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Foundation spending lags investment returns

Written on Sep 10, 2021

Private and community foundations realized solid return on investments during 2020, but their spending didn’t necessarily reflect those gains, according to the Council on Foundations-Commonfund’s Study of Investment of Endowments for Private and Community Foundations. The 147 private foundations and 83 community foundations participating in the survey represent $115.4 billion in assets.

Foundation leaders are examining how they invest, in terms of responsible practices or investments aligned with their missions. Those examinations are resulting in gradual changes at best, increased societal focus on social responsibility issues notwithstanding.

While not as strong as the returns of 2019, 2020 marked the second positive year in a row, and helped offset the overall losses of 2018, which included negative 3.5% returns for private foundations and negative 5.3% returns for community foundations, according to the study.

In 2020, the participating private foundations reported an average return of 13.1%, while community foundations reported average returns of 12.1%. These were good, but behind the pace of 2019 when private foundations realized returns of 17.4% and community foundations saw returns of 18.2%.

Private foundations with assets in excess of $500 million saw growth rates of 16.1% during 2020, while community foundations of the same size generated 11.4% growth rates. Among all foundations with assets between either $101 million and $500 million, or less than $101 million, growth rates ranged between 11.6% and 13.1%.

Despite the increased need and stresses within the nonprofit community, increases in foundations’ spending rate did not match the jumps in their returns. Among private foundations, spending rose from 5.4% in 2019 to 5.6%. Community foundation spending actually declined on a percentage basis, from 4.8% in 2019 to 4.7%.

Overall, however, these foundations did not jump at a chance to meet the increased needs. Only 33% of private foundations increased their overall spending rate during 2020, although that figure was up from 26% in 2019. Within the community foundation sector, spending doubled to 10% last year from 5% in 2019. Just over four in ten (41%) of private foundations, and 28% of community foundations allocated incremental spending at alleviating the coronavirus pandemic.

In terms of dollars, 58% of private foundations released more in 2020 than they did in 2019, while 67% spent more in 2020.

At the same time, however, 32% of private foundations reduced their spending rate, as did 16% of community foundations. As for actual dollars, 38% of private foundations and 27% of community foundations cut back the amount of actual dollars spent.

The pandemic apparently influenced other aspects of foundation policy: more private foundations are considering environmental, social and governance (ESG) criteria when determining where to invest, up from 14% in 2018 (the question was not asked of foundations in 2019). During the same period, the percentage of community foundations taking ESG criteria into consideration remained steady at 20%.

Foundations were similarly mixed when considering investments inconsistent with their missions. In 2020, 20% of private foundations screened investments based on mission consistency, up from 12% in 2018 (again, the question was not asked in 2019). But among community foundations, this practice actually declined between 2018 and 2020, slipping from 13% to 12%.

Similarly, only 15% of private foundations made investments that further their mission, up from 14% in 2018. And among community foundations, this practice dropped from 16% in 2018 to 12% in 2020.

Despite the seeming lack of action, foundation leaders are increasingly having discussions about responsible investment practices. During 2020, 41% of private foundation investment committees discussed ESG issues, up from 27% in 2018. And 59% of community foundations investment committees held similar discussions, up from 27% in 2018. Survey respondents from both types of foundations indicated that increased use of ESG standards was likely during the upcoming 12 months.

Source: The NonProfit Times