Investments: Our Journey So Far
Our belief is that a tradeoff between impact and financial returns is a necessity, not a choice, especially given the financial resources of the communities we seek to support as well as the challenges and barriers in the countries we work.
Over the past year, we’ve begun our journey with Mission Related Investing (MRI). At the start, we were fortunate enough to have all our assets in Treasury bills and make a decision to integrate Environmental, Social and Governance (ESG) factors into our portfolio in its entirety in the near term, rather than a long term goal. We sent out a request for proposals to a select group of financial advisory firms known for their capabilities working with endowments and sustainable investing and ultimately chose Threshold Group (now Tiedemann Advisors) due to its origination within a mission focused family office and foundation, as well as the insights and capabilities of the team.
We began our MRI strategy with our basic toolkit for capital allocation as:
In collaboration with our advisors and fund managers, we started investing a year ago with the following restrictions and availabilities:
Classic Investing: profit maximization without regard to Environmental, Social and Governance factors (not eligible)
Responsible: consideration of Environmental, Social and Governance risk across a range of factors to screen out investments (eligible for endowment)
Sustainable: targeting investments best positioned to benefit from the integration of Environmental, Social and Governance factors and broad based macroeconomic trends (focus for endowment)
Thematic: focus on issue areas where social or environmental needs offer commercial growth opportunities for market returns (eligible for endowment)
Impact Investing: optimization of social or environmental criteria which may result in financial trade-offs (focus of our program related investments)
Philanthropy: Social or environmental needs outweigh any consideration for financial return (core focus — grants)
Our allocation parameters originally looked like this:
Based on the learnings over the last year, we no longer see the potential for true mission alignment with public investments in equity and debt; therefore, we do not consider our current endowment allocation as “Mission Related Investing”. We plan to continue thinking critically about if and how we can allocate our endowment via private asset strategies that fundamentally align with our mission, including our sectors and geographies of focus in Southeast Asia. Our target allocation range is currently set at 15% of our endowment for these private allocations.
As a result, our new capital allocation toolkit now looks like this:
Based on learnings over the past year, we have also determined that the lines between classic, responsible and sustainable investing are often blurred (especially when it comes to public equities) and there is limited product availability that is not long only public equities. In our experience, Top 10 holdings between funds are often similar (especially large cap funds that track index based benchmarks) with or without ESG screens. Therefore, since ESG investing was not as mission aligned as we were hoping and there is still limited product availability that is conducive to navigating tumultuous market environments, we have decided to open up “Classic Investing” as a category for our investments with an intuitive, qualitative “Do No Harm” screen (e.g. we don’t want to have our investments result in black lung outbreaks from mining investments or emerging market sovereign bankruptcies from hedge fund distressed debt investments).
Although we still believe in the value of incorporating Environmental, Social and Governance screens and the inherent correlation with long term performance potential, we have modified our parameters in order to increase our investible universe in the near term, particularly within investment classes that are not long only. As a result, our eligible spectrum of capital going forwards now looks like this:
When it comes to allocating our endowment, unless it fundamentally relates to our mission, we are and will continue to be risk averse. Our capital allows us to support organizations to achieve real impact with our grants and our program related investments — we don’t plan to sacrifice that. Our belief is that a tradeoffs between impact and financial returns is a necessity, not a choice, especially given the financial resources of the communities we seek to support, and the challenges and barriers in the countries we work. This trade-off will continue to be a factor as we develop our program related (direct debt) and mission related (private asset via fund managers) investment strategies. The simplest case for our belief in the necessity of this trade-off is our grants — if we (or any foundation, for that matter) didn’t fundamentally believe there was a trade-off between impact and financial returns, why would we (or they) give grants?
The second case for this is that our Program Related Investment (direct investment) strategy seeks a 0% target return. Impact is at the core of our direct investment strategy and we’ve learned from other impact investors in the region that there is a trade-off, especially with private investments. As fund sizes increase, commercial viability with middle and upper income consumers often becomes the priority of underlying portfolio investments for funds that seek to target “market rate” returns.
As a result of the above learnings, we do not consider our current endowment allocation to be “Mission Related”, and certainly don’t consider it Impact Investing. With our endowment, we plan to increasingly incorporate mission alignment by seeking out fund managers that cover the sectors and geographies we work in with thoughtful investment theses and values aligned approaches in collaboration with our investment advisors. Our hope is to build our Mission Related Investing via private asset strategies with fund managers that are fundamentally mission related, but finance first.
With our direct investing (Program Related Investments or PRIs), we plan to support social purpose organizations to achieve their goals using 0% debt over patient, long term time horizons. We plan to continue building our PRIs with direct investments that are impact first, finance second.
And, above all, we plan to continue allocating grants that are impact only.
For any Foundation currently considering rethinking endowment allocations, here’s a high level summary of the steps we took over the past year:
- Research, learning and education
- Board approval for Mission Related Investing strategy
- Request for proposals from advisors
- Select advisor (hint: trust and capacity are key)
- Create Investment Committee
- Draft Investment Policy Statement (IPS)
- Integrate IPS parameters into investment portfolio
- Consider carving out private asset allocation (to select investment managers that come as close to aligning with your foundation mission as possible)
- Develop Program Related Investing strategy (if desired and feasible)
- Remember: grants are and always will be the primary method of allocating capital to achieve impact