Big Foundations Double Down on Government Mistakes

Wall Street Journal July 8, 2017

What’s the trouble with ‘mission-related investments’? Who defines the mission. By James Piereson and Naomi Schaefer Riley | 771 words

The Ford Foundation is putting its money where its mouth is. That seems to be the message from its president, Darren Walker, and his colleagues. Ford, the third-largest foundation in the U.S., recently announced that over the next 10 years it will put $1 billion of its $12 billion endowment into “mission-related investments.”

Until recently, foundations generally invested the way everyone else did—to get the most bang for the buck. The difference was that foundations sought returns so as to have more money to give away. But now nonprofit leaders such as Clara Miller of the F.B. Heron Foundation have decided to go instead for social-impact investing, with the goal of generating a social or environmental effect alongside a financial return. “If we were just doing good work for a limited number of people, we would never eliminate poverty,”Ms. Miller told Crain’s last month. “We wanted to be influential beyond our own giving. We wanted to get others into this mindset.”

Yet mission-based investing also can create serious distortions in the market. For foundations like Ford, whose mission has long been entangled with encouraging more federal spending on a variety of programs, the potential for harm is significant.

Fifteen years ago, for example, the foundation invested $2 million in the Bay Area Equity Fund, a backer of the electric-car company Tesla, according to a recent article in the Chronicle of Philanthropy. “The foundation declined to provide details,” the article continues, “but estimates suggest the fund’s value grew 24 percent, while its investment in Tesla alone increased more than tenfold.”

What’s odd about this is that Tesla is still not selling cars at a profit, but it has received billions of dollars in state and federal subsidies, as well as payments from other car companies buying “zero-emissions vehicle” credits. Ford has reaped its returns in part thanks to subsidies and regulations.

Both politicians and the Ford Foundation are picking winners and losers—favoring what they see as more environmentally sound cars over traditional ones. Generous government subsidies also create distortions within the electric vehicle market itself. As Adam Andrzejewski of notes, Zero Motorcycles has received millions in credit from the Export-Import Bank, subsidies from the state of California, and even grants from the city of Santa Cruz. It could hardly have been a surprise when Zero’s biggest competitors, Brammo and Mission Motorcycles, exited the business in 2015.

If the subsidies go away at some point, Ford may lose a significant chunk of money—a risk it has presumably decided is worth taking. But the foundation is also putting its pretty big thumb on the scale.

Traditionally, foundations were supposed to be independent—needing to worry about neither financial returns nor voters’ demands. But these days it seems philanthropic money simply follows government money. The Rockefeller Foundation is investing part of its endowment to launch a clean Energy Investment Trust that will “support institutional investments into renewable energy.” In other words, it will pour money into solar and wind power, where government is already deeply involved.

Similarly, Ford has announced it will invest in affordable housing in the U.S. This is an area where government regulations and subsidies have already distorted the market significantly, creating shortages in cities and constructing public housing with terrible living conditions.

Nonprofits often see government as leading private investment. A post earlier this year on the blog Broadway Journal explained that when a theater receives a grant from the National Endowment for the Arts, it “confers a stamp of approval for a project, which is appealing to other donors.”

But it’s not as if government gets out of the way once private money starts flowing. Many nonprofits take taxpayer money even when they don’t need it. As of June 2016, the Metropolitan Museum of Art had $3.82 billion in total assets and annual revenue and support of $379 million. But last year it got a $50,000 NEA grant for its “Age of Empires” exhibit.

One problem with public-private partnerships is that the private partner often ends up covering the public partner’s mistakes. So much of foundation giving these days seems aimed at trying to fix public institutions. Yet this money—hundreds of millions of dollars for large public-school systems, affordable housing or AmeriCorps and the World Bank—seems simply to fall into the abyss.

With mission-driven investing the opportunities for private philanthropy to follow government will only grow, leaving foundations like Ford, more than ever, throwing good money after bad.

Mr. Piereson is president of the William E. Simon Foundation. Ms. Riley is a senior fellow at the Independent Women’s Forum.■