A Historic Crisis and a Historic Opportunity for Action: the Ford Foundation’s Social Bond

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The Covid-19 pandemic has already had a huge impact on the work of nonprofits and charities worldwide. The first and most immediate effect has been the impossibility for charities to carry out their normal programs, due to lockdowns and social distancing. In the long-term, however, the most serious impact may well be on the financial sustainability of nonprofits, as the donors and the funders they normally rely on feel the squeeze of the economic crisis caused by the pandemic.

As one of the world’s most prestigious and well-endowed charitable foundations, the Ford Foundation has recently been taking the lead in finding new solutions to help its partners and the entire nonprofit sector make it through these difficult times. Back in March, the Ford Foundation spearheaded the creation of a pledge for philanthropic donors to support the needs of their grantees and partners during the Covid-19 crisis, with the signatories pledging to be generous with their funding and flexible in their demands. Almost 800 grant-making organizations have signed the pledge so far; most of them are based in the US, but there is also quite a number based in other countries (see the full list of signatories here). Chinese foundations later created a version of the pledge adapted for China, and about 233 foundations and funders have already signed it.

This June, the Ford Foundation took another unprecedented step in response to the coronavirus pandemic: it launched a social bond in the U.S. taxable bond market with the aim to raise $1 billion for grant making (not for foundation operations) to help sustain and strengthen nonprofits suffering from the economic impact of the coronavirus pandemic. CDB recently had a chat about this new social bond with the Ford Foundation’s country director for China, Elizabeth Knup, and with the foundation’s Program Officer, Gu Qing.

Elizabeth, who has been based in China for over 20 years and has been the Ford Foundation’s country director since 2013, explained how the foundation initially responded to the pandemic: “It was in the month of March that the we began to think about Covid-19 in terms of a global response, although we had already been active within China. From our point of view, there are a couple of different levels of impact. One is the public health crisis, which requires an immediate emergency response. There is also an almost immediate economic crisis, when societies begin to shut down, economies begin to slow down, and people feel like they have less resources to contribute to philanthropy. Social distancing also makes it difficult for people to come together in fundraising events.

We find that Covid-19 has revealed a lot of social challenges existing in many countries that are related to inequality. Who is getting sick? Who has to go to work? Who has to bear a certain kind of risk within society? There are economic, cultural and social inequalities in all of our societies that we all knew about, but now they are becoming really, really clear. In terms of these three dimensions, the public health dimension, the economic dimension and what it reveals about inequality, the Ford Foundation began thinking about what its responses could be.”

The Ford Foundation’s country director for China, Elizabeth Knup

The Ford Foundation’s initial response was focused on the public health crisis, and the foundation gave grants to frontline medical workers in Hubei, and later did the same in West Africa and Colombia. However the Ford Foundation is not a humanitarian relief organisation, and its main focus is on how to help social institutions continue to do their original work in the context of the pandemic and the economic crisis. In March, the foundation issued the pledge mentioned above, committing to be flexible with its funding so as to allow its grantees to survive this period of economic uncertainty. It also collaborated with several other foundations to create a number of funds focused on specific sectors of the economy that have been hard hit by the pandemic, for instance restaurant and hospitality workers in New York.

After these initiatives had been taken, the president of the Ford Foundation Darren Walker still felt that more was needed to channel resources to the institutions that the foundation supports. After all, as Elizabeth puts it, this was a “once-in-a-century crisis, and also a once–in-a-century opportunity to take action”. So in March, Mr. Walker went to the board of directors and proposed the idea of raising a social bond, and using the money made through the bond to strengthen the resilience of the grantees. The idea was to go to the capital markets and issue one billion dollars’ worth of bonds that would be acquired by institutional investors. After much discussion, in June the board decided to go ahead with this plan.

As Elizabeth explains, “the bonds are between 30 and 50 years in length, meaning that we will pay back the bonds plus interest over a 30 to 50 year period. So we are taking on debt, but we don’t think it’s very risky, because the current state of the markets makes that debt pretty inexpensive, and we anticipate being able to pay back the bonds quite easily over the next decades. The bond issuance has been incredibly successful, oversold in fact, and we have raised the money we anticipated, which is one billion dollars.”

