The Evolution of Heron: Enterprise

Enterprise

Founded in 1992 with the mission of helping people and communities to help themselves, the F.B. Heron Foundation came into being during one of the greatest economic booms in U.S. history. The strong financial markets of the 1990s not only resulted in the rapid growth of Heron’s asset base but also served to reinforce its then focus on asset building and community economic development — as so many Americans did not benefit from the economy’s generation of wealth.

1996: The Tipping Point

Faced with the challenges of making effective grants and managing a growing endowment, Heron’s board of directors understood all too well that the scope of the social problems it sought to address required more significant resources than its mandated 5 percent payout. At a regularly scheduled meeting in 1996, Heron’s board reviewed a particular investment manager’s performance for what seemed like hours, leaving little time for program matters. This imbalance caused the board to step back and evaluate the effectiveness of the foundation. After much discussion, the board put forth the suggestion that because of Heron’s social mission and tax-exempt status, the foundation should be more than a private investment company that uses its excess cash flow for charitable purposes. Without changes, in the board’s view, there could be very little to distinguish the foundation from a conventional investment manager. The board began to view the 5 percent payout requirement as the narrowest expression of the foundation’s philanthropic goals. By looking to the other 95 percent of assets, the “corpus,” the board could conceive a broader philanthropic “toolbox” capable of generating greater social impact than by grant-making alone. Spurred by this “tipping point,” the board encouraged staff to explore ways in which Heron could engage more of its assets through a combination of grant-making and “mission-related” investment strategies. The board made a deliberate decision to find ways to leverage an increasing number of Heron’s resources in pursuit of its mission and therefore maximize the foundation’s impact in low-income communities.

Guiding Principles: Progressing Incrementally and Learning by Doing

Developing a mission-related investment strategy did not happen overnight. Heron invested time refining its mission and determining how that mission could be enhanced through a proactive investment strategy. Initially, there was some uncertainty as to how far and how fast the foundation could move and therefore a reluctance to establish specific mission-related investment targets. By adopting an incremental philosophy, the foundation was able to test the concept without making any major missteps. Staff was encouraged to explore opportunities in core program areas that would build on existing networks and expertise, as well as to share lessons learned along the way. As the field became more robust, Heron started to encounter intermediaries who could engage in mission-related investing on its behalf. Heron proceeded to invest with some of these fund managers, many of whom were creating jobs for people who were otherwise being waylaid by globalization, mechanization, and disintermediation. Within a decade, Heron’s mission-related activity had grown to comprise approximately 40 percent of its overall endowment and included everything from taxable municipal bonds to private equity.

The World Has Changed

In 2012, Heron underwent a strategic review and decided to increase this activity even further — investing not just 40 percent of the endowment but all of its assets for mission. The 20-year-old foundation announced the change in strategy, citing:

“We have come to conclude that unfortunately, our comfortable habit appears to have outlasted the accuracy of the premises on which it was founded, and in the process has grown less useful year by year. The world has changed, and so must we. It’s time for a new approach.”

 

 Heron spent the next few years looking for managers who could help it invest 100 percent of its assets for mission. Unfortunately, the foundation discovered that there were relatively few truly mission-aligned, poverty-oriented investment managers in the market. But there were a growing number of impact-screened opportunities in which Heron could engage. Accepting that impact-screened vehicles were at least more mission-aligned than its traditional portfolio, Heron spent the next few years working with managers to move over $150 million to impact-screened products. The initial rotation culminated on December 21, 2016, when Heron moved the last unscreened piece of its corpus to a slate of impact-screened ETFs. (Appreciating how far it has come, Heron is abundantly aware that in the future the work will be to further rotate the portfolio from screened for impact to invested for mission.)

For now, Heron is poised to leverage the lessons it has learned over the past 25 years — both on the ground in communities and within the capital markets. By operating more deliberately at the intersection of communities and capital, Heron will be better positioned to help people and communities help themselves out of poverty.

 

Much of this history was well captured by Michael Swack in his January 2009 piece, Expanding Philanthropy: Mission-Related Investing At The F.B. Heron Foundation, published by the School of Community Economic Development at Southern New Hampshire University.

Heron's Journey

1992

Inside: The Creation of Heron

Heron formed with a belief in self-help, personal independence and empowerment, in the importance of access to the market for community as well as for personal prosperity and, underlining these themes, an impatience with a philanthropic model that seemed at times to be static and ungenerous. These principles inspire how the foundation is structured, how it operates and how it targets the impact it seeks to have in society.

