Mapping The Journey To Impact Investing - Surdna Foundation
Mapping the Journeyto Impact InvestingFebruary 2017
Researched and drafted byJan JaffeSenior Partner at The Giving Practice2
Table of ContentsMAPPING THE JOURNEY TO IMPACT INVESTING Page 5THE 50,000-FOOT VIEW OF SURDNA’S IMPACT INVESTING JOURNEY Page 6AN IMPACT INVESTING ROAD ATLAS Page 8PREPARE FOR THE JOURNEY Page 8ON THE ROAD Page 11KEY MILE MARKERS Page 12ANTICIPATE BUMPS IN THE ROAD Page 14EXPLORATION CAN BE TRANSFORMATIVE Page 163
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Mapping the Journey to Impact InvestingMany foundations, particularly family foundations, have an interest in exploring missionand program-related investing, but impact investing is a major undertaking and thelearning curve can be steep. Questions arise about how to initiate the process and thekind of capacity needed for implementation, and Surdna was no diferent when our boardand staf began to consider mission-related investments (MRI).We started the process in 2014 as our board committed to an extensive collaborativelearning, exploration, and decision-making process to consider instituting mission-relatedinvesting or impact investing policies.At the end of the nine months, the Surdna Foundation board decided to create a 100million – approximately 10 percent – allocation within our endowment for a combinationof MRIs and program-related investments (PRI) and to apply a robust variety of otherimpact investing strategies across our endowment.For the Surdna Foundation, our learning and decision-making process was well worththe journey. We will now strive to increase the impact of our investments in line with ourmission of fostering sustainable communities and guided by principles of social justice. Inaddition, we are bridging the separation that often exists between endowment investingand grantmaking.Examining your investment policy involves more than straightforward, technical solutions.Aligning your policy with your mission will raise complex issues that most foundations donot tackle. But in our case, our examination led to productive dialogue and importantinstitutional evolution.This report focuses on how to organize a generative process to learn about and discussimpact investing, using our own experience as a guide. Existing resources in the ieldcan provide the technical blueprints for making impact investments, so we do not seekto replace those resources. By openly sharing our experience, the Surdna Foundationinstead hopes this report will serve as a case study for others in the philanthropiccommunity who choose to explore impact investing tailored to their mission and goals,and that it will contribute to collective learning in the ields of mission-related investingand family philanthropy.There is no single right way to approach impact investing. But whatever course youfollow, our hope is that the tools and tips we provide will help make the trip a rewardingand worthwhile one.Respectfully,Peter Benedict, IISurdna Foundation Board ChairJocelyn DownieSurdna Foundation Board Chair (2013-2016)5
THE 50,000-FOOT VIEW OF SURDNA’SIMPACT INVESTING JOURNEYMany foundations, particularly familyfoundations, have an interest in exploring missionrelated investments (MRI) and program-relatedinvesting (PRI), but impact investing is a majorundertaking and the learning curve can be steep.Questions arise about how to undertake impactinvesting and the kind of capacity needed forimplementation, and Surdna was no differentwhen staff and board began to consider MRI.The Surdna Foundation is a national familyfoundation with strong local and regionalinvestments tied to its mission of creating just andsustainable communities by advancing long-termsocial change. Aligning its investment portfoliomore closely with its mission through impactinvesting was a natural evolution of its guidingprinciples. Surdna started an exploratory processin 2014 as the board committed to an extensiveAbout the FoundationThe Surdna Foundation, guided byprinciples of social justice, practicesstrategic philanthropy to fostersustainable communities across theUnited States. Its programs addresshealthy environments, strong localeconomies, and thriving cultures tocreate communities whose memberslead the way in advancing solutionsthat increase equitable access toopportunity. John E. Andrus createdSurdna in 1917 and five successivegenerations have guided theFoundation’s evolution.collaborative learning, exploration, and decisionmaking process to consider instituting missionrelated investing or impact investing policies.At the end of the nine months, the SurdnaFoundation board decided to create a 100million – approximately 10 percent – allocationwithin its endowment for a combination of MRIsand PRIs and to apply a robust variety of otherimpact investing strategies.The process of deciding on an impact investingstrategy required a variety of activities, including: Looking at Surdna’s