Impact Investing, Insight
April 17, 2023
How foundations can begin their journey in impact investing
How foundations can begin their journey in impact investing
April 11, 2023
- Aligning investments with your mission extends your foundation’s good works
- There’s no one way to start impact investing, but there is available expertise and help
- Start your impact investing journey and see where it takes you!
Foundations fund our activities through the proceeds of endowments. For many public-good organizations, most of their portfolio is invested in the market – predominantly the stock market – sometimes with little awareness of how profits arrive or the impacts on the environment or workers.
Aligning our investments with our values maximizes the positive change an endowment creates. The Catherine Donnelly Foundation does that by employing strong ESG (environmental, social and governance) screens in our portfolio. These protect against investing in fossil fuels or exploitative labour practices. In addition, we further that work through shareholder activism and impact investments. Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact as well as a financial return.
“There’s no one right way to do it, so just start doing whatever works for you.”
Sucheta Rajagopal, Portfolio Manager at Research Capital Corp and Investment Committee Chair, Catherine Donnelly Foundation
Early in 2023, we sat down with Sucheta Rajagopal, a Socially Responsible Investing (SRI) trailblazer and a Catherine Donnelly Foundation Board member, to discuss how foundations can begin to explore impact investments. (CDF has been involved in 13 impact investments totaling $2.4 million since 2014 and Sucheta now helps to guide that process.)
In discussing how foundations can begin to get involved in impact investing, Sucheta emphasizes it’s a journey and you just need to get started: “There’s no one right way to do it,” she notes. “So just start doing whatever works for you.” Excerpts from that conversation:
Why make Impact Investments?
I think the biggest benefit is that as a foundation, we have a mission and the idea that we’re taking 5% – our CRA-determined disbursement quota – and using that to forward our mission and then we have 95% of our assets that we don’t use to forward that mission seems kind of crazy.
So, when you start to make impact investments, you’re saying let’s take some of that 95% of our assets and direct it toward making an impact.
There is now public discussion about further increasing the Disbursement Quota, and the idea that while charitable status confers benefits, it also creates an obligation to use much more of the endowment to address social issues.
Rather than spending down the assets, moving a portion of the endowment into impact investments is a way to make investment portfolios a powerful tool for social good.
[Traditional] investing is just two dimensions, it’s risk and return. But when you’re looking at impact investing, you’re looking at risk, return, and impact and you want to optimize all three of those for where you are in your investing journey.
The first step is a heartfelt desire to extend your mission
A foundation really needs the desire to do this. I think a board needs to think about impact investing as something that matters to them as a way of extending their influence and their mission. And I think when you approach it in that heartfelt way, then that’s the first step.
I always try to stress to people it’s a journey and you just need to get started. There’s not one right way to do it so just start doing whatever works for you. The fact is we are all going to make missteps. Being open about your missteps is a valuable learning process within your foundation and it’s a useful learning experience for other people too. So, it’s great to talk about what you did right but it’s also very helpful to talk about what you got wrong.
There’s more than one way to add impact investments, so why don’t we try this?
It’s important to accept there’s not one way to add impact investing to your portfolio. Boards and foundations shouldn’t be afraid to just get started and maybe it’s with something simple that comes to their attention. Maybe their existing investment manager has some sort of impact product they are familiar with, and they say, ‘why don’t we try this?’
There are many more products today and the whole area is growing rapidly and there are more resources and more people who are knowledgeable. A lot of people are very interested in helping impact investments grow and helping other people understand it.
I think we must acknowledge that impact investing is like every other kind of investing. There are many types of assets with different risk and return characteristics. When you get started, you probably want to be on the most conservative side of that. And that’s where the Catherine Donnelly Foundation started with SolarShare bonds which were guaranteed with a 20-year government contract and a fixed rate of interest. It’s a way of saying, yes, we’re doing something good for the environment and encouraging the uptake of solar, but it was also a very low-risk investment for our portfolio.
I think the biggest misconception is that all impact investing is high risk and that’s not the case. There are community bonds and some real estate investments which are lower-risk, more conservative investments. Real estate investments are almost always anchored by real estate – a piece of land or a building. And those are inherently quite low risk.
Starting with available low-risk impact investments builds confidence.
Having a relatively low-risk investment with a small amount of money and having that investment in place and being able to monitor it in real-time and real dollars will start to give everyone a sense of comfort about this new approach. And then you can move along the spectrum and say, well, if we had equity investments what would happen there?
The highest risk category – but also potentially the highest impact category – is venture capital and some boards and foundations may say, you know that’s not a place we ever want to go. And that’s fine too.
There may also be times when you find something that the board and the foundation is very excited about and it aligns with your mission and you say, you know what? We’re prepared to accept this even though it’s potentially a little bit higher risk than what we usually do. Or maybe it’s a little bit lower return. And so, you say, we will take some concessionary returns because this is so perfectly aligned with our mission.
Sharing expertise and opportunities and due diligence.
There are informal opportunities for people in foundations to talk to individuals in other foundations about impact investing and to find like-minded people who say, “Yeah let’s work together on this.”
I think sharing information and sharing due diligence is the way forward. And I know that Philanthropic Foundations Canada and others offer opportunities to do that.
For more information on Sucheta Rajagopal link to her bio
And you can read more about CDF’s impact investing work here