During our strategic planning retreat at the beginning of the month, 3rd Creek Foundation took the decision to develop an impact investing strategy.
The field of impact investing* has held our interest for some time. As the trustees of 3rd Creek Foundation, we are responsible for governing the organization in a way that is consistent with our charitable mission and that exercises prudent stewardship of our investments. What motivates 3CF the most about impact investing is the opportunity to expand our impact at meeting our mission through leveraging our asset management in addition to our charitable funds distribution.
I know 3CF is not alone in the world of small foundations that would like to start impact investing but struggle to get started. Given our recent experience initiating an impact investing strategy, I offer foundations the following advice in the form of 4 steps for leaders to take with their boards.
- Make the decision to start impact investing.
It might sound easy, but this is no trivial task. The board of a foundation must be comfortable that by saying yes to an impact investing strategy, it will neither compromise the foundation’s investment policy statement (IPS) nor put the foundation’s funds at risk.
At 3rd Creek Foundation, we circulated a wide range of research on impact investing prior to our retreat so that all board members were familiar with the field. We also brought in our investment managers to help inform the discussion. Ensuring that all board members felt fully informed paved the way to taking the decision that yes, we would like to do something with impact investing. This was the pivotal first step toward taking action.
- Develop an impact investing strategy that the whole board can align behind.
This step becomes more complicated. Taking the decision to start impact investing is great, but now you must frame how you are going to do it. This part could stir up some confusion and/or contention among board members, as there are a million and one ways to go about doing things. I recommend answering the following questions together as a board to help guide the process:
- What is the foundation’s risk tolerance? (Review IPS)
- What is the foundation’s time horizon? (Review IPS)
- What percentage of the portfolio does the foundation want to allocate to impact investing?
- What type(s) of impact does the foundation want to have through its investment? (e.g. job creation, clean energy, climate, etc.)
- What type of return does the foundation want to have on its investment?
- What types of assets does the foundation prefer to invest in? (e.g. Socially Responsible Investing (SRI) Funds, private businesses, non-profits, etc.)
- What types of instruments is the foundation most comfortable using to invest? (e.g. Program Related Investing (PRIs), Direct Equity, Convertible Notes, etc.)
Getting each board member’s buy-in as well as that of your investment professionals should lead to a more cohesive, prudent, and appropriate strategy for your foundation.
In the case of 3rd Creek Foundation, we decided to allocate 8% of our portfolio to a new asset category, “impact assets.” We also determined our most mission-aligned investments should target small (social) business development in the types of communities that we serve through our charitable giving. Since it will take some time to identify a portfolio of investment-worthy private businesses, we will invest some of the eight percent allocation in an SRI fund.
- Execute the impact investing strategy, and build partnerships along the way.
Once your board has aligned behind a strategy, it’s time to take action. This means working with your investment committee and/or investment advisors to restructure your foundation’s asset allocation model as per the board-approved strategy. Next you will need to identify the investments suitable for your foundation’s strategy. This task can range from relatively quick and easy to quite complex and time-consuming depending on the strategy your board has selected. Whatever the case, I highly recommend building partnerships to help you navigate through this stage.
3rd Creek Foundation will soon be a member of Mission Investors Exchange, an organization where “philanthropic innovators exchange ideas, tools, and experiences to increase the impact of their capital.” We have also been meeting with different nonprofit organizations, foundations, and investors, whose impact investing experience we can learn from and who we may potentially work with on future investments.
- Evaluate your impact investing strategy the same way you evaluate your charitable giving and investment portfolio.
Just as you monitor and evaluate the results (or impact) of your charitable grant-making, it is wise to set up a monitoring system to measure the charitable results and impact of your impact investing. Likewise, just as you monitor your investment portfolio’s risk/return matrix, you will want to do the same for your impact portfolio. Figure out how you will measure the impact of your investments once you have identified them, and be sure to examine impact at the business, beneficiary, and community levels. Leveraging partnerships is a great way to do this if monitoring is too much for your foundation to do in-house.
By taking these 4 steps, 3rd Creek Foundation becomes an impact investor. There are certainly more challenges ahead, and there is far more work to be done, but we have begun the process and are excited about the future.
Gwen Straley is the Executive Director of 3rd Creek Foundation where she oversees the foundation’s grant-making processes and ensures fiscal and regulatory compliance. An emerging markets professional, Gwen has worked for a diverse range of organizations in some of the most complex environments in the world. Prior to moving to Seattle, Gwen managed a large-scale nutrition program in Mogadishu, Somalia. She has also consulted for government, foundations, NGOs, and small businesses in Africa, the Middle East, Asia, and Latin America. Gwen holds an MBA from the Thunderbird School of Global Management and a Bachelor of Arts from Hampshire College with a concentration in Sustainable Development. She is a travel, outdoors, and coffee enthusiast.