By Alex Haber
Would you like your foundation or nonprofit investments to actively support your mission?
It's hard to imagine anyone saying no. But the follow-up question--Can you make that happen?--tends to inspire responses somewhere between a shrug and a vigorous "no way." In fact, a recent Council on Foundations study asking 186 public and private foundations about their socially responsible investment practices found that just 16 percent of respondents had investment policies that permit or refer to direct mission-related investing.
I understand the roadblocks, because my organization has been there. And I'm happy to say, yes, you can invest for impact. You will face barriers related to the culture of traditional investing and the new capacities needed to undertake this work, but overcoming them is worth the effort. Not only is a new generation demanding more of philanthropic institutions, but the opportunities for mission-related investment are growing.
In the spirit of helping our colleagues take the next step, I offer the following lessons learned from RSF Social Finance's experience over more than a decade of work on deepening our mission through our investment portfolio.
What we did
Your particular approach is likely to differ from ours--every organization will have its own path dictated by its mission and priorities. RSF's story provides context for the advice below.
RSF's purpose is to transform the way the world works with money. Our goal is to build a financial system that is direct, transparent, personal, and based on long-term relationships. We began to align our philanthropic investments with this mission in 2002 by working with socially responsible investment managers and using custom screens based on our values.
When we started, our philanthropic assets were held entirely in cash and equivalents with no investment strategy, impact or otherwise. By 2006, we had built a diversified portfolio of the most socially and environmentally beneficial investment options available. We invested in public and private equities, real estate, real assets, and fixed-income vehicles. Across all the asset classes, we were invested in an array of impact areas, including clean technology, green real estate, health and wellness, microfinance, and affordable housing. We were the first philanthropic investor that we know of to build a portfolio like this, and it has continued to evolve.
The most radical shift came in 2010, when we decided to divest entirely of public equities, which at that time made up about 30 percent of the portfolio. We made this decision because we felt that even socially and environmentally screened funds contributed to a toxic trading culture focused on short-term gains rather than long-term sustainability for people and planet. We also realized that our relatively small investments were not having the catalytic effect we wanted to create. This left almost all of our holdings in private equity and real assets, and that is where the almost $10 million fund balance remains today. (See more on RSF's commitment to walking off Wall Street here.)
What we learned
We've learned a lot since 2002, but I've distilled our experience into four key lessons.
1. Financial returns are not the only measure of success
As with any strategy, the timing of your initial investment has a significant impact on the ultimate financial, social, and environmental returns of your portfolio. Unfortunately, you can never be certain about where markets are headed. At RSF, we entered into many of our private equity positions just before the Great Recession of 2008, and they never had the chance to perform as well financially as we had hoped. Many, however, have been a success from an impact perspective, pioneering new models and achieving social returns in areas from medical technology to sustainable timber management.
The experience also showed us what our next step should be: the unpredictable and inconsistent financial returns from our investments spurred us to divest from elements of our portfolio that lacked transparency, like mutual funds and hedge funds, in favor of investments based on closer relationships and longer-term commitments. As you experience the vagaries of the market, you will find out what really matters to you and how best to target your investments in support of your mission.
2. Strive for diversity within your mission-related investments
The number of targeted impact fund options is growing all the time, and ideally you will have a broad array of investment choices in your mission area. In any case, finding diversity within your mission is important. If your work focuses on poverty alleviation, for example, you might seek out relationships with financial institutions that invest in community development and affordable housing, as well as higher risk vehicles like social impact bonds or microfinance. This will help ensure the sustainability of the portfolio, and you may find mission alignment in surprising asset classes. For example, RSF was excited to find a fund that provided short-term bridge loans to nonprofit organizations as a mission-aligned, fairly liquid investment in our portfolio.
Even with the expansion of impact investment offerings, odds are you won't be able to construct a portfolio that's an exact match for your mission goals. In this case, it's imperative that you don't let the perfect be the enemy of the good. Find appropriate compromises that meet the market where it is but still fulfill your mission needs, and that also allow you the flexibility to refine and deepen your mission over time.
3. Adopt an investment policy that reflections your impact philosophy
It's important to consider whether your investment philosophy is geared more toward financial returns or social and environmental impact. Clarity around this question will help you make the appropriate trade-offs between market realities and mission goals. RSF has run the gamut of the returns-to-impact continuum. We began with a mostly return-first vision for our portfolio, and selected socially responsible managers who could help us meet our return goal. As we deepened the mission alignment of our portfolio, we moved consistently closer to an impact-first model. Now the transformative potential of investments is one of the most important factors we consider. For all new investments and for the management of our current ones, we evaluate impact and mission alignment first and foremost, rather than making decisions based on an investment's capacity to meet target returns. We've also repeatedly revised our investment policy to reflect our changing impact theory, and to outline the mechanisms and targets for putting it into action.
4. Philanthropic investors can--and should--take more risk
In philanthropy, we often forget our mission when we step into our fiduciary responsibility role. But philanthropic assets--all of them, not just our grant dockets--have been entrusted to our stewardship to create social benefits. Invested funds have the potential to be the most transformational capital when they are devoted to supporting experimentation and testing new models. Our decision to divest from public equities in 2010 was based in part on this firmly held belief.
The most important criterion for us now is the transformative potential of the investment, both for the company or fund we're investing in and for the world. It is also core to the development of our integrated capital approach, which is the coordinated use of investment, loan, and grant dollars to support entrepreneurs and effect whole-system change. Moving toward a transformational lens in your impact investing requires asking challenging questions of yourself and your investment advisors: Do we need to earn a return on our philanthropic funds? Are our investment management practices, and not just investment outcomes, in line with our theory of change? How can we change the power dynamics around our investing to build strong community economies? Courageous foundations like the F.B. Heron Foundation, the Swift Foundation, the Libra Foundation, the Chorus Foundation, and the Fund for Democratic Communities are pushing the envelope on these questions every day.
Ultimately, the most important step in building a philanthropic impact investing portfolio is to consistently question assumptions and ask challenging questions of yourself and those advising you. By using our intuition and our deep commitment to our missions and values, philanthropic institutions can activate more--or even all--of our assets in service of our missions, and deepen the values of the impact investing field in the process.
Alex Haber is Program Manager, Philanthropic Services at RSF Social Finance, a pioneering funder of social enterprises based in San Francisco. Follow RSF on Twitter @RSFSocFinance.