Foundation Investment Funds for Grant-Making Foundations in Germany: Do They Facilitate Sustainable Investing?

Abstract

Grant-making foundations commonly use financial returns on investment in support of a public purpose. Recently, more attention has been given in academic research to the role of foundations as sustainable investors. According to the concept of socially responsible investing (SRI), foundations should integrate their social purposes into their investment strategies. However, foundations are also required to comply with national legal frameworks. Our research interest lies in those investment funds that are specifically developed for foundations in Germany. In this study, we answer two research questions: First, what are the characteristics of the market for foundation investment funds in Germany? Second, to what extent are foundation investment funds useful for foundations pursuing an SRI strategy? We build on a full sample comprising all 52 German foundation investment funds that are currently available and then use data from MSCI to apply a sustainability rating for these funds. With these data, we evaluate the financial performance of foundation investment funds in relation to their sustainability ratings. Multidimensional Scaling (MDS) was used to reduce complexity in the dataset and detect similarities among a set of objects. Our findings differentiate between two distinct clusters of foundation investment funds. The first “discrete” cluster represents the majority of funds, and these funds are generally smaller with lower performance and lower levels of SRI conformity. The funds in the second “attached” cluster are generally larger, more diversified, and have higher performance. Finally, we call for further research offer implications for both fund managers and foundation asset managers.

Plain Language Summary

Shortcommings in sustainable investing through foundation investment funds

Keywords

investment funds socially responsible investing SRI foundations philanthropy

Introduction

Grant-making foundations have become the default option for financing large-scale philanthropic activities. Basically, a grant-making foundation is an endowment in which revenues are used to pursue a charitable purpose. Within the past thirty years, the number of foundations has more than doubled in many countries, including the United States, Germany, and Switzerland (von Schnurbein & Perez, 2018). Although these foundations are categorized as nonprofit organizations, they are distinct from other types of nonprofits (Toepler, 1999). The major difference between the two is that nonprofits generally seek funds, whereas the purpose-driven activities of grant-making foundations are generally connected to spending money (Anheier & Leat, 2013). However, in recent years, earning revenue has become a demanding task, as financial markets have fundamentally changed. Low—even negative—interest rates have forced foundations to either invest in asset classes with higher levels of risk or reduce their funding activities. These developments have placed a spotlight on a longstanding shortcoming of grant-making foundations: In the traditional grant-making model, only a small percentage of the total endowment actually goes to charity. The vast majority is invested as capital in general financial or other assets (Prewitt, 2006). Therefore, the overall effect of such foundations should be considered. The research focus is thus on the endowment fund, which can be invested in all sorts of asset classes to create a financial return that is then distributed according to the charitable purpose.

Against this background—and with the rise of SRI in general—a new understanding of investing has developed (Fritz & von Schnurbein, 2019). Although both mission-related and program-related investing have been in use for a long time in the United States, the concept of pursuing a charitable purpose with a foundation’s capital is relatively new. Given the social of grant-making foundations, one would expect them to be frontrunners in terms of SRI (Kong et al., 2002). However, in practice, foundations are conservative in their investment strategies. In this work, we examine an investment tool that has been specifically developed for grant-making foundations and assess the potential for sustainable investing within the foundation sector in Germany, which is the largest in Europe in absolute terms. There are more than 25,000 foundations in Germany, and it is estimated that they have over €100 billion at their disposal. Approximately 5% of these foundations have an asset spread worth of more than €10 million at their disposal, approximately 70% have funds amounting to less than €1 million, and approximately 25% have assets worth less than €100,000 (Bundesverband Deutscher Stiftungen, 2021). The continuing trend of low interest rates is influencing the rates of return that these foundations generate. Foundations were still earning an average of 4.4% in 2009; however, in 2010, this figure was approximately 3.5%, and in 2011, it was approximately 3% (Bischof & Wiener, 2014). Current reliable figures are unavailable, but one may assume that this downward trend is continuing. Compared to Anglo-American law, German law is stricter regarding the use and management of foundation capital. This capital may not be put at excessive risk, and further regulations limit the options for financial investments. In particular, foundation board members are liable through their private assets in the event of asset shortfalls. As a consequence, foundations’ portfolios are dominated by conservative fixed-interest securities or bonds, followed by holdings in cash and fixed-term deposits such as real estate and other material assets (Winkeljohann et al., 2016). To offer German foundations access to the stock market at reasonable risk levels, financial institutions have developed specific foundation investment funds. These funds are typically mixed funds that include, at the least, both bonds and stocks and thus offer a reduced risk compared to pure stock investment funds. Additionally, the specific legal requirements of foundation law (e.g., limitations of international investments) are respected. As these funds are specifically created for charitable foundations, one might ask if they effectively increase the potential of charitable foundations to generate a social benefit through their investments, for example, when the foundation investment funds show a high concordance with SRI principles (Fritz & von Schnurbein, 2019).

