Foundations have played a vital role as pioneers in impact investing. Their early influence carries across to now: others following in their footsteps do not have to reinvent the wheel. Instead, organizations considering moving all or some of their portfolio into impact investments can let a critical mass of early movers serve as a model for investments of all shapes and sizes.
Although there is no single strategy or formula that all foundations should follow, new entrants to impact investing can learn important lessons from the investing groundwork foundations have laid.
Seek Out Like-Sized Peers
It can be tempting to try to mimic the biggest foundations in impact investing. Although these organizations provide aspirational models, they are not always a useful blueprint for smaller foundations with limited resources. “You can try to emulate certain elements,” says John Church, director of endowment and foundation impact portfolio management at Glenmede. “But multimillion-dollar foundations operate with a totally different model from smaller organizations.” A more effective approach is typically to connect with foundations of a similar size, even if they have different missions.
Church recommends that foundations first pinpoint their concerns, which may include staff costs and intergenerational matters. Then, similarly sized foundations can discuss the issues and hear how others have handled those problems.
“Start with a short list of concerns,” he says. “Then you can compare notes.”
Prepare for Some Hand-Holding
In the early stages of the shift to impact investing, there will likely be some hesitation from the board. Successful foundations often spend the initial phase slowly guiding stakeholders through the issues involved and allaying their concerns.
That is the path the Surdna Foundation took when it started the process in 2014. During a nine-month exploration period, it created a working group that included both board and staff members. The organization also took steps to share information, including making sure the full board received regular written updates and conducting workshops during meetings. It also developed an impact investing tool kit with selected readings. The board decided to move $100 million to impact at the end of that period, equating to 10% of the portfolio.
Bring in Outside Experts
Even foundations with trusted advisors may find they must supplement those professionals with specialized expertise. For example, Surdna needed a financial advisor capable of taking on a temporary educational role. It hired two firms—a wealth advisory firm focused on impact investing and an advisory group specializing in helping organizations create an impact road map.
Organize Portfolios into Impact-Oriented Categories
Of course, different foundations develop their own strategies for organizing investments within their portfolio. A number of factors come into play. For instance, is the ultimate objective to go all in and align 100% of assets with impact or only a portion? Cataloging various foundations’ strategies can help establish expectations for financial returns and support more agile investment choices.
The K.L. Felicitas Foundation aims to go all in. It organizes investments into two general categories. Both explicitly target impact, but they carry different expectations for financial returns.
From principle to market rate, “impact first” investments target a range of returns. That includes Corpus Impact First Investments, which are typically program-related investments that offer low-interest financing, loan guarantees, lines of credit, or equity investments made directly from the foundation’s endowment rather than the annual 5% payout.
The other category is “financial first” investments. This mostly includes equity investments into sustainable companies. However, it also spans funds and thematic investments that provide grants or equity to investees with programming aligned with the foundation’s mission.
Do Not Let Perfect Be the Enemy of Good
Foundations getting started tend to focus on creating the perfect investment policy. The process often is so daunting that it leads to paralysis, and nothing progresses.
Church says he has learned from many foundations to move forward, even if only in baby steps. “If you can take immediate action before all the pieces line up perfectly, it’s much more effective than remaining in a holding pattern,” he says. “You can refine the strategy later.” For example, that might mean allocating 20% of a portfolio to impact investing and evaluating performance after two years.
“The best way you learn is through experience with investments,” he says.
Make the Right Connections
Lean on resources when reaching out to fellow foundations. For instance, the Council on Foundations provides support and community for philanthropic professionals and organizations. Its peer-to-peer platform Philanthropy Exchange connects members around shared interests. Investment network Exponent Philanthropy targets foundations and individuals with “lean” resources. Some communities restrict membership to corporate and community foundations.
Investors also gather at impact investing conferences, such as the Global Impact Investing Network Investor Forum; the Economist Impact Investing Forum; the US SIF Forum; and the North American Family Investment, Impact & Ethics Conference. These events attract many seasoned investors who can share their experiences.
Fortunately for foundations exploring impact investing, investors in the sector tend to be generous and enthusiastic about sharing their knowledge in the interest of furthering the field.
“Foundations are usually more than happy to publicize the work they’ve done,” says Church.