In a move that could change philanthropy, foundations are asking investors to finance grant-making to nonprofits, which are essential to a post-pandemic recovery and more equitable future.
Canceled fundraisers, lost corporate sponsorships and reductions in grant money are just a few of the challenges that nonprofit organizations have struggled to overcome as the coronavirus pandemic squeezes their budgets right when their services are even more critical.
To meet that extraordinary need, large private foundations—such as the Ford Foundation, Doris Duke Charitable Foundation and the MacArthur Foundation1—have turned to a nontraditional source of funding: the public bond market.
“We are facing a once-in-a-century crisis, and we must respond in unprecedented ways to sustain organizations that are advancing the fight against inequality at a time when the need is more pressing than ever," said Darren Walker, President of the Ford Foundation, which in early June issued a $1 billion first-ever social bond by a foundation, for which Morgan Stanley served as joint bookrunner and co-sustainability structuring agent.
Issuing debt at scale for nonprofit grant-making represents a new approach for foundations.
The timing may be just right. Fixed-income investors are looking for stable securities that nevertheless can still return more than Treasury bonds, which continue at historically low yields. That these bonds also let investors fund critical grant-making to nonprofits in dire need adds to the appeal.
Issuing debt at scale for nonprofit grant-making represents a new approach for foundations, allowing them to boost their giving at a time when many nonprofits face reductions in funding. Realizing they can leverage their strong credit ratings and the debt market’s low borrowing costs, foundations use the bonds to raise capital they can then distribute to smaller nonprofits that lack such recourse. This also allows foundations to preserve their endowments, which may fluctuate in value given the market volatility.
Social Bonds and ESG Investing
“The nonprofit sector will be fundamentally upended and diminished by the economic fallout from Covid-19,” says Walker. “The proceeds of the social bond sale will support and stabilize social justice, human services, arts, and cultural organizations who must be essential voices in influencing the recovery and reimagining a new normal that is more just and inclusive.”
The Ford Foundation, which supports hundreds of organizations, including Color of Change, the Equal Justice Initiative, Black Youth Project 100 and the National Employment Law Project,2 has led the way, but other foundations haven’t been far behind. This month, the Doris Duke Charitable Foundation expects to issue a $100 million social bond, with Morgan Stanley engaged as an underwriter. The firm is leveraging its Public Finance, Global Capital Markets, Sales and Trading, and Global Sustainable Finance teams to bring the bonds to market. Each of the offerings will increase grant-making to nonprofits positioned to address coronavirus and social inequality issues for local communities.
Investors have reacted positively. The Ford bond garnered significant investor interest3 and attracted a broad range of investors, including insurance companies, bond funds, hedge funds and retail investors, according to Eric Wild, a Managing Director in Morgan Stanley’s Public Finance department, which led the deal.
Walker (a member of the Advisory Board for Morgan Stanley’s Institute for Sustainable Investing) and Morgan Stanley’s Chief Sustainability Officer Audrey Choi hosted a call with more than 200 of Morgan Stanley’s financial advisors, some of whom purchased the debt on behalf of their clients. Asset managers also bought the bond through strategies available on the firm’s Investing with Impact platform, which offers investment solutions designed to advance environmental, economic and social goals.
Whether because of Covid-19 or social justice movements, the ‘S’ in ESG is becoming increasingly important.
Partially fueling the demand is the growing popularity of sustainable investing among institutional asset owners, who perceive the potential for attractive financial performance alongside positive impact on the planet or society, just as regulations are driving greater disclosures on environmental, social and governance (ESG) factors.
The bonds can offset the volatility of other investments, Wild says, while offering higher yields than government bonds over the long term. “Investors viewed the bonds as solid investments with the highest possible ratings, offering the opportunity to earn a yield well above Treasury rate, and within the social bond context,” he says.
Moreover, the bonds offer investors a way to target purely social causes, a less common option than addressing environmental issues, according to Wild. In fact, volume for sustainability bond issuances shows that social bond offerings reached just $17 billion in 2019, compared with $235 billion for green bonds to finance environmental efforts that same year.4
“Whether because of Covid-19 or social justice movements, the ‘S’ in ESG is becoming increasingly important right now,” says Jamie Martin, an Executive Director in Morgan Stanley’s Global Sustainable Finance group. “Organizations and investors are waking up to the role that capital markets can play in scaling solutions that are of the size that’s needed to start to address these systemic challenges.”