Our research interest thus lies in the sustainable orientation of these specific foundation investment funds. In the following, we answer two research questions: First, what are the characteristics of the market for foundation investment funds in Germany? Second, to what extent are foundation investment funds useful for foundations pursuing an SRI strategy? In answering the first research question, we aim to describe this very specific type of investment product. As grant-making foundations are important donors of nonprofit organizations and social movements, the way that they are approached as clients by financial institutions is of general social interest. Given that there are only a few examples of studies on specific investment strategies implemented by grant-making foundations, the second research question is exploratory and contributes to a better understanding of how foundations are able to integrate sustainability into their investment strategies. We build on a full sample comprising all 52 German foundation investment funds currently available and use data from MSCI to develop a sustainability rating for these funds.

The market for sustainable financial investment is growing (Eurosif, 2018; GSIR, 2016; PRI, 2018), and more than 50% of the assets held by global institutions are administered according to UN-supported principles for responsible investment. The level of interest from clients in such investment is also increasing (Eurosif, 2018), and in recent years, investor anxiety regarding the harmful effects of poor ESG (environmental, social and corporate governance) performance has decreased (Amel-Zadeh & Serafeim, 2018; Brooks & Oikonomou, 2018; Friede et al., 2015; Khan et al., 2016).

Literature Review

Grant-making foundations hold capital to pursue charitable purposes. These charitable purposes are the basis for their tax exemption. However, the pursuit of charitable purposes is generally reflected in the spending of capital returns and does not include the act of capital investment. Hence, without specific regulations set by the founder, grant-making foundations are not restricted in any way regarding their asset allocation but are rather bound to the foundation’s charitable purpose in their spending. In recent years, this “fire-wall” between investments and spending has crumbled (Emerson, 2003). Following the criticism of early scholars that the charitable purpose only accounts for the lesser share of a foundation’s financial resources (Prewitt, 2006), a foundation is now referred to as a unit of impact (Sprecher et al., 2021). This implies that the social impact of the foundation is the sum of the social and environmental consequences of both investing the foundation’s capital and spending the returns. Naturally, this leads to a stronger integration of the charitable purpose into the asset allocation process (Ligonde et al., 2022). Based on this general approach, and using foundations such as the Ford Foundation and F.B. Heron as guiding stars (Brandenburg & Iqbal, 2022), we take a closer look into the situation of German grant-making foundations.

Financial Investments Made by German Grant-making Foundations Using Foundation Investment Funds

When investing their capital, German foundations are required to account for the framework provided by Germany’s Civil Law Code (Palandt et al., 1967; Article 80), the Fiscal Code (as related to tax), and state laws governing foundations (Karpen, 2015). However, these do not constitute statutory provisions or specific legal requirements for investment strategies. As a result, in principle, foundations can participate in all investment classes (bonds, shares, properties, and alternative investment) and forms (direct and indirect). There is a tension that arises between the provision that capital should be invested lucratively and the obligation to ensure the preservation of capital. Historically, German grant-making foundations have mainly invested in bonds, real estate, and liquid assets. ‘Ordinary’ income that is as steady and continuous as possible is thus made available for the funding of these foundations’ primary purposes. However, a foundation’s capital also needs to be maintained, thus the question of whether its capital preservation responsibility is nominal or genuine (Von Campenhausen, 2009) remains vague. As a result of these two requirements, investing in risk-free instruments is no longer sufficient. Riskier investment strategies have become expected.

