Impact investing — the idea of putting endowment dollars to work for both social and financial returns — is a hot topic in philanthropy, especially since the Ford Foundation announced plans to place $1 billion of its $12 billion endowment in investments that advance its mission to reduce inequality.
Many foundations and nonprofits interested in the approach aren’t sure where to begin. Here, experts in the field offer some of the lessons they’ve learned so others can succeed.
Talk to other investors.
The Northwest Area Foundation, which has been making mission-related investments since 2004, has watched the trend take off in recent years. “Investment managers are very good at responding to demand,” Amy Jensen, Northwest’s investment director, says. “If they think that investors are looking for impact-related products, they will create impact-related products.”
But that doesn’t necessarily make it easier for organizations to find investments that correspond to their mission and goals. The Northwest Area Foundation, for example, wants to reduce poverty and create jobs in poor, rural areas. “That’s a little bit harder to find off the shelf,” she says.
Ms. Jensen recommends that organizations just getting started talk to as many impact investors as possible. She says referrals from other investors have been her best source for new leads.
“There are a lot of foundations and nonprofits looking for these types of investments, so when we find something that’s really interesting, we share it,” she says. “It’s a really collegial community.”
Determine your goals.
Organizations need to decide which social or environmental outcomes are vital to them and where they can be flexible. Ms. Jensen cautions that for foundations, hewing too closely to their grant-making mission can limit investment opportunities.
Innovative nonprofits and foundations are turning to impact investing to attract commercial capital to their causes. But some observers worry the investments that blend social and financial returns could change the way donors think about charitable giving.
In 2004, the Northwest Area Foundation took $10 million from its endowment to start a venture-capital fund to provide financing to companies in the eight-state region where it makes grants. The goal was to create high-quality jobs. The foundation had high hopes that the fund would attract $40 million from other investors and earn a 15 percent return. Instead, it raised just $5 million in outside capital and is only on track to break even.
Ms. Jensen thinks the fund failed to bring in significant money because of its rigid geographic focus, which other potential investors didn’t share.
Now, Northwest works with managers who invest in low- and moderate-income communities in the western part of the country. The goal of improving livelihoods is non-negotiable, but the foundation is more flexible on geography, Ms. Jensen says. “That’s where we’re willing to give.”
Be open-minded.
Some investments that could help an organization meet mission-goals might not be marketed as impact investments.
Stone Arch Capital, a venture-capital firm in Minneapolis, doesn’t advertise its funds as impact investments, but Ms. Jensen noticed that some of its previous investments were in out-of-the-way areas. She asked the firm to map the location of the companies in its portfolio and was intrigued by what she saw.
“These were little towns,” she says. “It was Sumner, Wash., and Algona, Iowa.”
It turned out that Stone Arch often put money into businesses located in areas where equity funds typically do not invest — in many cases, the same kinds of rural communities where the Northwest Area Foundation wanted to boost the economy.
The foundation invested in Stone Arch’s current fund, and decided to pay for a study to measure the fund’s social and economic benefits.
“My belief is that we will demonstrate that they created a lot of jobs,” Ms. Jensen says. “I think once we can prove that, there will be other investors who are trying to do the same thing who will want to invest in their next funds.”
Consider grant making.
Foundations can test the waters by making grants to support impact-investing work, says Taryn Goodman, director of investment partnerships at NatureVest, the Nature Conservancy’s mission-investing arm.
For the last three years, NatureVest has been developing investments designed to provide a financial payoff for conservation. For example, it built a $20 million fund to buy water rights in Australia’s Murray-Darling Basin, where one-third of the country’s food is grown. The majority of the basin’s wetlands are in poor health because of climate change and the diversion of water to agriculture.
The fund works to balance the needs of agriculture and the environment while returning a profit to investors. During years of plentiful rainfall and low water prices, the fund uses its water allocation to renew critical wetlands. When rain is scarce and water prices climb, it sells its allocation to farmers. Investors net earnings from water sales and the appreciation in value of the water rights.
So far, NatureVest has closed six deals that have attracted $200 million in capital.
When creating new investment products like the Murray-Darling fund, grant dollars are critical to paying for personnel, expertise, and upfront costs, Ms. Goodman says.
“In areas that are new to investment, the deal itself can’t cover those expenses,” she says. “But once you start proving those models, you can scale those deals and build those expenses in.”
Exert your influence.
Investors have more clout than they realize, says Elizabeth Lewis, head of sustainable investing at the World Resources Institute. The organization is two-thirds of the way to its goal of investing its roughly $40 million endowment entirely for environmental sustainability; for example, its holdings include a fund that makes equity investments in distributed commercial solar-power projects.
If foundations and nonprofits can’t find the kind of impact investments they want, Ms. Lewis says, they should demand new ones from the investment managers and financial institutions they work with.
“You have a lot of power when you’re a customer, even if you’re small,” she says. “A lot of these financial institutions really like to work with smart asset owners.”
When the McKnight Foundation’s board started to think about impact investing, it examined its portfolio and identified its most carbon-intensive investment: $75 million in a stock fund that tracks the U.S. market. McKnight, a 20-year client, went to the fund manager with its environmental concerns and then worked with the company for 10 months to create a new product. The result, the Carbon Efficiency Strategy fund, provides low-cost, broad exposure to the U.S. stock market, like the old investment, but is heavy on companies that produce fewer carbon emissions than their competitors.
Just do it.
Some foundations considering impact investing spend a lot of time devising a detailed road map and identifying criteria for decisions they expect to make, says Elizabeth McGeveran, McKnight’s director of impact investing. Her organization has taken a different approach, she says: determining a broad outline that everyone could agree on but then learning by doing.
“Just getting to it and starting to actually look at real-life investments has allowed us to move pretty quickly,” Ms. McGeveran says. “There’s a danger of analysis paralysis in this space.”
