Historically, private foundations have focused on principal capital preservation while distributing their 5% payout for social good. Today, the world of impact investing has more and more philanthropists asking how their foundation’s corpus can be invested for social good as well.
According to a recent study of 32 ultra high-net-worth families, Impact Investing: Mapping Families’ Interests and Activities, more than half plan to move 90% or more of their assets into socially-responsible, values-driven investments in the next 10 years. Currently, however, they are doing so with less than 20% of their assets. This discrepancy is largely due to the gap between intention and knowledge about what steps to take to move down the road to impact investing.
Here are five tips to get started:
1) Know what you own.
Co-founder and CEO Dana Lanza of Confluence Philanthropy, a membership group for private foundations interested in impact investing, visited the Pacific Foundation Services offices in December. Lanza proposed that an essential first step is to take stock of your current investments. More and more investment managers have the capacity to run your portfolio through a screening tool that will show your holdings. While you are hard at work ensuring that your grants are making a positive difference in the world, are you unwittingly invested in companies that manufacture guns, run private prisons, profit from oil and gas extraction, promote harmful factory farms, or use exploitative labor practices? The answer for most of us, unfortunately, is yes—but knowledge is power, and the first step towards change.
2) Consider your values.
Spend some time with your board identifying the values you want your investments to reflect. For some, divestment is the central tenet: “I will not invest in X, Y, Z.” This is called negative screening. For others, they use positive screening by selecting only public market managers who build portfolios of companies that consider environmental, social and governance (ESG) factors—trusting that these best practices lead to better long-term returns. Still others take a look at their foundation’s grantmaking and consider parallels in their investments. This synergy can be thematic or place-based, through pooled funds or private equity. If your foundation funds environmental organizations, invest in clean energy. If it funds workforce development, invest in access to finance. Foundations can also consider becoming engaged and active shareholders, wielding that power to push for corporate change from the inside. Discussing and reaffirming your foundation’s values will provide a north star for your journey into impact investing.
3) Establish a point of view about ROI.
Although the relatively new impact investment market is still seeking the best measurement tools to demonstrate social and financial returns, there is now ample evidence that socially-responsible impact investing produces comparable or better financial returns than traditional portfolios. When one Pacific Foundation Services client engaged in impact investing, it determined that only high-return opportunities would be sought, resulting in an Investment Policy Statement that only required modest adjustments from before the family undertook their impact investment journey. Others are willing to have low or no returns in order to deploy capital in mission-aligned ways within their corpus—particularly if they wish to put their money towards mission immediately and do not intend to maintain their foundation in perpetuity. Setting expectations about returns will help to narrow the field of investment opportunities and avoid disappointment down the road.
4) Talk to experts.
Learning from others’ successes and challenges should be part of your due diligence process. Identify one or two point-people from your foundation to engage in conversations with peers and experts. Robust resources are available through Pacific Foundation Services client foundations, as well as membership organizations like Confluence Philanthropy, Mission Investors Exchange, Global Impact Investing Network, Divest-Invest Philanthropy, and Toniic. Silicon Valley Social Venture Partners (SV2) has a very active impact-investment committee that provides monthly learning opportunities. Pacific Foundation Services can also point you towards knowledgeable consultants and investment firms to interview as part of this process.
5) Make a blueprint for action.
Knowing what you now know, draft a short statement of purpose and a plan to codify the decisions you’ve made. Document the values you want to uphold and the investment goals you’ve identified. Establish a prudent and phased approach to roll out over several years. Consider the plan as a guideline for action. This document will be useful to any investment firm you interview because it will help them understand your high-level goals. If you opt to hire a consulting firm as your guide, they can help draft this plan. Together with your team, you will start to find investment products that align with your values—maximizing every dollar in your foundation for the greater good.
Have we piqued your interest? Contact your PFS team to get started.