The concept of a foundation raising money in the bond market for grant making is quite unprecedented in the US. Foundations sometimes raise money in the bond market for capital improvement, for instance to renovate their buildings, something which the Ford Foundation did itself for the renovation of its building in New York. But this is the first time that a US foundation raises money in the bond market specifically for the purpose of grant making, which is why it is designated as a social bond. All the proceeds have to be spent on the purposes of the social bond, and in fact the foundation has to report on its website how every penny of the money is spent, to show that it is used entirely for a social purpose.

The aim is to use the funds from the social bond to strengthen the resilience of charitable organizations during the pandemic. 70% of the money will be spent in the United States, and 30% in the rest of the world. All of it has to be spent by the end of 2021. In the US the grants will be focused on 35 to 40 grantees seen as core civil society organizations that are essential to fighting inequality. The grants will be long-term, lasting 3- 5 years, and the organizations will be free to use the money in a flexible fashion, including putting it in the bank for later use. The end goal is to ensure that once this crisis is finally over, the US will still have a healthy ecosystem of organizations focused on fighting inequality.

As Elizabeth explains: “Many think that the economic hit from Covid-19 will come in a year or two from now, when NGOs have consistently been unable to have a fundraising gala, where companies consistently don’t feel like they can make charitable donations, where individuals consistently feel at risk economically and don’t make the kind of contributions they used to, and where foundation endowments are consistently going down. After the Great Financial Crisis of 2008, the economic impact that I have just described came 18 – 24 months after the crisis. People have money now, but over time they are going to have less and less of it. So we want these grants to help organisations for four or five years, because we anticipate the real crisis to come not today, but in one or one and a half years time.”

Part of what motivated the Ford Foundation to launch the social bond was the feeling that the pandemic requires wealthy charitable foundations to step up and do something more compared to normal. US law requires charitable foundations to spend 5% of their total assets every year for charitable purposes, but the president of Ford felt strongly that this was insufficient in the face of the circumstances.

As Elizabeth puts it: “in the US there’s actually a very big debate about how our country is in a huge public health crisis, and the revelation of how deep the inequality is and what it really means for marginalized groups. Our whole country recognizes that this is a once in a century crisis and we need to rise to the occasion. Foundations who sit on top of a gigantic pile of money and only spend 5% every year…. well, there are those who say that this not enough in the face of the current crisis. If you’re ever going to give more you have to do it now.

Now of course, foundations can’t spend their whole endowment because then they couldn’t keep on existing, and there’s going to continue to be social issues that need to be addressed in the future. But you can take this moment to dig a little deeper and do a little better.”

So why did Ford decide to go down the route of raising money in the bond market, rather than make use of its original endowment? The reasoning was pragmatic, as Elizabeth explains: “Our endowment is 13 billion dollars. We could have taken one billion and used it for grant making. Raising money in the bond market puts a financial obligation on us to pay back that money over the next 30 years, as well as the interests. So why did we do it? The reason is that, first of all, during this period the stock markets are very volatile, and the endowment we have needs to stay as strong and healthy as possible, because the Ford Foundation by its charter must survive in perpetuity. The endowment is really important to our long-term ability to exist as a foundation, so in this moment of volatile markets, it would not be financially prudent to take a lot of money out of it [the endowment] right now.

At the same time, because of the financial crisis the bond market interest rates are low, meaning that the interest we have to pay on the social bond are also quite low. This means that the money is “cheap”, and we have 30 to 50 years to pay it back. We anticipate that over the next 30 years our endowment will certainly grow by more than the percentage of interest we have to pay on the bond.

It’s pretty unusual, I’d say we’re the only foundation that’s ever done this, but we are hoping that other foundations will follow us, and there already are five other US foundations that have committed to paying more than the 5% requirement. Some may go to the bond market but most will not, they will just use their endowment and increase the pay-out.”

