Environmental, social, and governance (ESG) analysis, impact measurement, and reporting have all seen rises in awareness and utilization. Amid this expansion of responsible investing, some of the largest institutional proponents may be found in the endowment and foundation community.
Many organizations’ investment committees and boards of trustees have adopted mission-aligned goals as a core element of their investment policy statement (IPS), capitalizing on the opportunity to use their sizable endowments to expand their impact.
More specifically, Callan’s 2020 ESG Survey found that 63% of endowments and 57% of foundations incorporate ESG factors into the investment decision process. Additionally, more than a third, who have not incorpated these factors, expect to do so within the next two years. Only 13% of those polled were unfamiliar with sustainable and impact investing.
“It’s uncommon to go into a boardroom, bring up mission-aligned investing, and find that nobody’s heard about it,” said John Church, Glenmede’s director of endowment and foundation impact portfolio management. “Especially over the last decade or so, foundation trustees have broadened their focus from primarily caring about where the money is going to more of an inward focus around the questions of ‘how are we actually growing this money, and are we doing it in a responsible manner?'”
IPS Sets the Tone
An IPS provides an investment road map for a foundation or nonprofit, by setting out its investment objectives, guidelines, and risk tolerances. As organizations ratchet up their responsible investing efforts, a reworked IPS can outline how to effectively integrate mission-aligned investment strategies.
In its 2020 survey of organizations incorporating sustainable and impact investments (SII), Cambridge Associates found that 63% of respondents relied on an IPS that integrates SII. Meanwhile, Callan’s 2020 ESG Survey of public and corporate pension plans as well as endowments and foundations reported that more than half of the organizations have added ESG elements to their IPS and consider them an important part of any investment discussion.
“The key with any investment policy statement is to come up with a set of guidelines that are general enough to provide room for growth, as well as interpretations of what mission alignment might mean, all while keeping fiduciary responsibilities paramount,” Church said. “So, a good IPS will describe the issue they’re trying to solve and—in very broad strokes—suggest the types of investments that they might want to pursue to achieve that.”
Consensus Drives the Model
To achieve the ideal blend of impact and returns, Church typically asks each foundation trustee to complete a questionnaire fleshing out specific societal or environmental concerns. This also factors in overarching tenets, such as faith or climate change. Working through the responses, he helps the group achieve some consensus on matters such as an initial portfolio percentage that should be dedicated to mission-aligned investments. He also highly recommends revisiting the discussion on an annual basis.
“It’s not always obvious what the solution is going to be, and it can change over time,” he said. “Plus, as trustees come and go, it is important to educate the group while allowing the entire board to stay on top of shifting industry trends.”
For example, Church works with a foundation that has deep roots in the founding family’s faith. Within its immediate community, that translates into a sharp focus on the wealth gap and an emphasis on opportunities in job creation, education, financial inclusion, and access to healthcare. As the foundation has grown and expanded its outlook more globally, it has tended to seek out broader opportunities that still tie to its faith-related foundation.
Elsewhere, the Park Foundation actively seeks to strengthen its grantmaking efforts by following an ESG IPS that addresses environmental, employee relations, product liability and corporate governance, animal welfare, and community relations issues. The organization also screens out companies in industries such as weaponry, nuclear power, tobacco, alcohol, and gambling.
The McKnight Foundation IPS details a 10% carveout from its endowment for mission-oriented investments. Expectations from the carveout vary by type of investment, such as public, private, or program-related. This allows for impact returns that may be measured quantitatively, qualitatively, or via engagement and learnings.
As demonstrated in the Valentine Foundation IPS, mission alignment may extend to an organization’s cash holdings by investing in local community banks as well as other higher-impact alternatives that still offer considerable security and liquidity.
Return expectations hinge on timing. Ideally, endowment investments should be viewed through a lens similar to that used by Lewis & Clark College. Although the school acknowledges in its IPS that the annual real net return goal of 5% on its endowment investments may be difficult to achieve in one specific decade, it “should be attainable over a series of 10- or 15-year periods.”
“If you take a long time frame, which you should as a foundation because you’re investing for perpetuity, you should have the ability to withstand the ups and downs in the market while aligning your investments with your values,” Church said.
Mission Bolsters Succession Planning
The primary benefit of a mission-aligned IPS is its ability to ensure the organization’s impact extends beyond the grantmaking process—frequently in measurable ways. It also prompts trustees to explore the question, “How do your goals align with your mission?”
“It’s really no different from what happens with grantees, where a foundation sees that their $100,000 grant helped create X number of jobs,” Church said. “They can look at their portfolio and see that the mission-aligned companies they invested in reduced the portfolio’s carbon emissions by 50% over three years or increased the portfolio’s diversity on companies’ boards of directors from 30% to 50%.”
Church added such results can in turn help engage and retain the founding family’s next generation and third-party trustees, who may be more interested in holistic impacts than the organization’s longer-tenured leaders.
For the well-meaning foundation or nonprofit striving to expand its impact through its endowment portfolio, a mission-related IPS can ultimately help lock such ambitions in place.