Endowments in the Age of Extinction: How Foundations Can Legally Activate their Endowments to Fight Climate and Economic Crises

This is an embarrassing situation, to say the least: We have a narrow window of time in which to take action and avert massive extinctions, sea level rise, and other climate disasters. We’re also watching the rapid spread of global poverty, inequality, and community displacement. Meanwhile, U.S. philanthropic foundations sit on more than a trillion dollars that could be activated for climate and economic justice, but most of that money is instead invested in the Wall Street companies fueling the disasters. “We can’t spend our endowment,” sings the chorus of funders, “our hands are tied.” Among foundations, there is a widespread belief that, somewhere, there lurks a legal document or law forcing them to cling tightly to most of the foundation’s assets. Very often, that belief is wrong. This needs to come to light. 

Some foundations are seeing the light, and one large UK foundation, Lankelly Chase, just announced a plan to “abolish itself” and give away the full endowment. The foundation said in a statement:

“We have recognised the gravity of the interlocking social, climate and economic global crises we are experiencing today. At the same time, we view the traditional philanthropy model as so entangled with colonial capitalism that it inevitably continues the harms of the past into the present. [...] We will relinquish control of our assets, including the endowment and all resources, so that money can flow freely to those doing life-affirming social justice work.”

Many foundation leaders will hopefully be inspired to follow suit, but I know there will be legal questions. Twice, I’ve been in conversation with a foundation staff person who spoke of the foundation’s “endowment” and how they can’t touch it. In both cases, I looked at the 990 tax returns of the foundation to discover that most or all assets have no donor restrictions. In other words, the assets could be activated to support climate and economic justice efforts. The only thing standing in the way may be either misinformation or a board of directors decision (or indecision). 

In other cases, there are indeed donor-created constraints on spending endowments, but many foundation staff are unaware of the exact nature of those constraints, or they are failing to view them with an inquiring eye that asks: Can we actually use this money in some other way? Given the crises we are facing, do we have legal grounds to question our assumption that the endowments should go on in perpetuity? Based on our research, I believe so.

With help from volunteer attorneys,* Sustainable Economies Law Center has worked to understand the law of foundation endowments, and we feel moved to share our learnings. We’re starting by writing this blog post to help foundations understand their options, with the hope of sparking more informed action around endowments. Heads up, there are some nuances not covered in this piece, which we hope to write about in a more thorough guide for foundations. Meanwhile, this piece should give you a good idea of what’s possible with endowments. We’d encourage foundation staff to review this, probe into the details of any foundation “endowments,” and start conversations at their foundations about what is possible. We’d also encourage advocacy groups to put pressure on philanthropy to do this work.

Here are some steps and strategies for accessing endowment funds so that the foundation can spend or apply them to urgent climate or economic justice work. The first 5 are relatively straightforward, legally and logistically speaking. The next 5 will involve some legal analysis and advocacy.

Five Straightforward Strategies

Strategy 1: Find, share, and familiarize yourself with the endowment documents

Did you know that almost no foundations make transparent the specific terms governing their endowments? It’s nearly impossible to find endowment documents or gift instruments online. (The Law Center has sent two interns searching in vain.) For this reason, we wrote an open letter – Request for Endowment Transparency – and created a form and upload button (leading to this folder) where foundations can share their endowment documents. This is not a “strategy,” so much as an essential first step before all the other strategies listed below. We’d love to see someone steward a project to collect and share endowment documents. More on that at the bottom of this article! 

So your first step is to inquire and search internally to collect any documents governing the endowments at your foundation. Often, the thing you need to find is the “gift instrument,” or the document written by the donor that came with the funds used to create the endowment. It might be an agreement or even a will. If such a document doesn’t exist, it’s quite possible that the endowment was created by a Board decision, instead of by the donor’s gift instrument. These endowments are sometimes called “quasi-endowments” or “board-designated endowments.” You can look for the Board minutes or resolution creating the endowment, but it’s less important to find this, since it likely remains in the Board’s power to make a new decision that a different use of the funds would better advance the foundation’s purpose.

Strategy 2: Figure out whether you have any Endowments with a capital “E”

Sometimes people use the word “endowment” colloquially to refer to the foundation’s total assets. But these assets don’t become a true Endowment unless or until someone with the power to do so declares the intention that the funds be held or invested for long-term or permanent support of the foundation’s purpose. When a donor states this intention, I think of it as an “Endowment” with a capital E, because this is the only way to create an “endowment fund” under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), a law adopted, with minor variations, everywhere in the U.S. except Pennsylvania and Puerto Rico. UPMIFA defines “endowment fund” as:

“an institutional fund or part thereof that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis. The term does not include assets that an institution designates as an endowment fund for its own use” [emphasis added]. 