In response to the need for riskier investment to simultaneously generate returns and secure the capital of foundations, banks and investment companies have developed investment funds that are specifically targeted to grant-making foundations. There are two criteria for receiving these funds. First, such funds must offer diversification across asset classes, especially stocks. To comply with legal restrictions, foundation investment funds execute defensive investment strategies, but these strategies still offer higher returns than the low-risk investments traditionally taken by German foundations. Second, the target market for these foundation investment funds comprises small and medium-sized foundations, which represent the vast majority of the foundation sector in Germany and hold assets of approximately 1 million Euro. In light of the restrictive supervisory authorities, participation in a foundation investment fund might raise fewer critical questions than the implementation of a self-developed investment strategy. Given these legal requirements and financial goals, the inclusion of sustainable financing creates an additional challenge for grant-making foundations.

Foundation Investment Funds and SRI

In pursuing their charitable purposes, grant-making foundations are dependent on the generation of returns on their assets. However, the generation of greater revenue is a weak justification for higher risk taken by charitable foundations in their stock market activities (Emerson, 2003). Additionally, SRI offers solutions for responsibly investing foundation assets and preventing the emergence of trade-offs between the way that returns are generated and the way that they are used. Returns generated with investments that hinder or even contradict a foundation’s purpose should be eliminated. With SRI, foundations can incorporate suitable sustainability criteria into their investment processes and exclude ethically incompatible investment domains from the start (Fritz & von Schnurbein, 2015; Wood & Hagerman, 2010). This may lead to the exclusion of specific industries or particular types of investments through negative screening. Additionally, a best-in-class approach favors companies with high sustainability standards and facilitates portfolio selection. Despite recent critiques (Berg et al., 2019; Liang & Renneboog, 2020), ESG factors have become the dominant standard against which SRI is evaluated in practice. Investments following an explicit policy of screening companies based on ESG criteria, for example, grew from $12.3 trillion in 2012 to $35.3 trillion in 2020 according to the Global Sustainable Investment Alliance. Despite earlier restraints (Hoepner & McMillan, 2009), the influence of ESG factors on general indicators such as firm performance (Fatemi et al., 2018; Revelli & Viviani, 2015), strategy (Arslan et al., 2021) and market value (Nekhili et al., 2021), as well as on more specific management aspects such as board diversity (Cucari et al., 2018) and the cost of debt (Raimo et al., 2021), are emphasized. In a meta-analysis of more than 2200 individual studies, Friede et al. (2015) show that over 50% of the examined works report positive results, while only 10% report negative results; the rest show mixed findings. Maiti (2021) highlights that ESG factors play an important role in predicting returns and are thus important criteria for investors.

Especially under German foundation law, grant-making foundations are not obliged to follow any sustainability criteria in their investment strategies, as their charitable purposes are only applicable to their spending of returns. However, in light of the general development of financial markets, calls for greater responsibility are increasing (Fritz & von Schnurbein, 2019). In that sense, an investment cannot be socially responsible on its own; rather, it must affirm the social purpose of its corresponding foundation. This is motivated by (1) the prevention of conflicts of aim and (2) the realization of potential synergies. Wood and Hagerman (2010) emphasize the realization of leverage effects as the main drivers of social responsibility. Instead of only focusing on returns, foundations can apply social criteria to their investment processes to strengthen their level of purpose fulfillment. However, investments based on impact assessments are costly and require in-depth analyses. For small investors—as most German grantmaking foundations have limited assets—such a high level of engagement is not possible due to both the required time and the involved risk of investment. Investment funds are thus an important alternative for reaching sustainable investment targets. However, Bofinger et al. (2022) show that demands for sustainable investing lead active fund managers to select potentially overpriced sustainable stocks, which results in lower returns. Additionally, ESG investing is criticized as being insufficient. Busch et al. (2021) call for a reassessment of sustainable investing and question whether ESG investments are effective enough to tackle current societal challenges. Especially in light of the increased awareness of the SDGs, sustainable investing needs a thematically broader and more in-depth foundation from which to actually contribute to societal development (Khaled et al., 2021).