Outside: Diminishing Social Safety Nets

While some of the country manages to recover from the deep recession of the early 1980s, the era is markedly negative for cities, the working poor and access to capital. There are significant cuts in aid to cities, such as the Community Development Block grant program and aid for affordable housing. This era forms the backdrop for the Heron staff’s thinking on how to address poverty.

1994

Inside: The Reinvestment Fund

Heron contributes grant support toThe Reinvestment Fund, a national leader in the financing of neighborhood revitalization, to assist with operating costs, loan loss reserves and policy work.

Outside: Creation of CDFIs

The Community Development Financial Institutions Fund becomes part of the Treasury Department, paving the way for Community Development Financial Institutions (CDFIs) to legally step in and give low-income communities access to credit and financial services they had been denied by traditional banks.

1996

Inside: Moving Beyond 5%

Board members suggest that, because of Heron’s mission and tax-exempt status, the foundation should do more than just act as a private investment company that uses its excess cash flow to support charitable causes. Inspired by this concept, the board encourages staff to explore ways in which Heron could engage more of its assets through a combination of grantmaking and “mission-related” investment strategies. 

Outside: 'Welfare Reform'

President Clinton signs the Personal Responsibility and Work Opportunity Act into law, which puts an increased emphasis on moving people who receive benefits into the workforce. The legislation makes major changes to the welfare system in the United States and shifts much of the responsibility for providing benefits to the states.

1998

Inside: Shifting the Investment Strategy

In late 1997, Heron makes its first Program-Related Investment and by 1998 sees an increase in volume of PRIs investment. The foundation also starts a "capital markets access project," identifying potential nonprofit partners and marketing deals to potential investors. The foundation's leadership seeks to simplify investment management and reduce investment expenses by shifting an increased percentage of assets from active managers into index funds.

Outside: Tracking 'Good' Business

Journalists Robert Levering and Milton Moskowitz begin producing the Fortune 100 Best Companies to Work For. This highlights the companies using the best corporate social responsibility practices and how their financial performance fairs because of it.

2000

Inside: Expanding the Mission Portfolio

By 2000, 75 percent of Heron’s grants advanced affordable homeownership, small business development and access to capital. The “Mission-Related Investment” portfolio grows to $15.8 million, almost 6 percent of the foundation’s total portfolio. Urban America becomes Heron's first significant “double bottom line” investment with the goal of acquiring and developing commercial real-estate. 

Outside: Internet and Economic Boom

Though the decade of the 1990s sees one of the most sustained periods of economic growth in U.S. history, it culminates in a dot-com bubble and economic recession by 2001. The Economist calls the 2001-2009 period "the lost decade." Largely due to globalization, the country bled nearly five million manufacturing jobs between 2001 and 2009 according to the Bureau of Labor Statistics.

2004

Inside: Screening Public Companies

Heron supports more R&D and policy work to create a more favorable environment for change to happen and advances its Mission-Related Investing strategy. The U.S. Community Investing Index is set up to encourage investing in public companies that demonstrate successful and proactive engagement with economically underserved populations in rural and urban communities in the United States.

Outside: The Housing Bubble Peaks

The Bush administration places great significance on an “ownership society” initiative—focused on rapidly increasing homeownership—and Congress passes the American Dream Down Payment Assistance Act, which provided $200 million in subsidies for first time homebuyers. Housing rates in the U.S. hit an all time high of 69.2 percent. Meanwhile, the Securities and Exchange Commission repeals the net capital rule for several major broker-dealers, allowing them to take on heavily leveraged debt. 

2005

Inside: Narrowing our Focus

Heron seeks to target its support to have greater impact by focusing its wealth creation strategies in specific geographies, at one point aiming at New York City, Chicago, Michigan, Texas, the Mid-South Delta and Appalachia. Heron also responds to the natural disasters along the Gulf Coast durring hurricanes Katrina and Rita, offering support to the Disaster Recovery Task Force.

Outside: Hurricane Katrina

The 2005 Atlantic Hurricane Season tears through the country, becoming the most active and destructive season recorded. This includes hurricanes Wilma, Katrina, and Rita: three of the top six most intense Atlantic hurricanes ever. The areas below sea level that suffer the most destruction are also some of the poorest. Many of these residents do not have insurance and face a difficult and lengthy recovery. 

2007

Inside: Expanding Our Scope

As the housing market crashes, Heron-supported housing developers and CDFIs report that their families and mortgages are holding their own despite immense stress. Heron investees and grantees provide early warning signs of the housing crash and direct more resources to confronting the financial sector's irresponsible practices. The foundation also builds on core competencies and its track record in mission-related investing. By 2009, 58 percent of Heron’s fixed-income investments are mission-related.

