The ImpactInvesting JourneyAligning Portfolio with PurposeOCTOBER 2018
ContentsForeword / p.301Learning Through Experimentation / p.4Leveraging our Legacy/ p. 4Investing in our Mission: A Pilot/ p. 5Learning from the DivestInvest Movement / p. 902Reframing Our Processes / p.11Updating our Investment Policy Statement / p. 11“Tug of War” Exercise / p. 12Committing to Measurement / p. 1403Having the Difficult Conversations / p.17Overcoming Resistance and Updating Misconceptions / p. 17Learning from Our Mistakes: The Interra Project / p. 19Establishing a New Kind of Investment Due Diligence / p. 2004Thoughtful Portfolio Management / p.22Our Asset Allocation / p. 22Using a Spectrum of Impact Approaches / p. 24Pursuing Mission-Alignment / p. 25Collaborative Due Diligence / p. 27Bringing Responsible Risk Taking and CatalyticAction Together / p.2705Reflecting on Our Investment Practices / p.30Appendix / p.32Sample Impact Investments / p. 33The DivestInvest Philanthrophy Pledge / p. 36Learning Experience: Canopy Pilot / p. 37Glossary of Impact Investing Approaches / p. 38References / p.39
ForewordEvery organization around the world makesan impact. Those that create positive impactbuild relationships, develop clear goals, andmeasure their progress. Exactly how this patternplays out depends on the organization; but it’ssafe to assume that some version of it lives ineverybody’s playbook.For decades, philanthropy has adopted a binaryapproach. Many organizations have gottenaccustomed to defining their scope of work bythe grants they make. You might say it is the“lather, rinse, repeat” routine for philanthropists.But that’s changing fast.There has been a surge in curiosity about newavenues to maximize impact. Specifically,foundations are examining ways to utilizetheir resources in the service of their mission.One such practice is known as impact investing,which seeks to generate social, environmentaland financial returns. This is done byintegrating program priorities with portfoliomanagement decisions.At The Russell Family Foundation (TRFF),we’ve been merging these worlds for morethan a decade. We started making impactinvestments in 2004 with an emphasis oninvesting in community, alongside environmentalsustainability. By the summer of 2013, we hadbegun divesting our portfolio of fossil fuels in3favor of alternatives such as sustainable forestry,organic farming and renewable energy in thePacific Northwest. These decisions helpedtighten the alignment between our holdings,mission and values. They also set the path forongoing refinements to our investment strategy.We got an early start with impact investing, butit’s been a rich and iterative learning journey.To that end, our Board, staff, and investmentadvisors were instrumental in making this a trulycollaborative journey. But we know there are stillmany opportunities for learning and sharing.We have prepared this report to documentour experiences and lessons learned. We’vealso created a shorter Executive Summary ofour main lessons that we invite you to accesson our website, here. We hope you will find ituseful in charting your own course and pursuinginvestments that support the change you wishto make.Sincerely,Richard WooChief Executive OfficerThe Russell Family Foundation
01Learning throughExperimentationTwo things can define the success ofphilanthropic organizations, regardless of theirsize: desire to collaborate and ability to takecalculated risks. Collaboration is essentialbecause we rely on the expertise of others toachieve our shared goals. Calculated risks areinevitable because, in our field, there are noguaranteed outcomes.The same can be said about impact investing– the practice of making investment decisionsthat generate social, environmental and financialreturns. It certainly sounds like a best-ofmany-worlds proposition. However, as with anyinvestment strategy, you must have clear goalsand realistic expectations.At The Russell Family Foundation (TRFF), we’velearned this lesson first hand. But we didn’t cometo this conclusion quickly or lightly. Through aprocess of experimentation and reflection webegan to undercover just what this approachmight look like.Our experiences have taught us that impactinvesting is a valid, potent, and inspiring way toput resources to work in service to our mission.04Leveraging our LegacyOur foundation’s philanthropic focus isenvironmental sustainability and communityempowerment, with an emphasis on the PacificNorthwest and the Puget Sound region inparticular. Many of our programs reflect thiscommitment to people and place.So do our values. We believe deeply in courageand entrepreneurship – the desire to createimpact by starting something new. Giventhis orientation, it’s easy to see why we wereattracted to impact investing just a few yearsafter we opened our doors.But it’s also integral to look at our past to sourcethe spirit of catalytic change and financial rigor.TRFF was created by pioneers of the global assetmanagement industry. With an explicit focuson prudent measurement and management,our culture is rooted in thoroughness. We takea measured, holistic approach to grantmaking,investing and analysis – both financial andnon-financial. We believe experience is thebest teacher. Those habits have been hardat work since the beginning of our impactinvesting journey.
