One Foundation’s Journey into Impact Investing: Experimentation & Staging a Tug of War Exercise
This blog is the second in a 4-part series documenting The Russell Family Foundation’s (TRFF) impact investing journey, detailed in their recently released case study, “The Impact Investing Journey: Aligning Portfolio with Purpose”. Click here to read the first blog post and here to read the second post. To learn more about TRFF’s impact investing journey, access the full case study here.
When The Russell Family Foundation established its Mission Related Investment Committee (MRIC) in 2010, combining program staff and investment advisors, a new chapter began for what was possible. We had finally devised an operational structure that not only strengthened our vetting and decision-making process, but energized those involved to begin considering new investment strategies and “total portfolio activation.”
Total portfolio activation meant we wouldn’t just carve out one area for impact, we would seek this across all of our asset classes. This idea was uncharted territory for us, it was intimidating, and we didn’t have a roadmap early on. Fortunately, we had a team.
(Read more about the development of TRFF’s MRIC in part two of this series here).
As we continued to experiment with our investment strategies, a monumental shift happened when TRFF joined other early adopters of Divest Invest Philanthropy to divest of fossil fuel companies. We initially divested of 15 U.S. coal companies that were considered the most harmful to public health and the environment. This effort helped set in motion an eventual divestment from the fossil fuel sector and focus on reinvesting in sustainable alternatives.
It was a new beginning for TRFF to reflect and reframe our processes.
With the MRIC in place, we asked ourselves, “Could we have the best of both worlds; a way to invest that bolsters our mission while generating competitive returns?” The answer was not obvious, but we had the right people in the right place to start figuring it out.
In 2014, we orchestrated a “tug of war” exercise that analyzed different investment strategies to test our question. One of our investment advisors took the position as “impact advisor” and the other as the “traditional advisor” to design a hypothetical mission-aligned portfolio that maximized the percentage of impact investments without sacrificing the potential for returns and achieving perpetuity. If there were obvious opportunities for mission alignment, such as the ability to negatively screen particular stocks, like coal, the “impact advisor” would push in favor of those mission-related investments. On the flip side, if there were unacceptable limitations in specific asset classes, such as emerging market equities, the “traditional advisor” would push to avoid adding those risks. Both made their case based on mission alignment, exposure to risk and financial performance.
This simulation allowed us to take a sharp look at the realities of both strategies and gave us methods for how we could restructure the portfolio for greater impact through various means, like divestment or the integration of new managers that address environmental, social and governance issues. It also helped reveal the existing opportunities and challenges in the transition period we would face for the next several years to adjust our investment strategies to be more mission-aligned.
In the end, we landed somewhere in middle, with an asset allocation framework that addresses the liquidity needs of grants and expenses as well as the growth targets to achieve perpetuity. Above all, we confirmed our belief that we can leverage TRFF’s entire portfolio to further our mission.
Every foundation’s journey to impact investing will be unique, but our experience illustrates that with a diverse team of experts, room for experimentation and upholding values of continuous improvement and learning, you can uncover the right mix of strategies that support your mission.