existing portfoliothrough the lens of environmental, socialand governance best practices; Getting a feel for what a hypotheticalportfolio of investments andapproaches tied to the mission would looklike; Learning about the available investmenttools; and Spending time with peers who haveadopted impact investing strategies.The project was facilitated by a consultant team,The Giving Practice and Veris Wealth Partners,under the leadership of a working group ofSurdna Foundation board and staff members.Cambridge Associates, which Surdna contractsfor external chief investment officer services(CIO), played a collaborator role, workingclosely with the Working Group and consultantteam to provide important, comprehensiveendowment data and other informationthroughout the nine-month exploration process.This report is a detailed account of the WorkingGroup’s process. Throughout this document, thereare anonymous quotes taken from interviews6
with Surdna board and staff members about thelearning process. We begin with the essentials ofwhat they learned.Start with a frameworkA clear framework for decision-making onwhether to pursue impact investing allowed theboard to maintain a focus on project goals.The consultants’ primary task was to build thisframework and a toolkit – a list of every impactinvesting approach the Foundation might employwith Surdna’s Working Group. These guideshelped all the players use the same language,which is especially important for boards that bynature drop in and out of complex topics overtime. The toolkit, in particular, helped Surdnasee that an impact investing approach is abouta broad range of activities – not strictly aboutinvestments.“We heard case studies of effectiveshareholder engagement with companiesAnalyze your currentportfolioA portfolio analysis was done for the WorkingGroup and then repeated with the staff andfull board. This was an important opportunityfor the board to apply mission values to itsinvesting practice. What’s more, the boardis now interested in learning more about thesocial impacts of endowment investments on anongoing basis.Create a hypothetical modelStaff and board members had an opportunity toidentify potential themes for mission investing andthen look at real-world investments or shareholderengagements that could be made within thosethemes.“I saw that we could advocate asshareholders in existing investmentsrelated to our grant programs. I wasn’tthinking about that.”that were very impactful. It [thosepractices] could become a major part ofour approach.”Listen to voices ofexperienceGaining insights from those with impact investingexperience proved invaluable, especially forWorking Group members who were less familiarwith or skeptical about the approach. Thisincluded attending impact investing conferencesand visiting a foundation that’s similar in sizeand had made the decision to pursue impactinvesting.“We saw that we were not out on a ledge.We talked to them [other foundations] aboutshared concerns and how they managedthem [their concerns].”7
AN IMPACT INVESTING ROAD ATLASPREPARE FORTHE JOURNEYLooking back before movingfowardIn 2014, the Surdna Foundation beganinvestigating impact investing and mission-relatedinvestments by looking at the ways its endowmentpolicies and practices either aligned or conflictedwith its mission. It wasn’t the first time theFoundation had discussed this, but there wassome initial resistance based on past explorationsinto MRI in the early 2000s. The field was still inits infancy then, and the Foundation didn’t find acompelling framework for pursuing it.In 2008, the board and staff engaged in amajor mission redefinition that included a deeperfocus on Surdna’s social justice goals. That notonly led to greater clarity on the Foundation’saims, but also piqued interest in what else couldbe done outside the grants program to advanceSurdna’s social justice mission – or at least notinhibit it.“Having conversations about knowingwhat you own is so important.”Prior to exploring all of its endowment practices,the Foundation had taken a significant andpublic step when it created a program-relatedinvestment (PRI) portfolio in 2013.1 As Surdnalooked into creating a PRI fund, its programswere also developing new strategies. The timingwas beneficial: As the staff were formulatingnew program strategies, they considered areasof potential PRI opportunities. What they founddemonstrated the strength of the market in manyof Surdna’s areas of work. When each fundwas created, program staff were ready witha pipeline of investment ideas. This was animportant learning experience because bothboard and staff members gained skills andcomfort with an initial set of impact investingconcepts.