an expectation of fund managers to integrate ESG criteria and impact investment opportunities into their portfolios and grow their own knowledge.

Changing investment strategies and fund managers can be challenging due to legacy issues and long-term relationships. Foundations can have long-standing relationships with their fund managers, who may have been trusted advisors for years. Transitioning to new managers or strategies can be difficult, particularly when there is a need to balance respect for legacy practices with the desire for innovation. However, the need for alignment with current values and goals is driving foundations to reconsider their investment approaches.

The CEO’s Role in Navigating Complexity

Canadian foundations’ operations vary significantly by type, size, and funding model. CEOs play a pivotal role in navigating the complexities of foundation operations. They act as intermediaries between boards, staff, grantees, and the public, balancing traditional values with the need for innovation. This position requires a deep understanding of their foundations’ internal dynamics and the broader societal challenges they aim to address. This study asked CEOs about emerging needs within their foundations, revealing three key themes: generosity, diversity, and risk.

Generosity

Generosity remains a cornerstone of Canadian culture, with foundations a crucial element in supporting communities, especially during times of greater need. Participants emphasized the importance of generosity and called for more philanthropic support from the country’s wealthiest citizens. This sense of duty to contribute to societal well-being is a driving force across various foundation types. Many foundation leaders noted increased collaboration and willingness to provide immediate support during crises like the COVID-19 pandemic, reflecting a collective effort to meet urgent needs.

Diversity

The philanthropic sector is experiencing intergenerational shifts, impacting donor profiles and foundation operations. CEOs often find themselves “holding the middle,” balancing the traditions of foundation founders with the evolving priorities of younger generations. Their roles involve navigating diverse voices and fostering inclusivity within boards and leadership. However, achieving greater diversity and implementing inclusive practices remain ongoing challenges.

Participants acknowledged the sector’s lack of diversity in terms of ethnic origin, age, and gender. Efforts to address these gaps include diversifying donor profiles, employing advisory boards, and engaging in initiatives like Truth and Reconciliation, trust-based philanthropy, and participatory grantmaking. While progress is being made, implementing these inclusive practices is slow, and much work must be done to achieve greater genuine diversity and equity.

Risk

Risk aversion is a notable characteristic of Canadian philanthropy. Participants highlighted how legacy decisions like values and fund management can hinder innovative changes. While there is progress in areas like climate financing and Indigenous collaboration, broader collaboration across the sector remains limited. Regulatory constraints and a lack of clarity also contribute to cautious approaches in foundation operations.

A critical debate within the philanthropic sector revolves around whether foundations should spend down their assets to meet immediate needs or operate in perpetuity to ensure long-term support. Sitting between these two options, some interviewees suggested that Canadian philanthropic capital needs more imagination for a greater diversity of approaches, such as immediate spending on certain issues, more community involvement, allowing some erosion of the endowment, and limited perpetuity (e.g., 15-20 years).

Conclusion

As foundations increasingly recognize the importance of aligning their investments with their values, the move towards impact investing, though slow, shows promise. The debate between spending down and maintaining perpetuity continues to evolve, with each foundation charting its own course based on its unique mission and goals. CEOs play a pivotal role in navigating these complexities, balancing tradition with innovation, and ensuring that their foundations can effectively meet both immediate and long-term societal needs. By fostering open discussions on investments and operations, Canadian foundations can maximize their positive impact on society both now and in the future.