Buzz Schmidt

The F B Heron Foundation was established in 1992 with the mission of ‘helping people and communities to help themselves’. Although not the largest foundation by endowment, it has gained a strong reputation in the US for its forward-thinking impact investing and mission-related investing. In 2012, the 20-year-old foundation announced a change in strategy, citing that: ‘The world has changed, and so must we. It’s time for a new approach.’

Speaking at the Salzburg Global Seminar session on ‘Value vs. Profit: Recalculating Return on Investment in Social and Financial Terms’, F B Heron Foundation Chairman and Director Buzz Schmidt spoke of the strategic role foundations can play in the emerging philanthropic model of blending both social value and impact with profits. SGS Editor Louise Hallman spoke with Schmidt to discuss his ideas further.

SGS: Where do foundations fit in this emerging new model of philanthropy and social value? Are they just the pursestring-holders or can foundations be more strategic than that?

BS: Foundations like to think of themselves as society’s venture capital, but in my view that really is a significant misnomer. Foundations have been slow to take risks with respect to their endowments and even, to a significant extent, with respect to their annual grants, which comprise a relatively small percentage of their capacity to engage with society. So as we look at some of the elements of an emerging social investment philanthropy engagement opportunity, we will be calling on investors of all kinds to think differently about how they invest their capital in enterprises – hopefully, if everyone thinks rationally, in enterprises that provide net positive impacts for the key attributes of a successful, robust, sustainable, regenerative society.

But doing that is going to be very difficult for some investors because anything that’s different will send off alarm bells. The financial equation that so many individuals, middle class and down, face for themselves and their families is so tight right now that taking risks, thinking differently about financial return beyond traditional risk-return parameters, will be a difficult sell. It will need to be explained and modelled, it will need pioneers. There are a few institutions and a few individuals that are really in a position to pick this up, but the top of the list to provide transformative finance for society has got to be foundations, which have at least a putative social mission.

SGS: Is the F B Heron Foundation one of these pioneers? You recently announced a change in strategy that will eventually see you investing 100% of your endowment.

BS: Well we were pioneers even before that, actually. We’re at between 40-50% of our endowment today, which would certainly put us in the top quarter of a percentile with respect to our interest in this area. There may be another handful of other foundations that are looking at things in this way. We have been very conscious of doing this, and doing it correctly; maybe we’ve been too cautious as we’ve not wanted to fall on our face and create another barrier for adoption of these kinds of investment principles by other foundations. So we’re much more confident now of our ability to achieve impact as well as a reasonable financial return – even a competitive financial return – and we’re ready to ramp it up and take it to 100% over the next two or three years.

SGS: You say you’re looking to achieve impact as well as financial return. Is one more important than the other or are you looking for those win-win situations where you can have both?

BS: We’re definitely looking for win-win situations. We don’t think there’s any inconsistency. In fact, we believe – though maybe we can’t fully prove it yet – that attention to society’s critical needs for sustaining capital is the mark of a company that will not only achieve great things for society but also achieve a superior long-term financial return. We think that rather than being a trade-off between the two, they are part and parcel of the same operating perspective.

SGS: You said you consider the F B Heron Foundation to be a pioneer. Have you seen many other foundations following your lead or is the process still very slow?

BS: It’s definitely very slow. We’ve had some triumphs: the leading financial adviser to foundations and a number of other types of institutional investor, Cambridge Associates, has established a mission-related investing division. And it has a number of regular clients that have expressed great interest and that have at least dipped their toe into the mission-related investing water. There is a lot of interest on the part of foundations in an area that is increasingly being called ‘impact investing’. This is often conflated with mission-related investing but there is a difference.

We refer to mission-related investing as the full range of debt equity, private equity, cash-equivalent-type investing that we do across the portfolio that has an impact on the mission of the organization. Impact investing typically refers to very direct investments, more private equity type investments, in specific, very socially focused ventures – social enterprises. Whereas we will find impact across a much broader range of investments. I think Heron’s early involvement has been taken as support for impact investing and has helped spur on impact investing – and although that’s a part of what we do, it’s not the totality of what we do – and there’s lots of interest from foundations, though not a lot of activity yet, in that impact investing part of the universe.

SGS: Before taking up your position at the F B Heron Foundation, you set up GuideStar in the US and UK, enabling others to access and use financial and organizational data on non-profits active in those countries. What sort of entrepreneurial opportunities do you see within the philanthropy sector?

BS: I think that there are immense opportunities for entrepreneurs, established companies, rating agencies, foundations themselves – particularly if they’ll do it collaboratively among themselves, which is not their tradition(!) – to help us understand how our enterprises impact society.

And it’s not just if they’ve achieved their mission, which might be to fill hospital beds or to eliminate malaria. There are other things that all of these institutions and enterprises that we invest in do; they all impact society in multiple ways. They all have an impact on our natural environment; they all have an impact on human capital development; they all have an impact on other systems that they touch – the communities that they operate in, the highways they use, the telecoms systems they might build, the networks of relationships geographically, other organizations they might assist, the supply chains they establish – and a robust society needs our enterprises to be strengthening that stuff, right?

So how do we figure that out? How do we know? We can’t measure all this stuff, so we need to be creative but we need a lot of people looking at it. I would love to see a number of analysts looking at companies differently, looking at non-profit organizations differently, looking at cooperatives differently, building a new vocabulary that is supportable with data. It might be qualitative data, it might not be measurable, but it needs to be faithful, descriptive and compelling. And I think there is just tremendous opportunity there and tremendous need for it. Once its value is recognized, I think there’ll be multiple business models to pay for it.

SGS: Coming back to this week’s seminar, what sort of outcome, impact and value do you see coming out of it? [The F B Heron Foundation provided financial support to the Salzburg Global Seminar for the running of sessions, including ‘Value vs. Profit: Recalculating Return on Investment in Social and Financial Terms’.]

BS: I have to admit, I don’t go to that many conferences, and this isn’t technically a conference; it’s a formative process where we’re taking disparate viewpoints and experiences and trying to build some new capital in understanding an issue. But what is different about this, what is really exciting from my point of view, is that this really enables a holistic view of the issues. We did not get trapped talking about impact investing alone or non-profit performance alone, or looking at negative behaviour and poorly behaving corporations – which have been the subjects of other conferences.

Instead, we were able to really take an expansive view. We were able to think about how all these enterprises impact society and how we as investors really have a responsibility to think very broadly about it and not to automatically put non-profits in one bucket, large companies in another, SMEs in another, and these new social enterprises in another, but rather to see that we really ought to be looking at the whole thing. And there are consistent ways to be looking at these different enterprises across that continuum, and actually when you think about it, that continuum is not what we think it is! They’re all mixed up in their impact! And kind of recognition has huge implications for portfolio development, for other investment strategies and for sourcing resources for ventures that impact society. So, I think it was very successful in doing that. Clearly there are at least three or four significant threads that are emerging from subgroups of people who are keen to develop different aspects (I’m involved in a couple of them). So I think it was highly successful.

Buzz Schmidt is Chairman and Director of the F B Heron Foundation. This is an edited version of the original interview first published on the SGS website.