What the last sentence emphasizes is that even if the Board votes to create what it calls an “endowment fund,” it doesn’t actually meet the legal definition of Endowment Fund for the purpose of UPMIFA, the most important law applicable to Endowments. That leaves the control of the endowment in the Board’s hand, giving the Board discretion to terminate the endowment at will. 

Strategy 3: Bring a proposal to activate your small “e” endowments

If the Board created the “endowment,” the Board also has the power to terminate the endowment and spend those funds.  The Board can adopt a resolution to spend some or all of these funds in light of the current global threats that might otherwise frustrate the long-term purpose of the foundation.

Strategy 4: Use the variance clause of your capital “E” Endowments

If you are indeed dealing with a donor-created Endowment, look to see if there is a variance clause in the gift instrument or other document governing the Endowment. This usually gives the Board the power to change the terms of the Endowment and remove restrictions on expenditures, if circumstances demand it. For example, the Board might determine that present global crises threaten the purpose of the foundation and the Endowment fund, and that immediate expenditure to avert crises is critical to protecting the purposes. Here’s an example of the kind of language you might find in a variance clause:

“If, in the sole discretion of the Board of Directors, the purposes for which the Fund was created ever become unnecessary, incapable of fulfillment or inconsistent with the charitable requirements of the community served by the Foundation, the Board of Directors shall have the power to amend or restate any restriction or condition on the use or distribution of the income and principal of the Fund.”

If you are worried that a donor or someone else might challenge your use of a variance clause, I’d suggest drafting a thorough memo explaining how the urgency of climate or social issues threaten irreparable hars to the community you serve, mandating immediate expenditures to prevent harm. For related arguments, see the sections below.

Strategy 5: If the donor (or any designated successor) is still alive, ask them to lift restrictions on the Endowment

The donor who created the Endowment generally has the power to lift any restrictions on the use of the funds, as long as the funds are still used for charitable purposes. If the donor is still alive, you can ask them to sign a letter lifting restrictions. In creating endowments, some donors sometimes designate an heir or other entity with authority to alter the terms of the gift, who could sign such a letter if the donor is no longer alive. 


Five Strategies Involving Legal Argument and Advocacy

If none of the five above options help unleash the endowment funds, below are some strategies that will require you to learn about and engage the law. 

Strategy 6: Spend down the Endowment after crafting a solid argument that it is “prudent” to do so: Given the present crises of the world, you may be able to make a strong argument that it is prudent to “appropriate” (i.e. spend) the endowment funds to combat the crises. 

First, I’d suggest you briefly read your state’s version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). It’s a fairly easy read and takes about 10 minutes. Here is California’s UPMIFA and here is the uniform law with commentary by its drafters. If you are in a place that hasn’t adopted UPMIFA (namely Pennsylvania or Puerto Rico), you’ll have to dig deeper to find out what law applies. Here’s Section 4 of UPMIFA, with key parts bolded: 

“(a) Subject to the intent of a donor expressed in the gift instrument, an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established. Unless stated otherwise in the gift instrument, the assets in an endowment fund are donor-restricted assets until appropriated for expenditure by the institution. In making a determination to appropriate or accumulate, the institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and shall consider, if relevant, the following factors:

 (1) the duration and preservation of the endowment fund;

 (2) the purposes of the institution and the endowment fund;

 (3) general economic conditions;

 (4) the possible effect of inflation or deflation;

 (5) the expected total return from income and the appreciation of investments;

 (6) other resources of the institution; and

 (7) the investment policy of the institution.

(b) To limit the authority to appropriate for expenditure or accumulate under subsection (a), a gift instrument must specifically state the limitation.”

In essence, even if you have a capital “E” Endowment, if the gift instrument does not specifically state limitations on the ability to appropriate funds, then it might be possible for the foundation Board to decide that it is prudent to spend the funds, in light of the conditions of the world and the purpose of the foundation and the endowment. 