Given the legal restrictions in Germany that govern foundations’ capital allocation and the increasing demand for sustainable investing, our study investigates how foundation investment funds can specifically support foundations in becoming more sustainable investors based on ESG ratings and SDG classification.

Methodology

Data and Descriptive Statistics

The data collection process used in this study was carried out in several stages. First, a database covering all foundation investment funds was collected. The database comprises 52 foundation investment funds that have “Stiftungsfonds” (foundation investment fund) in their name (see Table 2 in the Appendix). In the next step, this database was supplemented with key information such as costs and earnings figures (Wettlauffer, 2020) and statistics relating to the performance of the foundation investment funds (“Finanzen.net.,” 2021). This dataset, which is based on financial indicators, was further expanded to include data concerning sustainability. For this purpose, all the ESG fund ratings available from the American finance company MSCI were added to the dataset (MSCI, 2020), resulting in a data matrix sample of 23,794 cells. In a further step, we concluded the data selection, which focused on ESG quality scores, SDG alignment and violations against the UN Global Compact and climate data (financed Emissions and Carbon Coverage). All these data were retrieved from the MSCI database. The descriptive statistics of the 52 foundation investment funds are reported in Table 1. Two parameters were selected to assess the funds’ compatibility with the Paris Climate Agreement: CO2 emissions and CO2 coverage.

Table 1.

Descriptive Statistics of the Foundation Investment Funds.

Statistics (n = 52)	Minimum	Maximum	1. Quartile	Median	3. Quartile	Average	Variance (n–1)	Standard deviation (n–1)
Expense ratio	0.200	1.030	0.360	0.445	0.583	0.496	0.039	0.197
Performance in %	−2.120	18.340	4.423	7.545	9.960	7.448	19.686	4.437
Volume EUR million	9.680	2410.000	42.310	102.130	490.150	360.608	304243.776	551.583
ESG quality score	5.020	8.540	6.190	6.770	7.350	6.737	0.652	0.807
SDG alignment	1.000	15.000	1.000	4.500	9.000	5.500	19.863	4.457
UNGC violation	0.000	6.050	0.000	0.040	2.103	1.169	2.658	1.630
Carbon emissions	18.610	269.020	42.363	64.895	94.850	79.723	2982.451	54.612
Carbon coverage	30.860	91.120	52.235	59.035	67.220	59.350	149.561	12.230

Additionally, the ESG quality scores of the foundation investment funds were compared to those of a peer and to those of a global investment funds group. According to MSCI’s methodology, the ESG Quality Score for the investment funds are rated on a scale from 0 to 10, which corresponds to 0% to 100%. The ESG Score value (in percentage or decimal point) indicates how the fund ranks relative to other funds in the same peer group. A Kruskal–Wallis test showed no statistically significant differences in terms of sustainability criteria among the three investment fund groups (p = .290). Hence, despite the small sample size, the foundation investment funds are comparable to larger sets of funds.

The statistics on financial performance contain rather good results. Most of the funds have a relatively small volume, and their ESG quality is reasonable. Concerning the SDGs, the funds show a wide range of compliance covering from 1 to 15 SDGs. Violations of international norms, which are represented here by the UNGC, occur at a low level. Finally, the sample shows a high level of CO2 emissions, and none of the foundation investment funds provides full CO2 coverage of the entire investment universe. The results of these statistics are used for further analysis of foundation investment funds.

