The Russell Family Foundation (TRFF) has shifted impact investments in its portfolio from 7 percent to 76 percent over the past several years.
Impact investments now comprise roughly $100 million of its $141-million endowment. During that time, 2013-2018, the portfolio outperformed its blended benchmark by 2.7 percent annualized (7.9 percent versus 5.2 percent annualized returns.)
The Gig Harbor, Wash.-based foundation outlines the journey to bring almost three-quarters of its endowment into alignment with its mission, in a recent paper titled, “The Impact Investing Journey: Aligning Portfolio with Purpose.”
About 26 percent of its portfolio is still not expressly aligned with mission. Those funds are invested in “various instruments where their impact investment products are in their infancy or capital is illiquid and locked up in prior commitments.”
The foundation has focused on protecting the environment and empowering local communities in the Pacific Northwest and Puget Sound since 1999.
“These decisions helped tighten the alignment between our holdings, mission and values. They also set the path for ongoing refinements to our investment strategy,” Richard Woo, CEO of The Russell Family Foundation, wrote in the foreword to the 41-page report.
“We determined it was our responsibility and opportunity to leverage our role as investor, asset owner, and grant-maker together in a shared objective – our core mission,” according to the report. “We prepared this report to document our experiences and lessons learned.”
The foundation started making impact investments in 2003, with an emphasis community and environmental sustainability. By summer 2013, it began divesting its portfolio of fossil fuels in favor of alternatives, including sustainable forestry, organic farming and renewable energy in the Pacific Northwest.
In 2004, the Investment and Audit Committee and board agreed to allocate $1 million from the portfolio to pilot mission-aligned investments. “We were drawn to the idea that a foundation may be better able to reach its philanthropic goals if it looked beyond traditional grantmaking strategies. Investing in companies that conduct business in ways consistent with the foundation’s mission seemed like a favorable option,” the report noted.
The initial pilot explored environmental mutual funds, community bank deposits, program-related investments and included $500,000 in the Vanguard Calvert Social Index Fund; $100,000 certificate of deposit with Shorebank Pacific, a community bank in Ilwaco, Wash., putting deposits to work with environmental businesses and home loans; and, $200,000 in the Certificate of Deposit Account Registry Services (CDARS) program, which enables bundling of small CDs to secure financial guarantees.
The board allocated additional capital to expand its efforts, with $2 million in program-related investments (PRI) in Enterprise Community Partners, supporting green and affordable housing in the Puget Sound region, and $100,000 certificate of deposit with the Thurston Union of Low Income People (TULIP) to “put capital to work in community development.”
The foundation updated its Investment Policy Statement (IPS), detailing goals, policies, and decision-making procedures that govern its investment-related activities. Exploring its portfolio led to a divestment of 15 coal stocks and further examination, eventually divesting fully from all oil, gas and coal holdings, in favor of sustainable forestry, agriculture, and clean technology. The IPS is reviewed at least annually to determine “whether stated investment objectives are still relevant and to assess feasibility of achieving objectives.”
In what TRFF called its “Tug of War” exercise, two investment advisors would construct a portfolio and impact investing strategy with the shared objective of designing a hypothetical mission-aligned portfolio that would maximize the percentage of impact investments without sacrificing potential returns.
On top of that was a layer of additional “impact” considerations. If there were obvious opportunities for mission alignment, i.e., the ability to negatively screen for stocks like coal, without compromising objectives, the “impact advisor” would pull hard in favor of mission-related investments. If there were unacceptable limits in specific asset classes, like emerging market equities, the “impact advisor” would concede to the “traditional advisor” to avoid adding risk.
The exercise “provided us with valuable insights for how we could restructure the portfolio for greater impact over time through various means such as divestment or the integration of new managers that are addressing environmental, social and governance (ESG) issues throughout the process.” It also revealed what opportunities and challenges look like throughout the transition process, which was expected to take several years.
In 2010, TRFF established a Mission Related Investment Committee of program and finance staff along with representatives from its investment advisor. The committee meets quarterly to vet new opportunities and share insights about investing and program priorities.
Although every foundation is unique, TRFF suggested several processes that were found useful during its pursuit of impact investing goals:
- Rethink your investment policy statement.
- Choose between total portfolio activation or create a carve-out
- Commit to shareholder engagement
- Make incremental changes
- Engage in peer-to-peer collaboration
- Explore catalytic opportunities
- Take a look at your portfolio
- Learn from the field
- Finding the right partner
By 2016, the market of sustainable, responsible and impact investing in the U.S. was estimated to be $8.72 trillion, or one-fifth of all investment under professional management, compared to $3.74 trillion in 2012.