This is where a foundation will need to move forward with clarity and courage, because this is relatively unexplored territory. First, it is unclear whether such a decision would be subject to scrutiny. Generally, the state Attorney General (AG) is the one most likely to be alerted to potential concerns. An AGl may exercise discretion on whether to take action, if there is even capacity for their overstretched offices to do so. In most states, AGs are elected, which also makes it less likely that an AG will take action if it is politically unpopular. If a foundation spends down an endowment to immediately help a threatened community, it may not be popular for the AG to intervene. If you are concerned, in some states, it may also be possible to approach your AG in advance of taking action to request a letter of approval for your planned action. In other cases, courts may intervene, but it varies and it is unclear who has standing to file a complaint with courts. This can be covered in a more advanced guide for foundations. 

Second, even if the AG or a court questions the foundation’s decision, it is unclear how courts will respond to the foundation’s analysis of prudence. This is untested, as far as I know, but we desperately need foundations to test it. 

We all need to put on our legal analysis hats, whether or not we are lawyers. A few years ago, I co-hosted a webinar that relentlessly poked fun of and pushed the boundaries of this legal concept of “prudent.” If you are going to put on the legal analysis hat, I recommend watching it. Your job is to make the most compelling case that it is prudent to spend the endowment, rather than preserve it forever. I’d encourage you to gather data and factor in some key climate threats, like: 

😱 5.7 billion people are expected to have water shortages by 2050.

😱 Seafood is expected to be gone by 2048.

😱 The world will run out of topsoil in 58 years.

😱 The Amazon is disappearing at a rate of 10,000 acres per day.

😱 We’re already in the midst of a mass extinction event.

Here are some other resources where we’ve compiled data on threats related to 😱Housing, 😱Jobs & Income, 😱Soil, and 😱Food Systems

Next, make a clear case on how the expenditure of funds is critical to intervening in the crises and advancing the purposes of both the foundation and the endowment. Ultimately, what you want to argue is that an “ordinarily prudent person,” if presented with all of this data, would choose to make the expenditure. This is incredibly subjective and hard to predict whether a court will agree. 

One thing to know is that many states, including California and New York, adopted an optional component of UPMIFA, which states that expenditure of more than 7% of the endowment’s fair market value in one year creates a presumption of imprudence. This tells you a little about how the decks are somewhat stacked against your argument, but if you make a very strong argument backed by data, as described above, you can very well rebut this presumption of imprudence if the foundation is ever challenged. 

Strategy 7: Transform the endowment into more stable assets 

If the purpose of an endowment is to serve the long-term charitable purposes of the foundation, and if you feel hesitant to use the above strategy to make expenditures such as grants to other organizations, here’s another option: Instead of spending the funds, turn them into a more stable form of asset that can support your charitable purposes, like land or housing. If you use $10,000,000 to purchase land, this is not treated as an expenditure for accounting purposes. Rather, you transform a cash or security asset into a tangible land asset on your balance sheet. Here are a couple examples of how this could play out:

Example A: A foundation concerned about climate change purchases title or easements to protect 10 million acres in the Amazon. That asset produces "income" that gets distributed directly to the world: carbon sequestration, oxygen, clean air, moisture, habitat for biodiversity, and land for indigenous communities.

Example B: A foundation concerned about poverty uses its endowment to purchase 1,000 housing units to provide affordable housing to people who would otherwise be displaced as a result of rising housing costs. In this case, there could be monetary income in the form of rents paid, though likely nowhere near would be earned in securities markets, if the intention is to create affordable housing. So the argument is that the long-term "income" is really in the form of housing and community stability. 

A key question is whether the reduced monetary income or the alternative understandings of “income” will survive prudence scrutiny, since these purchases will be viewed as “investments” under UPMIFA. Your decisions become subject to a somewhat different list of criteria when determining prudence. Here are the relevant considerations from Section 3 of UPMIFA: 

“Except as otherwise provided by a gift instrument, the following rules apply:

(1) In managing and investing an institutional fund, the following factors, if relevant, must be considered:

 (A) general economic conditions;

 (B) the possible effect of inflation or deflation;

 (C) the expected tax consequences, if any, of investment decisions or strategies;

 (D) the role that each investment or course of action plays within the overall investment portfolio of the fund;

 (E) the expected total return from income and the appreciation of investments;

 (F) other resources of the institution;

 (G) the needs of the institution and the fund to make distributions and to preserve capital; and

 (H) an asset’s special relationship or special value, if any, to the charitable purposes of the institution.”