Multidimensional Scaling (MDS) Based on Euclidean Dissimilarity

Multidimensional scaling (MDS) is especially well suited for reducing complexity in a dataset and detecting similarities among a set of objects (Cox & Cox, 2008). It takes a matrix of interpoint distances as input and outputs a configuration of points. Ideally, these points are two- or three-dimensional, and the Euclidean distances between them reflect the original distance matrix (Borg & Groenen, 2005). For this study, we use the eight criteria previously presented to generate clusters through MDS analysis. MDS requires no preconceptions about which criteria might drive each dimension. The number of dimensions is gradually increased until the quality of fit is indifferent to the addition of a new dimension (creating an “elbow”-shaped curve). First, we calculated a 52 × 52 matrix in which each cell represented the Euclidian distance between a pair of indices (Cox & Cox, 2008; Kruskal & Wish, 1978; Ramsay, 1980; Woelfel & Barnett, 1982). Then, this proximity matrix (dissimilarities) was subjected to an MDS calculation with several parameters (see Table 3 in the Appendix). MDS provides a configuration that is usually estimated in two or three dimensions to facilitate easier interpretation. The goodness of fit of the MDS reduction algorithm used for data evaluation in this study can be assessed with a two-dimensional Shepard plot.

The Shepard plot demonstrates the influence of the transformation process on the input data (see Figure 1). Moreover, Shepard plots based on Euclidean dissimilarity with two dimensions reveal a very good distribution of points around the 45-degree line. The Shepard plots do not always appear to be straight for either dimension, indicating that the loss of information during the data reduction process was negligible. Therefore, the use of a methodological approach seems to be very suitable for our data analysis. As MDS is used to translate information regarding different objects in distances and dissimilarities, the axes do not directly provide specific information but rather require interpretation. In our model, dimension one can be interpreted as the geographic radius of investment, while dimension two shows differences in the size of funds. The results allow us to differentiate two distinct clusters of foundation investment funds.

Figure 1.

Shepard plot of 2D MDS representations of the 52 foundation investment funds.

Findings and Reflection

In answering research question 1, we discuss Clusters A and B based on the MDS analysis. Cluster A contains 43 funds that are relatively small in size and have a narrow geographic focus, mostly on European markets. Among them, no. 5 is the smallest investment fund, and it also has the lowest performance. The funds in the cluster are characterized by relatively high CO2 intensity, although the coverage of CO2 datasets is high. The first cluster can thus be called “discrete” because the foundation investment funds in this cluster are characterized as stand-alone products with limited target groups. The small size of the funds in this cluster highlights the difficulty found in other studies of connecting investment strategies with social purposes (Ligonde et al., 2022). Most of the foundation investment funds in the discrete cluster are exclusively developed for grant-making foundations, which mirrors the general opinion held by fund providers that foundations are in need of special investment products. These characteristics are diametrically opposed to those of Cluster B, which opens existing fund products to foundations and contains nine foundation investment funds.

The foundation investment funds in Cluster B are characterized by larger volumes of over 500 million Euro. The fund providers are either international banks (no. 23, 24) or very specialized private banks (no. 14 or no. 25, 26). Except for fund no. 23, all the foundation investment funds in Cluster B have a 3-year performance that is greater than 10%. This cluster can be described as “attached” because the foundation investment funds within it aim to connect foundations with other target groups and occupy a larger investment universe. Whether foundations are a specific investor class or should be treated the same as any other financial investor is also a question to which terms are applied—sustainable investing, social investing, impact investing, etc. Fritz and von Schnurbein (2015) emphasize the uniqueness of nonprofits, while the majority of foundation investment funds are generally very similar in terms of fund volume, costs, performance and ESG grading/rating, especially those in Cluster A. On the one hand, this homogeneity of hard facts facilitates the selection processes of foundation asset managers. On the other hand, it may hinder the alignment with the more specific requirements of foundations, for example, investment guidelines, statutes, and impact investing or SDG investments, which are becoming increasingly important. He et al. (2021)highlight the legal limitations of foundations in more recent forms of investment.

SRI Implementation of Foundation Investment Funds

Concerning research question 2, which focuses on the implementation of SRI in foundation investment funds (Hale, 2023), the findings depict an inconsistent picture. In the discrete cluster, no explicit mention of sustainability strategies or commitments to climate policies have been made by any fund. In the attached cluster, the level of ESG quality averages 6.7 out of 10, but the funds’ impact on SDGs differs. Some of the funds in this cluster focus on just a single SDG, while others address 15 of the SDGs. As far as carbon emissions are concerned, the results for all the funds except for no. 23 are inconclusive.

