The power of foundation endowments

26 October 2023

Carol Mack, ACF’s chief executive, reflects on the benefits of foundation endowments, the independence they provide and their important contribution to civil society.

Please note this piece was originally published by Third Sector.

For many foundations an endowment is their ‘super-power’: a key source of independent and sustainable income they can deploy to further their charitable mission. An endowment – a lasting investment for charitable work - ensures foundations can be responsive while also taking the long view, responding to urgent need without losing sight of longer-term needs and their founding vision for change.

We have seen foundations deploy their resources effectively in response to recent crises. During the Covid-19 pandemic, the UK’s largest 300 foundations gave away a record £3.7 billion over 12 months to charities and individuals in need - 13% more than the previous year - and that’s in real terms, over and above inflation. Foundations responded in a similar way in the 2008 financial crash and have stepped up their support in the current cost-of-living crisis.

This flexibility is an inherent strength of the foundation model - enabling them to dig deep when times are tough, stepping up their spending during turbulent periods and replenishing their endowment in better times to ensure that they can continue their work over the longer-term.

That’s not to say all foundations intend to hold their endowments forever. Plenty of foundations do ‘spend down’ and ‘spend out’ their endowments to meet their mission. For example, if you are trying to tackle the climate emergency, then the time to act is now. But we need other foundations to support ongoing causes, such as health, education, and the arts, and to keep philanthropic funding flowing at times of crisis.

This is all set against a backdrop of regulation in the UK, which does not allow charities – including foundations – to accumulate resources without a good reason for doing so. Recent debates over imposing a minimum payout ratio seldom acknowledge the existing regulatory environment. Comparing the UK to countries with a mandatory target such as the US, Australia, and Canada, as the recent report from Pro Bono Economics does, is like comparing apples with pears. Unlike these contexts, we already have regulation in place to ensure charitable funds are spent appropriately.

In fact, the introduction of any mandatory payout of assets would more likely act as a ceiling than a floor. Foundations would be reluctant to spend over and above the minimum amount without the assurance that they could rein in spending in future years if needed.

The current regulatory landscape ensures foundations are free to concentrate on what is the most effective way to use their funds each year in pursuit of their charitable mission, rather than fixating on meeting an arbitrary financial target in any one year.

Beyond grant-making, foundations are also considering other tools in their toolbox to further their mission. A growing number of foundations are investing their endowments with mission in mind, using their shareholdings to bring about positive change, whether that be through impact investing, shareholder engagement or divestment. This is a long term trend in the foundation sector, with investments being stewarded for positive social and environmental impact.

It’s clear that endowed foundations are uniquely placed to contribute to social good, offering both nimble, responsive funding and patient capital into the future. For our part, ACF will continue to support our members to leverage the power of their endowments, as they rise to the challenges of our times.