Investments

Ready to Be an Impact Investor? Move Slowly, Stay Curious

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This post is an excerpt from the complimentary resource Essentials of Impact Investing: A Guide for Small-Staffed Foundations, created by Exponent Philanthropy and partners Mission Investors Exchange and Arabella Advisors. Want to align your investments with your mission? Download your copy >>

By Lucy Cantwell, New Belgium Family Foundation

Many people are beginning to intuitively grasp the promise of impact investing but struggle with how they might participate. Finding a balance between the traditionally “hard” skills of finance and the “softer” considerations of impact is an opportunity for foundations and advisors alike.

We started, as many foundations do, by incorporating the beliefs and intent of our founder. Kim Jordan started the foundation with her family after New Belgium Brewing Company— the company she co-founded and runs as CEO—became 100 percent employee-owned through an employee stock ownership plan in 2012. In addition, the company has a long history of environmental and socially responsible practices, and we wanted to ensure the foundation would reflect that history. We knew that we wanted to pursue impact investing, as it dovetailed with Kim’s belief in the transformative potential of business, but we didn’t know how to execute that vision.

Interviewing investment advisors and learning each of these groups’ definitions of impact investing helped us articulate our own goals. Although financial return was important to us, we cared more about maximizing our potential impact—a surprise to many advisors. We realized that a 100 percent commitment to impact for our then $7 million portfolio was essential—a way of activating our 95 percent as well as our 5 percent payout. We wanted to support thoughtful businesses like the one created by Kim, and we also wanted to help signal to the mainstream financial system that there are investors who privilege value creation that goes beyond shareholder value. During this time we also refined the core values of the foundation and added an emphasis on taking risks and collaboration. After talking with potential advisors, and learning what leeway there was to support our vision of impact investing, we settled on a boutique impact investment firm to manage our corpus.

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Top 16 Posts of 2016

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We thank all our readers and the many funders and colleagues who lent us their voices this year. We were pleased to do our part to inform and inspire your giving with these popular posts and many others.

The Case for Investing in Nonprofit Talent
Funders’ signals often encourage nonprofits to deemphasize staff development and stress programs and projects instead.

Changing the Culture of Philanthropy: Building a Movement to Fund Real Cost
Insufficient infrastructure and limited resources don’t lead to impact.

My Family’s Foundation Entered the Policy Arena, and We Are Not Looking Back
As a philanthropist, your voice carries tremendous weight in the policy arena.

Philanthropy Lessons: Who Knows More?
Hear from leading philanthropists about building respect and trusting the people working day in and day out on the complex issues we care about.

There’s No Such Thing as Nonprofit Sustainability…and What To Do About It (Part 1) and (Part 2)
What is the role of funders in the lively topic of sustainability in the nonprofit sector?

Impact Investing: Making the Case to Your Trustees
For foundations, the early stages of impact investing lie at the board level.

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Impact Investing: Impact Measures and Monitoring Tools

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This post is an excerpt from the complimentary resource Essentials of Impact Investing: A Guide for Small-Staffed Foundations, created by Exponent Philanthropy and partners Mission Investors Exchange and Arabella Advisors. Want to align your investments with your mission? Download your copy >>

By Christa Velasquez, University of Chicago 

So much time and effort is focused on getting an impact investment closed and the funds disbursed. However, executing an agreement isn’t the finish line and, in fact, it may not even be the halfway point. Post-closing, there is still a lot of work to do in monitoring the performance of an investment to ensure financial health and intended impact.

Monitoring the performance of your investments ensures alignment with your foundation’s objectives, communicates expected and achieved impacts, ensures consistency among reported data, allows for performance measurement over time, and helps to identify the right questions for investors to ask. Unlike traditional investors that measure only their financial returns, impact investors track both the financial and social impact performance of their investments.

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Impact Investing: A Foundation’s 15-Year Journey to Catalytic and Direct Investments

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This post is an excerpt from the complimentary resource Essentials of Impact Investing: A Guide for Small-Staffed Foundations, created by Exponent Philanthropy and partners Mission Investors Exchange and Arabella Advisors. Want to align your investments with your mission? Download your copy >>

By Jesse Fink, The Fink Family Foundation

When my wife, Betsy, and I formed the Betsy and Jesse Fink Foundation [now The Fink Family Foundation] 15 years ago to help solve large-scale environmental problems, we were faced with a big question: how could a foundation of our size be impactful when hundreds of billions of dollars are needed to achieve our mission globally?