As already stated, the foundation investment funds in the attached cluster show higher global equity allocation. However, this cluster also includes funds with special investment strategies, for example, no. 16, which takes a benchmark-independent multi-asset approach. Most of the funds in this cluster do not name explicit ESG strategies, except for fund no. 14. The investment policy of this specific fund combines exclusion criteria that are based on the ecumenical values of justice, peace and the integrity of creation and uses them as positive criteria to contribute to sustainable development.

Finally, the comparison between the peer group and the global group of funds showed no significant differences (Busch et al., 2021). This result can be interpreted in two different ways. On the one hand, one can state that foundation investment funds are neither better nor worse than other funds in the market. From this perspective, investments in foundation investment funds are justifiable if they meet the foundation’s expectations concerning sustainable investment strategy, performance and costs. On the other hand, the findings lead to the basic question of why foundation investment funds are actually necessary. If they do not differ, then foundations could also invest in more general funds, and they might even benefit from the lower costs of these larger funds. Connected to this finding is the challenge of selecting a fund that complies with the specific foundation purpose, for example, cultural, social, environmental, etc. Fritz and von Schnurbein (2019) show that diversified portfolios can be matched to specific charitable purposes, but every purpose needs a specific portfolio. Particularly regarding those funds in the discrete cluster, our analysis does not offer a strong justification for their existence. If choosing a foundation investment fund does not improve the sustainability orientation of a foundation more than other investment opportunities or the direct investment in shares, general market logic would recommend investing either in larger funds with lower costs or in thematically specific funds that comply better with the foundation’s charitable purpose to better fulfill its societal mission. This criticism is in line with more general doubts regarding the true value of ESG criteria (Berg et al., 2019). It therefore remains to be said that foundations themselves are called upon to think about sustainability criteria for their investment strategies rather than blindly relying on investment funds (Ligonde et al., 2022).

Discussion

The aim of this study is to contribute to a better understanding of foundation investment funds as specific investment product for German grant-making foundations and to explore their ability to strengthen SRI strategies. Concerning the first question, we find two distinct clusters. The discrete cluster follows a more narrow conception of foundation investments in stock markets, and the attached cluster consists of funds with more generalized investment strategies. Moreover, discrete foundation investment funds seem to predominantly address foundations with a regional or national activity focus and smaller investment volumes. However, participation in more diversified investment funds would offer these foundations increased risk prevention. The funds in the attached” cluster are more generic, connecting the foundation sector to the broader financial markets. This raises the question of whether there is a need to promote specific foundation investment funds. The second main finding is that the extent to which SRI strategies can be improved through the use of foundation investment funds is limited. The vast majority of foundation investment funds do not offer surpassing value in terms of SRI and sustainability. If foundations want to pursue their public purpose through more avenues than just their funding expenses, they need investment opportunities that go beyond what the general market offers. It is a somewhat surprising—and demotivating—to find that fund providers do not link the charitable purposes of their target group with the overall societal movement toward sustainability. In fact, one would expect the opposite: An investment fund developed for a socially oriented target group should place the highest priority on SRI criteria or related issues. However, the reasons for this finding do not lie only with the fund providers. Many foundation board members and asset managers tend to act very conservatively in regard to investment decisions (Fritz & von Schnurbein, 2019). As they are supervised by the state, nonconformist action could potentially lead to inquiries by the supervision authority—and foundation board members in German foundations are liable through their private funds.

Hence, we suggest that fund providers increase their level of transparency concerning their products so that all constituents of the foundation—board members, supervisory authority, beneficiaries, etc.—can better understand the strategies of the different foundation investment funds (Berg et al., 2019) This would reduce insecurity and help to further improve the acceptance of foundation capital investments in sustainable investment vehicles. The contribution made by the present research to the academic debate is to highlight the need for more advanced foundation investment funds that better fit the public purposes of grant-making foundations.

