Case Study: 4 Lessons from a Foundation’s (Ongoing) Journey to a 100% Responsible Portfolio

November 13th, 2018 | Karim Harji, Erica Barbosa

As many other foundations do, the J.W. McConnell Family Foundation acts as prudent steward of its endowment to ensure that we can meet our granting priorities.

Established in 1937, our mission is to support Canadians in building a more inclusive, innovative, sustainable and resilient society. We use the lens of systems transformation — changing policies and institutional culture in order to address the root causes of societal challenges – to guide our strategy and investments. The Foundation has an endowment of $650M managed in perpetuity with current yearly charitable disbursements of about 4%.

In 2007, we also recognized that if we are to contribute meaningfully to pervasive social and environmental challenges, we will need to harness the full range of our unique assets, capabilities, and positioning, and we need to work collaboratively within and across sectors.

Creating an Impact Portfolio

We began our exploration of impact investing, which was an opportunity to attract private capital to scale impact, and complement our philanthropic objectives in the community sector. At the Board of Trustee’s directive, we started with an allocation of 5% to impact investing which subsequently became 10%.

Over the last decade, we have made impact investments across a range of asset classes (including public equities, private equity, debt instruments and guarantees) and sectors (including sustainable food, affordable housing, arts and culture, and indigenous economic development). Our impact investments have helped to advance the Foundation’s mission in at least 3 ways:

1. Target investments that advance our program objectives where debt, equity or hybrid investments can initiate or scale solutions that philanthropic dollars cannot;
2. Increase community effectiveness by enabling new financing mechanisms for charities and non-profits; and
3. Stimulate the development of a social finance marketplace through co-investments in new financial models and with like-minded investors.

Examples of the above include Renewal Funds which invests early stage in social impact companies, Community Forward Fund which provides lending capital to small and medium size Canadian charities and non-profits, and CoPower which enables green bond access for individuals, using the proceeds to invest in clean energy and energy efficiency projects.

 The J.W. McConnell Family Foundation’s Portfolio*
Total AUM: $651M

  • % Portfolio with targeted negative screen: 100%
  • % Portfolio with other RI strategies: 70%
  • Total Impact Investments: $70M
  • 26% with concessionary returns
  • 74% with market-rate returns

* Data from May 31, 2018

Growing our Commitments to Impact

As we grew our impact investing portfolio, we realized that the opportunity to harness the power of capital to advance social change was broader than we initially envisioned. A first expansion of our boundaries took place when we invested in NEI, which gave us a flavour of how you can be intentionally impactful when investing in public equity strategies. Later, we were involved through granting and investing in an Indigenous on-reserve housing project which in its pathway to scale anticipates greater involvement of the “mainstream” capital market actors, and not just foundations and governments.

This and other examples led to the redefinition of our internal practice as Solutions Finance – which we define as an integrated approach to deploying financial capital and adapting financial models to catalyze, sustain and scale systems transformation. This reframing recognizes our role as an asset owner with a diversified portfolio that can be aligned with our impact objectives, our role as a convener to encourage multi-sector collaborations, and our role as a grantmaker to support systems innovation.

A subsequent phase of our work began with a commitment to have 100% of our assets managed responsibly over the coming years. As the Canadian market evolves, with more capital being intentionally directed in this way from institutional and retail investors, and greater availability of products, we are optimistic about the opportunities to engage in this area. As we reflect on our journey, we would like to highlight four lessons from our experience that may be relevant to asset owners that already have, or aspire to, align and deploy their assets for impact.

Lesson 1 – Recognize that all of our investments have impact

An important realization for any asset owner is that all investments in your portfolio can be steered to have social and environmental impact. Although we do not yet have the required suite of tools to fully account for this, including impact measurement standards, acknowledging this reality has changed the way we view our goals and opportunities to transform systems with finance and investments. It encouraged us to use the full range of assets that we bring to the problems we seek to solve, which was important since many of the ‘wicked problems’ that exist require a range of solutions and various forms of capital along the way.

Lesson 2 – Not every investment is an impact investment

Impact investments hold “intentionality” at the core of their strategy. They are meant to direct capital to solve targeted social and environmental challenges. However, it should be obvious that not every investment can lend itself to this approach. That said, we can insist on parameters that ensure all our investments meet a minimum standard of reducing negative impacts while also progressively increasing good environmental, social, governance, corporate and general sustainability practices. For example, we can actively participate in shareholder activism with specific companies that are influential in the sectors in which we have granting programs, or in a less engaged manner require specific disclosures or increased transparency from our managers. In this way, our responsible and sustainable investment practices also contribute to improving broader social and environmental outcomes in complementary ways.

Lesson 3 – Be clear about what you are optimizing for

We deploy a range of complementary approaches across our portfolio, For example, we direct certain impact investment allocations for credit enhancement or risk mitigation for nonprofits and charities, while we direct other parts of the portfolio to scale organizations that have proven approaches and evidence in a specific area. As a foundation, we are unique in our ability to take risk through blended structures that optimize for both impact returns and financial returns; however, as we seek to maximize our impact, we will not sacrifice financial returns where it is not a fit. Evidence from us and others is that trade-off between financial and impact returns is not inherent to every impact investment; it all depends on your goals, preferences, and flexibility.

Lesson 4 – Collective action stimulates innovation and enhances results

Many private and community foundations, as well as institutional and private investors, are also committing significant dollars and time to uncovering and supporting community-based initiatives that can harness these types of capital to deliver positive impact. Our experience has shown that these collaborations are necessary to support product issuers and community initiatives to deliver on their objectives – whether it is sharing information, tools, training, networks or bringing to bear other institutional assets. Collaboration is also important as we think about designing and resourcing interventions at scale if we are to achieve the Sustainable Development Goals (SDGs). We will continue to advance in this way, and hope that many other investors will join as we work collectively towards the wellbeing of our societies and our planet.

Sources:

  • https://mcconnellfoundation.ca/introducing-solutions-finance-a-new-vision-for-our-work/
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Author

Karim Harji

Senior Fellow
J.W. McConnell Family Foundation

Karim Harji a Senior Fellow with the J.W. McConnell Family Foundation. He was previously a co-founder and Director at Purpose Capital, where he established and led its Impact Investment Advisory practice. He is an Associate Fellow at the Said Business School at the University of Oxford, where he is also the Programme Director of the Oxford Impact Measurement executive education programme, and a Senior Research Associate at the Carleton Centre for Community Innovation at Carleton University. He was previously on the Board of the Responsible Investment Association.

Erica Barbosa

Director of Solutions Finance
The J.W. McConnell Family Foundation

Erica Barbosa is Director of Solutions Finance at The J.W. McConnell Family Foundation, where she leads strategies for financial innovation and for integration of the Foundation's financial assets to support social and economic system's transformation. Her team oversees the management of the impact investing portfolio and ESG integration within the Foundation's larger endowment. She completed undergraduate studies in behavioral psychology and neuroscience, holds a MPA in Public and Economic Policy from the London School of Economics and Political Science. She specializes in innovation and systems dynamics for inclusive economic development.