Case Study: Getting to a 100% Impact Portfolio

November 13th, 2018 | Jory Cohen

In 2016 Inspirit Foundation – a public foundation working to promote inclusion and pluralism through media and arts, support for young change leaders and impact investing – committed to a 100% impact portfolio to leverage our full asset base for financial returns and positive social and environmental impact.

We formalized this commitment in our Investment Policy Statement (IPS), which states that Inspirit’s investment decisions must be guided by three principles:

  1. Risk-adjusted financial performance
  2. Movement toward a low carbon portfolio
  3. Positive impact through alignment with Inspirit’s organizational vision

By 2020, Inspirit is expected to meet our goals for a 100% impact portfolio. Here is a major chapter of the narrative of how we are getting there:

Conducting the initial audit

When we committed to a 100% impact portfolio, most of Inspirit’s portfolio was in the public market being managed by three investment managers with balanced mandates who were tasked with investing across the asset classes of fixed income, Canadian equities, and global equities. In order to analyze the performance of our investments, we conducted an audit of our portfolio based on our updated IPS.

Measuring performance indicators

Then, we enlisted the support of our investment consultant, Proteus, to assess financial performance using four main indicators: net returns vs. benchmark, information ratio, up-market capture ratio, and down-market capture ratio. We also subscribed to research offered by MSCI to understand the carbon and impact performance of our portfolio. This research allows us to measure our portfolio’s exposure to carbon emissions. Our portfolio’s positive impact is assessed through Environment/Social/Governance (ESG) scores and revenue from products and services that contribute to the United Nation’s Sustainable Development Goals (SDGs).

Benchmarking performance indicators

Next, we benchmarked the financial, carbon, and impact performance of our portfolio against a traditional benchmark, which primarily consisted of the FTSE TMX Universe Bond, S&P/TSX Composite, and MSCI ACWI (CAD). For aspirational purposes, we also benchmarked our portfolio’s performance against the MSCI Sustainable Impact Index, a benchmark with strong financial results, a low carbon footprint, holdings that are top performers along ESG metrics, and a selection methodology that identifies holdings deriving 50%+ of their revenues from products and services contributing to the SDGs.

Finding the right expertise

The analysis indicated our portfolio had room for improvement on financial, carbon, and impact performance. In order to improve portfolio performance, we committed to transitioning from a balanced portfolio approach to a specialized asset class style. Data demonstrated to us clearly that it is rare for investment managers to consistently sustain outperformance across multiple asset classes. We determined we needed to transition Inspirit’s portfolio management from three investment managers with balanced mandates investing across asset classes to investment managers each with specialized mandates to invest in specific asset classes.

In May 2018, Inspirit released a Request for Statement of Interest and Qualifications inviting submissions from investment managers to help us satisfy the goals in our IPS within the fixed income asset class. We started our transition to a specialized asset class investment approach with fixed income due to underperformance of that asset class within our portfolio compared to our benchmark. We received a high number of quality submissions, which we scored based on five main categories:

  1. Investment firm and their commitment to diversity, equity, and inclusion – 20% scoring weight
  2. Proposed product overview, thesis, and fees – 20% scoring weight
  3. Proposed product’s financial performance – 30% scoring weight
  4. Proposed product’s carbon performance – 5% scoring weight
  5. Proposed product’s impact performance – 25% scoring weight

After reviewing and scoring all the submissions, we conducted two rounds of interviews before coming to a final decision. In the end, we were pleased to select Addenda Capital as our new manager and allocate our entire public fixed income portion of our portfolio to their Impact Fixed Income Fund.

With our investment in Addenda’s Impact Fixed Income Fund, we now have over 85% of our portfolio invested in impact investments. These investments are top performers along environmental, social, and governance metrics and ideally also earn at least 50% of their revenue by contributing to the United Nations Sustainable Development Goals.

We plan to continue to transition our portfolio from one with traditional investments to one entirely composed of impact investments, and also one with a balanced investment approach to one with a specialized asset class investment expertise. The next step is a Request for Statement of Interest and Qualifications for a global equities manager, followed by a search for a Canadian equities manager that can satisfy the financial, carbon, and impact goals outlined in our IPS. We expect to fully transition to a 100% impact portfolio in 2020.

Please follow our progress here.

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

Jory Cohen

Director, Social Finance & Investment
Inspirit Foundation

Jory is the director of social finance and investment at the Inspirit Foundation. Since graduating from the Richard Ivey School of Business at Western University as the Valedictorian of his class, Jory quickly garnered a reputation as a next-generation leader in the impact investing field. Before joining Inspirit, Jory was the Managing Director of Youth Social Innovation Capital Fund (YSI), an impact investing fund.