Limitations and Call for Further Research

The results of this study offer the potential for further improvements in both theory and practice. However, we want to stress some limitations that should be considered. First, our study is focused on the specific legal situation of grant-making foundations in Germany. Due to the tight restrictions placed on their asset allocation and risk-bearing capabilities, German foundations face severe challenges in the current financial markets. In other countries with less rigid regulations, the findings of this study are of limited use. However, according to the Global Philanthropy Environment Index, there are many countries with similar or even stricter regulations on foundation capital (Indiana University Lilly Family School of Philanthropy, 2021).Hence, we believe that interest in funds conforming with ESG principles and the SDGs reaches beyond Germany, and active fund managers are struggling with investor expectations regarding the improved sustainability of funds (Bofinger et al., 2022). A second limitation is the size of the sample. Although we selected all known foundation investment funds, our sample size of 52 meant that we could use only a limited number of analytical methods. We therefore do not claim that our findings are generalizable. Third, we are aware that ESG ratings are not consistent and that using data from different providers can offer more robust information (Berg et al., 2019; Chatterji et al., 2016). However, in the context of this research and because MSCI ESG Research is a major provider of data for investment funds, we only used data from a single source. Finally, our data collection was limited to open-access data from the focal fund companies and rating agencies. An additional source of data might be foundation portfolios and their investment in foundation investment funds, which could be examined to better understand foundations’ motivations and expectations in relation to this investment tool.

Our analysis identified two distinct clusters of foundation investment funds. The first discrete cluster comprises the majority of the funds, which are generally smaller with lower performance and lower levels of SRI conformity. The funds in the second attached cluster are generally larger, more diversified, and perform better. However, most of them do not report specific SRI strategies. In short, there is little reason to recommend that foundations invest in any specific foundation investment fund when aiming for more sustainable investments. Further research can compare the performance and sustainability of foundation investment funds with that of general investment funds to detect any substantial differences in terms of the strategy, content, costs, and performance of the funds. With respect to foundation investments, future research should go beyond focusing on investment products. This would require access to data on investments and decision-making in foundations.

To date, little is known about the investment decisions made by foundation boards. The members of a foundation board bring together very different competencies that are connected to the charitable cause of the organization or its specific areas, such as law or financial assets (Bethmann et al., 2014). Despite the joint liability of all the members, decisions on asset allocation are often left to specialists. Thus, future research should analyze the perceptions regarding financial investments of all the foundation board members. Additionally, comparisons of the performance of foundations under different legal frameworks might offer new insights into the influence of state regulation on the performance, stability, and payouts of foundations. Do less rigid regulations improve the financial performance of foundations, or do strict regulations serve as a guarantee of consistent payouts over time?

Finally, going beyond the foundation sector, we call for more research on how sustainable and social impact goals can be efficiently and effectively implemented in financial markets. The existing ESG ratings may lead to contradictory evaluations of a single company, resulting in difficulties related to measuring the financial performance of sustainable investment products (Billio et al., 2021). It is very difficult for nonprofessionals to understand the structure and function of ESG ratings and to subsequently assess the quality of investment products based on these ratings.

This study offers practical recommendations to both foundations and fund managers. The analysis shows that foundations have little insight into information about the SDGs, screening criteria, or climate-related policies applied to foundation investment funds. Thus, these funds are not very useful for foundations seeking to apply SRI principles and the SDGs to their investment strategy. Consequently, we recommend that foundations select funds with clear and transparent policies. The results of the MDS analysis offer little justification for choosing specific foundation investment funds. In light of recent codifications by the Association of German Foundations and the increasing EU regulation on SRI, the market for SRI-related investment funds is projected to further increase (Ahlström & Monciardini, 2021). In the context of regulation via the EU taxonomy, the transparency requirements and thus disclosure in relation to sustainability criteria will be easier for investors to understand in the future. With respect to grant-making foundations acting as investors, we recommend that active fund managers develop funds based on specific fields of activity of foundations (e.g., environment, education, or research), which would allow these foundations to apply real purpose-driven investment strategies. Developing a general orientation regarding the legal form of foundations will not add further SRI benefits. Bengo et al. (2021)postulate that a cultural shift of intermediaries is one of three major venues that can be used to improve social impact investing. Thus, fund managers need to understand and apply the activities of foundations to offer better suited foundation investment funds. At the same time, foundation managers need to improve their financing strategies to detect financial products that support their charitable purpose.