“Experience with PRIs inluenced ourthinking about MRIs.”When Surdna launched an investigation intoendowment policies and practices, looking backon prior concerns and addressing them directlyhelped staff and the board prepare to moveforward. The Foundation therefore decided tocreate a chronology of past events that shapedthe decision-making process as a resource.Match the process to yourcultureSurdna values an open, analytical, collaborativeculture, and the road to impact investing wasno different. There were diverse opinions andperspectives among the board and staff aboutimpact investing in the beginning. But curiositywas the common thread that held the grouptogether.The nine-month exploration period encompasseda careful consideration process. Keys to successincluded: Making sure everyone stayed updatedand concerns were welcomed, heard, andaddressed; Creating a working group that included1. Surdna’s program-related investment fund constituted 2 percent of its endowment, or about 18 million. Its creation did not reduce grantmaking allocations; thatis, annual spending, including PRI, began to exceed the Foundation’s 5 percent minimum payout.8
both board and staff;Conducting sessions to share what wasbeing learned with all program staff;Creating an impact investing toolkit,including selected readings; andProviding the full board with regular writtenupdates as well as mini-workshops duringtheir meetings.“Really important that we focused onlearning irst and not pushing investments.Calmed the waters.”In retrospect, Surdna recognizes that it mighthave done more to encourage informationexchanges throughout the organization, such asinformal briefings or creating a buddy system fortransmitting information. As one board membernoted, “Better to overshare in these situations.”Seek out diverse viewpointsTo structure the impact investing explorationprocess, Surdna chose a method that hasserved the Foundation well in other big projectsby creating the Working Group for InvestmentPolicies and Practice. The board issued amandate charging the Working Group to comeup with a plan to explore impact investing.The Working Group included board and staffmembers on the investment committee as wellas those not well-versed“As anexperienced social in investment language.The Working Groupimpact investor,intentionally includedpart of my rolepeople with varyingwas to offerdegrees of passion forcomfort that weand against impactwere not out oninvesting. Despitea ledge to somecompetition for attentionwhile managingimpatience byagainst other projects, thisothers who feltdiversity of passion andthat we could doexpertise was essential toa lot more.”maintaining momentum9
and securing organizational buy-in for a fullexploration over the nine months.Having staff in the Working Group whowere tasked with keeping the work on thefront burner proved invaluable. Staff membersincluded Surdna’s vice president of finance andadministration, who is the liaison to the externalCIO, and the vice president of programs andstrategy, whose focus is mission and programimpact.A board member with expertise in impactinvesting, who was also on Surdna’s investmentcommittee, served as chair of the WorkingGroup. She saw her role as an “agnostic leader”who could use her expertise to explain data,facts, and opinions to both the enthusiasts andskeptics. Participants valued her guidance asthey explored new territory. Surdna’s board chairalso joined the meetings. She made sure theWorking Group was on track without getting toofar ahead of the board. In addition, the boardchair incorporated the Foundation’s social justicemission into the impact investing discussion bychampioning strategies that would advanceequity and inclusion.“To start, I wanted to learn: Do we ownanything that would keep us up at night ifwe knew about it?”Entrusting the impact investing exploration to aworking group made up of stakeholders with10diverse interests helped ensure that Surdna’sexploration process was thoughtful, robust,and ultimately embraced by the entire Surdnacommunity.Hire a guideIn addition to the Foundation’s longstandinginvestment advisor, the board decided it wasimportant to have an impact investing advisorwho could serve in an educational role. Surdnareleased a request for proposals (RFP) through itsnetworks, which explained that the Foundationwas looking for time-limited support in leadingan educational exploration – not a long-termengagement or a financial advisor. The staffreviewed responses from more than a dozenconsultant teams and ultimately chose aconsulting team that integrated approaches fromtwo perspectives: Veris Wealth Partners, a wealthadvisory firm that focuses on impact investing,and The Giving Practice, an organizationaladvisory group with a primary focus oncollaborative inquiry. This partnership integrateda deep knowledge of social investing with astrong background in foundation strategies.The consultants created the space theFoundation needed for learning and questioningassumptions. The guidance included offeringexamples of impact investing using a variety oftools, but not recommending specific investments.In other words, their emphasis was on educating,not advising.