Outside: Financial Crisis

Toward the end of 2007 into 2008, the financial crisis begins to spiral out of control and spread throughout the global market. The U.S. financial sector nearly collapses under stress from the abuse in the derivatives market, low liquidity and collapsing real estate prices. The subprime mortgage crisis leads to record foreclosures, and some families, who otherwise would have been financially sound, are left with mortgages much greater than their home’s value. The economic downturn, which lasts well beyond 2009, becomes known as the Great Recession.

2011

Inside: 100% for Mission

Heron shifts its strategy to invest, directly from its own assets and with others, across a range of industries, legal forms of operation and enterprise size. As part of the strategy, Heron will provide financing in the form of equity and debt and draw on social and knowledge capital. It also begins working on deploying not only its grant dollars, but all of its resources, towards mission. In addition, it hopes to recruit and follow co-investors and influence investment practices, both in philanthropy and private industry, to align with its goals.

Outside: Occupy Wall Street

Occupy Wall Street protests take New York’s financial district, sparking a national conversation on social and economic inequality. Protestors adopt the slogan “We are the 99%,” referencing the gap between the wealthiest 1% of Americans and the rest of the country, in order to highlight Wall Street greed and corruption. The movement calls for reduced influence of money in politics, more equal distribution of income, job creation, bank reform and student loan forgiveness. 

 

2012

Inside: The World Has Changed

Heron begins assembling a new staff including the Capital Deployment team, breaking the traditional barriers between investment and grantmaking departments. The World has Changed document is created, outlining a change in direction for the foundation under three pillars:

1. Primacy of Jobs and Livelihood: investing in the best deals producing reliable, decent employment…expecting meaningful results that enable people to be self-sufficient, act independently, and make choices.

2. Lift All Boats: bringing every enterprise up the social/financial performance curve with a greater percent of people sharing in the economy…seeking to have the market system operate more equitably.

3. Full Accountability: deploying 100 percent for mission…putting all Heron’s resources at work for the benefit of society.

Outside: Presidential Election

The 2012 presidential election ushers in a new discussion on society's "makers and takers." Candidates take different perspectives on America's poor and whether or not they take away from society. The election also sparks a debate on raising the minimum wage. Advocates state that a higher minimum wage would help Americans out of poverty and improve the quality of life for people across the country, while critics say higher wages cripple businesses and catalyze layoffs. 

2013

Inside: Adjusting Our Model

Heron begins making the major adjustments to our business model to better meet the goals outlined in The World has Changed document. This included the design and early execution of our first “pipelined” tracking system for deals, across asset class and across enterprise types with both social and financial performance. The early design of our first omnibus reporting system, to report results of all assets (debt, equity and funds) on a financial and social basis, and our first market analysis by industry, across legal forms of organization.

Outside: Thomas Piketty and the New Pope

French economist Thomas Piketty’s Capital in the Twenty-First Century becomes a world-wide bestseller. The 700-page work argues that inequality is an inherent feature of capitalism, since inherited wealth grows drastically faster than income, and that consequentially the American dream cannot deliver on its promises.  Over at the Vatican, Argentina’s Cardinal Jorge Mario Bergoglio takes the name Francis and becomes the 266th pope. The new pope lashes out against trickle-down economics and the “idolatry of money”, deeming income inequality the root of societal ills and urging for heightened poverty-alleviation measures.

2014

Inside: Moving Closer Towards Our Goals

Heron moves closer toward its goals, with 60 percent of the endowment screened for mission by the end of the year, up from 40 percent the previous year. The Board also approves a new investment policy statement with precepts driving toward measuring endowment performance for both social and financial. 

Outside: White House Roundtable

The White House hosts a roundtable on impact investing to galvanize and expand the global impact economy. Over 20 investors and foundations announce more than $1.5 billion in new impact investments, while the administration pledges to remove regulatory barriers keeping capital sidelined, support private sector investments in high-impact industries and make innovative enterprises investment-ready.

2016

Inside: 100% of Heron's portfolio screened for impact

On December 21, 2016, Heron completes a shift from other Blackrock holdings into Blackrock's new sustainable ETFs, thereby reaching the goal of having 100% of our portfolio in investments that are screened for impact—and kicking off a process of continual optimization for both social and financial performance.

Outside: BlackRock launches sustainable funds

BlackRock announces the launch of two sustainable equity exchange-traded funds (ETFs) to address growing investor demand for long-term, socially responsible investments. The funds make use of MSCI ratings on over three dozen environmental, social, and governance metrics, tracking two MSCI indices in the United States and emerging markets.