In conclusion, our study shows that funds connected to a specific legal form may not be the best solution for supporting SRI strategies. Rather, foundations seeking SRI investments should make better use of purpose-related investments.

Footnotes

Appendix

Table 3.

Excerpt from a List of 1,325 MDS Calculations of Each Pair of Indices with a Sample of the Results (Dissimilarity, Disparity, Distance, and Ranks).

Pair	Dissimilarity	Disparity	Distance	Range (dissimilarity)	Range (disparity)	Range (distance)
KCD-Union Nachhaltig MIX—KCD-Union Nachhaltig MIX I	0.577	0.577	803.011	1	1	1,115
VermögensManagement Fd.für St—VermögensManagement Fd.für St	1.087	1.087	43.041	2	2	256
Sarasin-FairInvest-Universal-Fds.A—Sarasin-FairInvest-Universal-Fds.I	1.389	1.389	0.029	3	3	2
Phaidros Funds Conservative C—Phaidros Funds Conservative D	1.410	1.410	0.100	4	4	4
Commerzbank Stiftungsfonds A—Commerzbank Stiftungsfonds E	1.792	1.792	579.037	5	5	1,017
Allianz Stiftungsfonds Nachhalt.A—Allianz Stiftungsfonds Nachhalt.W	2.310	2.310	0.001	6	6	1
JPM Gl.Inc.Conservative Fd.A Dis—JPM Gl.Inc.Conservative Fd.C Dis	2.318	2.318	0.088	7	7	3
Do—Stiftungsfonds EUR—Veri ETF-Allocation Defensive (R)	11.324	11.324	7.615	8	8	65
FVM-Stiftungsfonds S—Rheinischer Kirchenfonds	12.092	12.092	6.843	9	9	62
MEAG FairReturn A—MEAG FairReturn I	13.723	13.723	13.068	10	10	108
Allianz Stiftungsfonds Nachhalt.W—Sarasin-FairInvest-Universal-Fds.A	13.943	13.943	4.291	11	11	43
Allianz Stiftungsfonds Nachhalt.W—Sarasin-FairInvest-Universal-Fds.I	14.364	14.364	4.262	12	12	41
Allianz Stiftungsfonds Nachhalt.A—Sarasin-FairInvest-Universal-Fds.A	14.740	14.740	4.289	13	13	42
Deutscher Stiftungsfonds—terrAssisi Stiftungsfonds AMI I	14.798	14.798	0.978	14	14	11
Deutscher Stiftungsfonds—Do—Stiftungsfonds EUR	15.101	15.101	10.589	15	15	89
Allianz Stiftungsfonds Nachhalt.A—Sarasin-FairInvest-Universal-Fds.I	15.348	15.348	4.261	16	16	40
Deutscher Stiftungsfonds—Oddo WerteFonds A EUR	15.932	15.932	6.805	17	17	61
Do—Stiftungsfonds EUR—Vermögenspooling Fonds Nr.1	16.040	16.040	6.437	18	18	58
Deutscher Stiftungsfonds—Veri ETF-Allocation Defensive (R)	16.274	16.274	2.974	19	19	29
Bethmann Stiftungsfonds P—FvS Stiftung SI	17.127	17.127	943.775	20	20	1,132
Münsterländische Bank Stiftungs—Vermögenspooling Fonds Nr.1	17.157	17.157	2.055	21	21	19
Deutscher Stiftungsfonds—Vermögenspooling Fonds Nr.1	17.196	17.196	4.152	22	22	39

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Georg von Schnurbein

Data Availability Statement

Data sharing not applicable to this article as no datasets were generated or analyzed during the current study.

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