ON THE ROADCreate a detailed itineraryThe learning journey reached six significantmilestones over the course of the project, whichthe consultants developed into a roadmap withmarkers to summarize the steps along the way.Before every meeting, the Working Groupreviewed the roadmap to reflect on what hadbeen done and what was coming up next.This was very helpful for board members whocould not be immersed in the impact investingexploration as a day-to-day activity.The consultants interviewed all the boardmembers and the program directors one-on-oneat the beginning of the process to learn what theyknew about impact investing and what questionsthey had. This helped create a shared languageand highlighted important steps along the way.“Early on it could feel like we were lostin a ield of corn. As you learn, the pathsbecome clearer.”Stick to a scheduleFixing time boundaries for the process helpedeveryone keep the pace. The Working Groupscheduled meetings far in advance to maximizeattendance. The board set aside time at threeseparate board meetings to hear what theWorking Group was learning and discuss theimplications. And perhaps most important, afterthe beginning of the exploration, the boardheld a retreat that included a discussion of theWorking Group’s findings and a vote on movingforward. Instead of getting bogged down inwrestling data to perfection, everyone looked for“good enough” information that would keep theGroup moving to the next step on time.Follow paths forged byothersSome board members and staff who didn’tknow much about investing – let alone impactinvesting – came to the process hungry for moreinformation. Staff and board members attendedconferences hosted by Confluence Philanthropyand Mission Investors Exchange, which helpedthe Working Group and board membersunderstand the size of the impact investing field.A board and staff visit to the McKnightFoundation was also very enlightening. AfterSurdna decided to pursue impact investing,McKnight Foundation President Kate Wolfordmet with the board and offered encouragement“just as we were grinding through the details of aplan,” noted a board member. “Board and staffheard how it energized the whole [of McKnight],how great it had been.”“Along the way I went to three conveningsheld by afinity groups. Each was animmersion in language and more, withcool people who made me comfortabletalking in something that wasn’t my irstlanguage.”By attending conferences on mission investingand visiting peers, staff and board membersbecame more familiar with the territory andbrought back their new knowledge andenthusiasm to the Working Group.For those who preferred to be armchair travelers,the Working Group circulated a variety ofreadings.What is ESG?Environmental, social and governance (ESG)criteria is used by socially conscious investorsto screen or prioritize investments. Environmental criteria examine how a company maintainsor harms the natural environment. Social criterialook at how a company conducts relationshipswith its employees, suppliers, customers, andthe communities where it does business. Governance addresses a company’s leadership, executive pay, shareholder rights, and audits andinternal controls.11
KEYMILE MARKERSFraming what can be foundin a foundation’s impactinvesting toolkitHaving a common language about all of thepotential tools Surdna could consider in itsimpact investing toolkit made exploration easier.It also helped everyone broaden their horizonson plausible impact investing approaches. TheWorking Group explored strategies like directinvestment tools in the private market includingPRI, investments in public equity funds with socialcriteria screens, active ownership strategieslike shareholder engagement, and establishingcriteria for selecting fund managers.Learning what theFoundation already ownsIt was crucial for the team to have a solidgrasp of the criteria used by socially consciousinvestors to screen investments, includingenvironmental, social, and governance (ESG)practices. This analysis and evaluation of theexisting endowment, particularly the portfolioof the public equity and some of the alternativeinvestments, were based on ESG criteria bythe investment and external CIO consultants.In addition, a questionnaire went to everyfund manager inquiring about their investmentpractices, including whether they integrated ESGfactors. Also, at Surdna’s request, the numberof investment management firms and funds ledby women and people of color was cataloguedand compared to the total number in the financialadvisor’s universe of clients. The results wereshared with staff and the board as well as theWorking Group. The review helped Surdnaunderstand what social and environmental criteriafund managers in its portfolio were already usingand how those tools work. It also opened up anongoing and spirited discussion about exemplary12and poorly reviewed investments and theirimplication for ownership at Surdna.Creating values- andpriorities-based impactinvesting themesThroughout the process both board and staffwere engaged in learning. Together, theyidentified themes that were most important tothem both as individuals and
Mapping the Journey to Impact Investing Many foundations, particularly family foundations, have an interest in exploring mission- and program-related investing, but impact investing is a major undertaking and the learning curve can be steep. Questions arise about how to initiate the process and the
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