We started with two core principles. First, as former entrepreneurs, we wanted to be catalytic—to take risks to prove new models, so that larger funders with less risk tolerance would feel able to adopt them, too. We focused most of our funding on seeding new organizations and pilots in the Northeast, where we have strong local relationships and knowledge.

Second, we recognized that the scale of environmental problems dwarfs available philanthropic capital, so we needed to find impact leverage wherever possible. This led us to invest in scalable solutions, such as innovative business models, technology, human capital, and market-based solutions. Once we began supporting market-based solutions programmatically, we recognized that we could also push the field forward through impact investing (which we called “issue-based investing” before there was a common name for it).

We first researched and implemented a half dozen PRIs, including more traditional loans for low-risk land conservation projects, as well as higher risk loans for unsecured food hubs and food recovery projects. We also made a few small investments in third-party funds focused on clean energy. We learned from some of the failures and saw the huge potential of the successes, and decided to make mission-aligned impact investing a core of our work.

Recently, we asked our long-term trusted advisor Mark Cirilli, co-founder and managing director of the impact investing advisory firm MissionPoint Capital Partners, to help draft a comprehensive impact investment strategy and policy for our foundation. The resulting document, built in partnership with our trustees and team, codified a few core values that have driven our work:

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Impact Investing: Where to Source Investments?

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This post is an excerpt from the complimentary resource Essentials of Impact Investing: A Guide for Small-Staffed Foundations, created by Exponent Philanthropy and partners Mission Investors Exchange and Arabella Advisors. Want to align your investments with your mission? Download Essentials of Impact Investing: A Guide for Small-Staffed Foundations >>

By Cynthia Muller and Catherine Toner, Arabella Advisors

For the 90-year-old Edward W. Hazen Foundation, making impact investments was not a question of if, but how. The board was eager to more closely align the foundation’s investment portfolio with its mission. With the corpus entirely in screened investments, the board had voted to allocate $1 million, or 5 percent of its total corpus, whichever is less, to test mission investing—but found it challenging to identify transactions that met its criteria.

The foundation found [its first investment]—as well as two other potential transactions that are in the pipeline—thanks to the board and staff’s efforts to solicit suggestions from peers.

To successfully invest for impact, you’ll need a steady pipeline of investable transactions. Because the field is relatively new, finding investment opportunities that are aligned with a foundation’s interests and goals often requires extra effort and effective collaborations with colleagues, partners, and advisors. Foundations active in impact investing point to a number of ways you can find or develop investable opportunities:

Conduct a landscape scan. This will identify fund managers or investments that are aligned with your foundation’s investment criteria (investment, program, geographic requirements). Peer funders are especially helpful to speak to when identifying specific investment opportunities within your area of interest. Industry platforms such as ImpactBase, Aeris, ANDE, and ImpactSpace are good resources as well. If you are able to identify specific opportunities through these resources, the next step is to have a conversation to clarify if the fund manager or organization is actively raising funds and the timeline for possible investment.

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Impact Investing: Best Practices for RFPs

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In 2015, Exponent Philanthropy and partners Mission Investors Exchange and Arabella Advisors released Essentials of Impact Investing: A Guide for Small-Staffed Foundations. This post is adapted from the complimentary and actionable guide, geared to foundations with few or no staff that want to align their investments and missions. Download Essentials of Impact Investing: A Guide for Small-Staffed Foundations >>

To find potential advisors, it was most helpful to solicit referrals from peers. While some of these may not be a good fit with your size or budget, it is worth having a conversation with them as you may get new leads or learn about services you may wish to incorporate into the RFP.

It is also important to note that you may get a referral from a peer who had a good experience with a manager even though the advisor is not an SRI specialist. Depending on the premium your foundation places on SRI expertise and your own comfort level and knowledge of the SRI universe, this may be fine. In fact, in our case the advisor we selected was not an expert himself, but his firm had the resources to meet all of our fundamental needs.

—Pam Fujita-Yuhas and Zoe Rothchild, NW Fund For The Environment

When it comes to making impact investments, foundations of all sizes partner with consultants and financial advisors for a variety of reasons. Three common ones are to receive support for discrete needs, such as deal sourcing or portfolio monitoring; to augment existing capacity on a longer-term basis; and to use consultants’ and advisors’ imbedded capacity to implement a complex impact investing strategy.

