In this sub-section, attention is given to how foundations that have successfully implemented these strategies have addressed the possibility of originating limited investable opportunities that are aligned to their mission. Charlton et al (2014) and Business & Sustainable Development Commission and Convergence (2017) suggest that this might be a factor that prevents uptake especially considering that the impact investing sector is still nascent.
Two of the foundations, Ford and Heron, expressed concern that the market may not have sufficient impact product to meet their demand for it. Albeit a much smaller foundation in terms of assets in comparison to Ford, Heron was able to use this fact to leverage relationships with asset managers to develop bespoke investment mandates.
“One of the luxuries of philanthropy is that we are small … but big enough to have separate managed accounts. So most often, we were dealing directly with the managers. So, we were able to be in relationship with our managers, having pretty granular
conversations about this and what we would love to see. And them saying, ‘here is the data and the deal flow that is available’. And then having that interchange about what is fixable and what is not. We continue to do that quite aggressively. And I am happy to say, that we have had success working with managers to craft mandates.” ~ VP Capital Markets
Initially, Heron’s foray into impact investing used conventional fixed income instruments, but with the added layer of their foundation’s mission as a lens through which to consider their investments. Specifically, if they were buying property bond (mortgage) loan books, they would ask the manager to examine the postal codes of the underlying lenders. Based on their
philanthropic work in low-income communities, the post code information gave Heron a sense of which communities their fiduciary capital was impacting and thus aligned their investments with their mission. As they worked more closely with their asset manager, they asked to target certain post codes and affordability criteria as a way to better support poorer communities with access to finance without over indebtedness and therefore support their economic development mission.
“…in terms of mortgage pools, we had a preference for zip codes. We knew where moderate and low-income zip codes were. It was really pulling the thread of the things we knew as a grant maker.” ~ VP Capital Markets
From the use of post codes, Heron began the process by taking the slow, but iterative steps of examining their portfolio. Considering what assets they held, and if those adequately were aligned to their mission. At the time, this lead to the uncomfortable realisation that they held paper that heavily indebted poor people (information gleaned from their programmatic grant making teams, supported this contention specifically when it came to mortgage loans) or invested in private prisons. This began a process of asking their managers to ensure that mortgage paper they held had applied a long-term affordability test and to divest from private prison stocks despite the fact that they were net job creators.
“… moving from unexamined to examined and then once we know that, it became pretty clear that there were positions that we owned that we did not want to own. And some positions were better from a mission lens than others. So, then we started making affirmative shifts and rotating our positions toward impact.” ~ VP Capital Markets Heron’s trustees had, for fiduciary reasons, to ensure they achieved their impact intentions whilst still preserving capital, thus achieving 100% of their fiduciary capital in investing for impact strategies, which was achieved over a 12-year period in part because they had to work with managers in a nascent market that had limited capacity to absorb their capital (Miller, 2017). The Annie E Casey Foundation did not face a similar challenge as they took a different approach. Trustees had agreed to the carve out allocation to impact investing from their
endowment capital with no expectation that it would contribute to the growth and preservation of their endowment.
“…because we have combined concessionary investments with market adjusted returns, there is no expectation that this portfolio [the carve out] would perform at particular thresholds. Therefore, it is not going to feature in the overall growth of the foundation’s assets. [The] focus [is] on a return of capital with some sort of marginal return on top of it and driving programmatic results. The mission lens is very strong when it comes to the social investment portfolio.” ~ Senior Investment Analyst
This low or no performance benchmark approach gives Casey the opportunity to be less rigid in terms of a financial return threshold. They can seek investment opportunities that focus on “innovative ways to solve problems” in the first instance rather than be primarily concerned about the absorptive capacity of the market to offer product that could offer a financial return. In spite of this approach, the results have surprised them as they are more positive than anticipated:
“it is proven that you can get your capital back – returned to you by investing in scalable revenue models – that’s a strong lesson learned over and over again at the foundation.” ~ Senior Investment Analyst
It seems that the size of the foundation’s assets to invest does make a difference in terms of the market’s capacity to absorb mission aligned capital. Ford’s asset base is significant at $11.9
billion compared to the much smaller Heron with a comparative asset base of $274 million (PKF O’Connor Davies, 2016; PricewaterhouseCoopers LLP, 2017). Therefore, Ford’s trustees did not commit to more than a small percentage of assets to impact investing strategies because they believe that the market does not have sufficient performance data or product capacity to absorb their full asset base.
“To be fair, the impact investing sector has yet to deliver on a significant amount of data that says that you can do well in these asset classes and these sectors and to give you the transparency of data that the traditional investment sector has. It’s about getting
Trustees to move when all you can provide them with are examples – we think that this opportunity offers this with this kind of return profile.” ~ Foundation A
As an additional precaution, Ford has set a very long time horizon of 10 years to achieve the target of placing the portion of their assets in impact investing strategies (Paynter, 2017). Thus, they are hoping to exercise a conservative approach in a market, that in their opinion does not have sufficient capacity. This approach supports success rather than failure to build confidence and trustee comfort.
“I don’t know when would be the right time to have failures. As investors we are always nervous of failures. Having said that, yes, the initial set of investments we have brought forward have been with managers that have been doing this for quite a while. In
strategies that we are very familiar, with principles that we have known for quite some time. There is comfort in that.” ~ Foundation A
As discussed earlier in this chapter, the Rockefeller, Gates and Gatsby Foundations do not engage in impact investing strategies for their endowment capital. However, these foundations do execute complex and cutting-edge blended models using their philanthropic capital to create viable models that solve global challenges that affect the poor. Respectively, for Rockefeller, Gates and Gatsby, examples include impact investing eco-system development by leveraging traditional capital, access to vaccines in underserved markets using volume guarantees, and emerging market economic development also by leveraging traditional capital, but also by taking subordinate risk positions.