Ford Foundation program officer Gu Qing

The Ford Foundation is well aware that even a billion dollars won’t solve the problems that the Covid-19 pandemic has brought to light. The hope is to use the money in a way that will have a systemic impact, and inspire other organizations to do the same in their own areas. This holds even truer outside of the United States, where the Ford Foundation is giving its local offices much flexibility to decide how to best allocate the resources according to the local context. So how are the funds from the social bond going to be spent within China? When asked, Elizabeth says: “we are still having an internal discussion about how we are going to use these resources to help China respond and bounce back. We won’t be making very many grants, because we want to make them long-term and relatively large, in keeping with what our headquarters are doing. The grants will be made on an invitation-only basis. Many of them will probably go to existing grantees, because we believe they are core to what we are trying to support in China. This is a one-time allocation that won’t be repeated, so we need to think how to do it in a long-term and responsible way.”

An exciting aspect of the social bond is how it might inspire similar efforts from within China. The Ford Foundation was the first foreign philanthropic foundation to officially open an office in China after the Reform and Opening Up, in 1988. The foundation’s work has garnered much respect and appreciation from the state, the philanthropic sector and the public in China, and its initiatives are bound to attract attention and interest. As Elizabeth puts it, “This is a really interesting opportunity to think about the intersection of philanthropy and what we call impact investment, in other words using capital markets to raise money for social good. This is an interesting discussion which is currently quite hot in China, and I think what we are doing offers an example of how philanthropy can use its own power to magnify its economic impact and help create a socially good outcome. I know China has a different financial market, culture and philanthropic sector, but I think our social bond can be a useful inspiration, and I think it’s already begun to inspire some of our grantees and partners to think a bit more about what philanthropy can do beyond a project grant to help respond to the crisis.”

“We recognize that China is huge and our resources are tiny, so that’s another reason why injecting new ideas into the Chinese system and the use of capital for social good could inspire something that’s unique and responsive to the Chinese situation. Maybe we just provide an inspiration and help to think about these things in a new way, and that could be our long-term impact. More than our dollars, it could just be the idea.”

As Gu Qing adds, “I think the significance of our social bond for the Chinese philanthropy sector is that we present an innovative financial tool that it can draw upon. Yet I think there is a long way to go for a social bond to be issued in the domestic financial market. Hopefully our bond issuance could really serve to enliven the social bond market in China. In the past green bonds were developing very fast in China. This year though, because of Covid-19, social bonds have become an even hotter topic within the global bond market, yet in China people are still putting more attention on the green bonds. I believe there will be many social issues China will need to address on top of the environmental challenge. So it will be interesting to see if we can guide the domestic financial market to consider how it can contribute to the development of social bonds in China.”

Elizabeth is very clear on the point that the role the social bond can play in China is very different from the one it can play in the US: “What we are doing in the US is that, since we are a social justice foundation, we are trying to focus on the organisations that absolutely must survive to ensure a more just society. In China it’s a bit different, because we do not have the same level of resources we have at home, and we are also not a Chinese foundation, so we are not making the bold assertion that we are in a position to decide what the country needs. Rather, we want to use our funds to help the Chinese ecosystem think about what it needs, from its own point of view, to survive over the next five years.

And the fact is, Chinese institutions are pretty creative and do have some pretty innovative ideas. I know that for example one of our grantees, 北京协作者 (Beijing Facilitators), is also trying to figure out how to inspire Chinese philanthropy to support social organizations in China in response to Covid-19, particularly grassroots ones, through creating a bond and a small grants program. I am sure that across Chinese society there are many acts of innovation in responding to this moment. These are the kinds of ideas that we want to inspire and where we can accelerate, to help them get bigger and more powerful. That is what we are trying to do.”

In Brief

We speak to Elizabeth Knup and Gu Qing about the background to the Ford Foundation’s unprecedented $ 1 billion Social Bond, and how the funds will be used both worldwide and in China to help civil society get through this difficult moment.
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