Finding an advisor who will best address your foundation’s need starts with drafting a well-thought-out request for proposal (RFP). Here are some best practices:

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Impact Investing: Addressing Expertise and Staffing Needs

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In 2015, Exponent Philanthropy and partners Mission Investors Exchange and Arabella Advisors released Essentials of Impact Investing: A Guide for Small-Staffed Foundations. This post is adapted from the complimentary and actionable guide, geared to foundations with few or no staff that want to align their investments and missions. Download Essentials of Impact Investing: A Guide for Small-Staffed Foundations >>

By Peter Berliner, Mission Investors Exchange

To successfully develop an impact investing strategy, a foundation must consider its capacity needs, as additional resources may be required.

How much capacity a foundation needs will depend on how it designs its impact investing strategy. It may need added expertise to obtain deeper knowledge of specific issues, communities, and investment opportunities. Or it may require technical assistance to address legal and financial questions, as well as to structure, underwrite, and monitor investments.

Not every foundation will have all these resources in-house, but you can still access the tools, people, and expertise needed to successfully invest for impact. In our experience, both staffed and unstaffed foundations have been able to develop impact investing portfolios.

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Impact Investing: Making the Case to Your Trustees

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Several months ago, Exponent Philanthropy and partners Mission Investors Exchange and Arabella Advisors released Essentials of Impact Investing: A Guide for Small-Staffed Foundations. Below is an excerpt from the complimentary and actionable guide, geared to foundations with few or no staff that want to align their investments and missions. 

By David Wood, Initiative for Responsible Investment

The early stages of impact investment adoption for foundations lie at the board level.

The idea to explore impact investment as a philanthropic strategy often comes from a single board member, or from staff or consultants who have seen other foundations adopt impact investing. Board engagement is a critical next step for implementing an impact investing strategy: learning what individual board members think about the possibility, educating the board on the state of the field, and taking a broad survey of potential areas of interest or investment opportunities that engage the board’s imagination.

In most cases, board approval is required for a foundation to engage in impact investing, and that often requires ongoing, high-touch engagement from impact investing champions— whether staff or fellow board members. Early board engagement often involves peer-to-peer presentation from board members who are more familiar with the field—and an allaying of the skepticism of board members who may fear that impact investments may not perform well financially or socially.

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The Marriage of Passive and Active Investment Strategies

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By Peter J. Klein, CFA, CRPS, Klein Wealth Management at HighTower Advisors

In many cases, combinations are much more powerful than individual circumstances. Think hot dogs and mustard, Abbott and Costello, peanut butter and jelly.

Investing is not much different.

When the power of two schools of investment management—passive and active—are combined in the Core-Satellite approach to portfolio management, the end result tends to be better. Many of the largest pension plans and endowments use a form of the Core-Satellite approach in their portfolio management, and it may be just the right approach for your foundation in today’s markets.

Many investors may think passive investment management or “indexing” is optimal for foundations and endowments, especially over the past few years. After all, passive management matches an underlying market index, such as the S&P 500; is fully diversified; and is associated with low fees and expenses. But it is important to take into account the significance—especially over the long term—of generating alpha, or returns above that of the market that are associated with active management.

Whereas indexing does make a lot of sense in many asset classes and for many investors, it is not a panacea for today’s foundation investors. For that matter, neither are active strategies. Today’s foundation and endowment investors—in a bit of a pickle, addressed below—need a new playbook that offers a combination of approaches.

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New Guide to Impact Investing for Small-Staffed Foundations

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Pages from Essentials of Impact Investing full layout_v8Exponent Philanthropy, together with partners Mission Investors Exchange and Arabella Advisors, is pleased to announce the release of Essentials of Impact Investing: A Guide for Small-Staffed Foundations.                 

Below is an excerpt from the actionable guide—a Q&A with Luther M. Ragin Jr., former president and chief executive officer of the Global Impact Investing Network (GIIN) who helped accelerate the development of the impact investing industry. He speaks to opportunities for small-staffed foundations that want to invest for impact. 

Q: How does impact investing from small-staffed foundations help create impact? 

A: The same way it would from foundations with large staffs or from other philanthropically minded organizations. But small foundations are unique in two noteworthy areas:

  • Flexibility. Their small size makes for nimble structures that can adapt or respond more readily than larger foundations. This nimbleness leads to clear signals on the part of funders and allows asset managers and social entrepreneurs to make sharp decisions based on these signals. It’s better to get a “no” in a matter of weeks than after a process of several months.
  • Specialized knowledge. Small-staffed foundations have unique understanding and expertise in particular geographic or program areas, or both. This can be leveraged to attract other outside investors who can capitalize on the foundation’s connections to the community.

Q: What are some of the specific strategies leaders in small-staffed foundations can use to play a role in moving capital in markets including or beyond their traditional grant-making activities?

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