In general, prudent investor rules are strongly biased toward preserving and growing funds. But unlike prudent investor rules governing other kinds of fiduciaries (like 401(k) managers, who are under significant pressure to maximize growth and maintain liquidity), the rules governing prudent management of charitable funds allow fiduciaries to factor in consideration of the charitable purpose. Considering such purposes in conjunction with the conditions of crisis and the general volatility of currencies and securities, it might be considered highly prudent of a foundation to advance the endowment’s purpose through long-term holding of land for community or environmental benefit. 

Effectively, this option would convert foundations from trickle-out grantmakers into massive land trusts able to provide immediate benefit to people and ecosystems everywhere. 

Strategy 8: Ask a court to alter the endowment

If you don’t feel you have a strong prudence argument for either spending funds or transforming them into stable assets, or if the Endowment gift instrument is too specific in limiting expenditures or investments, another option is to petition a court to change the terms of the endowment. There are two bases for doing this: First, you can apply cy pres doctrine, arguing that it’s no longer possible to carry out the charitable intent of the endowment, and asking a court to alter the charitable purpose to something different, but “as close as possible” to the donor’s original intent. Second, and perhaps more helpfully, you can apply the doctrine of equitable deviation where you ask the court to remove or change donor-imposed administrative or procedural restrictions, on the basis that compliance is impracticable, impossible, illegal or wasteful. For example, imagine that the endowment has a specific provision requiring investment in stocks, bonds, and other securities. You can argue to the court that this has become wasteful or impracticable, given that cash is losing value due to inflation, bond markets are threatened by debt ceilings, and securities markets are generally volatile. The court might alter the terms of the endowment to allow for purchase of assets like land. 

Strategy 9: Explore various other legal options

If none of the above are working for you, there may be other options we’ll likely cover in a more detailed guide for foundations. For example, you might be able to free up more funds by better understanding the principles of endowment accounting. In some cases, the terms of the endowment require only that you preserve the value of the initial donation, which might be quite small in relation to the present value of the endowment. As another option, UPMIFA allows for the termination of endowments that are very small and old, with notice to the Attorney General. Or if you have a temporary endowment, you might explore whether it’s now possible to terminate it after the fulfilling of a certain condition or the passage of time. 

Strategy 10: If you can’t work with the law, change it!

In my legal opinion, the above 9 options have the potential to activate the vast majority of the $1 trillion in U.S. foundation assets. The problem is that some options involve uncertainty, and many foundation Boards are risk averse, especially when they give weight to the advice of risk averse lawyers and financial advisors. Ultimately, what we need are clearer laws, different standards of prudence, or different statutory standards for how charitable foundations can relate to their enormous assets. I believe that foundations and people everywhere should organize and eventually change these laws. With better laws, foundation Boards can move forward and spend down endowments with confidence. But I suspect that statutory changes are years away and we are facing crises NOW, which is why I encourage foundations to find the courage to explore the other 9 strategies as soon as possible. 

One more necessary action: A project to gather and analyze foundation endowments

Even with all of the above possibilities in mind, I believe that what we really need right now is for someone to launch a project that 1) collects and shares the endowment documents of big foundations, and 2) analyzes if and how each endowment could be tapped. Even with the above info, it will likely be challenging for each foundation to do this analysis on its own, especially with lawyers who tend to be conservative and risk averse. Plus, it may be politically difficult for foundation staff to start asking questions about endowments. Endowments are often shrouded in mystery, even within the foundation. A project that pushes for endowment transparency and that does this analysis will go a long way. When a new staff member, Mohit Mookim joins the Law Center in September, we may have capacity to collect and do legal analyses of some endowment documents, explaining how we’d advise on the foundation’s access to the funds. But we really feel like this is a larger project that needs to be funded and led by people working in philanthropy. 

P.S. Any foundation that would like to express gratitude for our learnings and teachings on this topic may send money to the Sustainable Economies Law Center at 1428 Franklin Street, Oakland, CA 94612. We spend a lot of our time applying for grants and asking for donations, and it is often quite stressful. Unsolicited gifts are our favorite kind, and it frees us up to do work like this. Thank you! :) 

*Acknowledgments: Various people have contributed to our research on endowments over the years. This includes Tarlochan "Tar" Rakhra, Mohit Mookim, Cameron Holland, folks from the Cooley law firm (Steven Holm, Mor Agam, and Pearlynn Wang), and Law Center staff attorneys Cameron Rhudy, Ricardo Nuñez, Erika Sato, and Charlotte Tsui. 

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  • Janelle Orsi
    published this page in Blog 2023-08-21 17:52:57 -0700

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