The John D. and Catherine T. MacArthur Foundation last month made headlines around the nation for unveiling the latest winners of its "genius" grants.

Weeks earlier, the Chicago-based philanthropic institution, one of the nation’s 10 largest private foundations, also was in the news, but this time the story wasn’t so flattering. Bloomberg News reported that the MacArthur Foundation was one of several institutional investors in a private-equity fund that bought into a company that had a network of payday-lending websites.

Payday lenders have been restricted or banned in most states, accused of preying on working people who struggle to make ends meet. The investment was more than just an embarrassment for MacArthur. It represented a conflict for the foundation that has a history of supporting programs that help people living in poverty.

MacArthur’s investment highlights a striking paradox in the philanthropic community. Charities give away money to improve the world but sometimes make investments that harm it.

The controversy was magnified in 2007 when the Los Angeles Times reported that the Bill and Melinda Gates Foundation owned stock in several oil companies with plants in Nigeria whose pollution was linked to respiratory disease and cancer. At the same time, the Gates Foundation had spent $218 million on polio and measles immunizations in Africa and other countries.

The contradiction between mission and money doesn’t make sense to people inside and outside philanthropy circles. Why would a foundation fighting global warming own stock in oil companies? Why would a charity that supports health organizations also invest in tobacco stocks?

The answers lie in the fiduciary duty foundations have. Many foundations like MacArthur focus on maximizing financial returns to increase grant-making dollars. To achieve the best returns possible, foundations often put up firewalls to make sure investment managers are independent from the grant-making side of the organization.

In a statement, the MacArthur Foundation said it maintains a diversified investment portfolio designed to achieve "strong risk-adjusted returns." The foundation, which has a $6.3 billion endowment, awarded $228.4 million in grants last year to address issues ranging from juvenile justice to housing to economic development.

The foundation said its investment approach "maximizes the philanthropic support we can provide to hundreds of creative and effective organizations addressing critical challenges in Chicago, across the nation, and around the world."

But as issues of climate change, corporate governance and social responsibility become more acute, the investment strategies of philanthropic organizations are under more scrutiny. Critics of the maximizing-returns philosophy argue that philanthropic foundations should consider the total consequences of their investment activities.

Clara Miller, president of the F.B. Heron Foundation in New York, asserts that foundations "have a duty that goes beyond the typical investor."

About 14 years ago, the F.B. Heron Foundation began to invest its $300 million endowment in securities that would advance its mission of helping people escape poverty. For example, the foundation invested in a private equity fund that provides capital to growing companies that are either located in or hire a large percentage of their workforces from low-income communities in California.

"We serve the public, and we have a fiduciary duty of obedience to our mission to make sure all of our assets are doing the best job they can in service to the mission," Miller said.

(EDITORS: BEGIN OPTIONAL TRIM)

The F.B. Heron Foundation is on the cutting edge of a school of thought that proclaims that values and profits can easily coexist. Known as mission-related investing or impact investing, the basic objective is to invest in ways that enhance, not detract, from philanthropic goals.

Despite some high-profile conflicts that have come to light, mission-related investing is not popular. A 2012 survey by US SIF: The Forum for Sustainable and Responsible Investment found less than 1 percent of U.S. foundations pursued some form of sustainable and responsible investing.

There’s reluctance, because foundations worry that they will sacrifice returns if they direct their investments to align with their missions.

"These aren’t easy discussions within foundations," said Liz Michaels, chief of staff at Aperio Group, a California-based investment management firm that customizes portfolios to align with investor values. "If your job is to perpetuate the foundation for future generations, the question is whether this is going to negatively impact your ability to do so."

But more research is showing that the investment risk of mission alignment is minimal, Michaels said.

(END OPTIONAL TRIM)

Mission-related investing also has received a boost from the so-called divestment movement.

Divestment occurs when institutions remove financial support from select companies to promote certain behavior or policy. The best known divestment occurred in the 1970s and 1980s when retirement funds, mutual funds and other institutions sold off the stocks of companies that did business in South Africa to boycott the country’s system of apartheid.

Today a divestment campaign is targeting oil, coal and natural gas companies for extracting fossil fuels that contribute to climate change. A coalition of foundations and individuals, known as Divest-Invest, has pledged to sell investments in fossil fuels and redirect the capital into clean and renewable energy sources.

(EDITORS: BEGIN OPTIONAL TRIM)

The Sierra Club Foundation, which provides financial support to environmental organizations, has joined the Divest-Invest campaign. It may surprise some to learn that the Sierra Club Foundation has holdings in fossil fuel companies.

Chuck Collins, who has recruited wealthy individuals to the Divest-Invest campaign, explained that environmental organizations sometimes hold stock in companies that pollute in an attempt to positively influence their behavior.

"They all believed in the engagement strategy," Collins said, "but it’s just not worked."

The Sierra Club Foundation said in a statement that it began aligning its investments with its mission four years ago and has removed most of its exposure to fossil fuel companies. It estimates those holdings to be less than 1 percent of its portfolio and plans to divest the remaining amount within the coming months.

(END OPTIONAL TRIM)

Some of the nation’s largest foundations have a mission-driven component in their investment portfolios. The MacArthur Foundation, for example, has set aside $300 million, or about 5 percent of its endowment, for impact investments.

Last year, MacArthur invested $10 million in a newly formed real estate investment trust that acquires affordable housing. MacArthur joined Citibank, Morgan Stanley, Prudential Financial and the Ford Foundation as founding investors.

MacArthur’s exposure to a payday-lending business would seem to undercut its support for organizations that preserve affordable housing and strengthen low-income communities, said the Heron Foundation’s Miller.

"I don’t think you have to invest in predatory lenders to get enough money to help poor people in Chicago," Miller said. "I think it’s a bad trade-off."

In 2012, MacArthur was a limited partner in Vector Capital IV, a San Francisco-based private equity firm focused on technology companies. According to the Bloomberg story, Vector Capital made an investment in Cane Bay Partners VI LLLP but didn’t tell its investors the company is in the payday-loan business.

MacArthur spokesman Andy Solomon said the foundation had no say in the investment decisions made by Vector Capital and "was not informed at the time of the investment" in the payday-lending business.

Solomon declined comment on when the foundation first learned of the investment in the payday-lending business and whether MacArthur remains a limited partner in Vector Capital IV. According to the foundation’s 2012 tax return, the most recent available, MacArthur’s investment in Vector Capital IV was valued at $4.2 million.