Investing in our Mission:A PilotIn late 2004, TRFF’s Investment and AuditCommittee and Board agreed to allocate 1million from the Foundation’s portfolio to pilotmission-aligned investments. Back then, asnow, we were drawn to the idea that a foundationmay be better able to reach its philanthropicgoals if it looked beyond traditional grantmakingstrategies. Investing in companies thatconduct business in ways consistent withthe Foundation’s mission seemed likea favorable option.But the decision to engage in a pilot requiredus to reconnect with our roots. Our decision tomove forward with the pilot was closely tied towho we are as an organization and the legacyof the Russell Family. TRFF CEO, Richard Woo,suggested a pilot based on his understandingof the Russell Family as a group of hands-onlearners. The desire to take action, experiment,and learn from instructive failures is a deep partof the family’s origins.So our pilot was designed as such – a handson, interactive, and engaged learning process– where multiple stakeholders took somethingaway from this experiment. Our investmentadvisors, who also managed traditional financialoperations for the Foundation, saw first-handthat with a small amount of extra effort and acommitment to collaborative education that itwas possible to move our assets from traditionalstructures to more impact-oriented ones. Forthe staff, the Board, our leadership and so manyother TRFF stakeholders, the pilot was useful inbreaking our routines and habits, and updatingassumptions about doing business, with aneye towards impact integration across theFoundation’s activities.05
Types of InvestmentsThe goal of impact investing is to make“Impact investments are investmentsmade into companies, organizations,and funds with the intention to generatesocial and environmental impactalongside a financial return.” That’swhy you’ll often hear the term“mission-aligned” and “impact”used interchangeably. Nevertheless,it’s important to understand thedifferences between two different typesof investments in service of impact –program-related and mission-related.ProgramRelatedInvesting(PRI)As a tool for private foundations, theseinvestments can take on almost any structure, solong as advancement of the foundation’s mission, not financial gain, is the primary purpose. PRIsare counted as part of the annual distribution(at least 5% of its endowment) a privatefoundation is required to make.1MissionRelatedInvesting(MRI)The practice of aligning a philanthropicorganization’s management of assets w ith itscharitable purposes while sustaining long-termfinancial return.2ImpactInvestingAn investment strategy in which an investorplaces capital in businesses, organizations, and/or funds that can generate measurable financialreturns as well as support an intentional socialand environmental goal. 3
Our initial pilot explored socially-responsiblevehicles such as environmental mutual funds,community bank deposits, program-relatedinvestments, and be able to engage shareholderactions. They included:We considered the following scenario: 500,000 in the Vanguard Calvert SocialIndex Fund (mutual fund) 100,000 certificate of deposit withShorebank Pacific in Ilwaco, WA(community bank putting deposits towork with environmental businessesand home loans) 200,000 in the Certificate of DepositAccount Registry Service (CDARS)program, which enables bundling ofsmall CDs in order to secure financialguarantees.To get to the decision on what types of productsto explore, we had to ponder a fundamentalquestion:07“Does an environmental foundation that fundsnonprofits to improve water quality undermineitself by investing in a business that polluteslocal waterways?”If, on one hand, an environmental foundationsimply draws profits from mainstreaminvestments to fund its clean water initiative,while its grantees battle the polluters in court—then maybe the net effect of the grantmakingzeroes out.On the other hand, if that same foundationuses its investment positions (via stockor other means) to raise environmentalconcerns at shareholder meetings, or brokerrelations between company management andenvironmentalists, then perhaps the grantmakingis enhanced, not diminished.Essentially, we determined that it was both ourresponsibility and opportunity to leverage ourrole as investor, asset owner, and grant-makertogether in a shared objective – our core mission.
Following the lessons learned from the originalpilot, the Board allocated additional capital thatenabled us to expand our efforts. This included: A 2 million program related investment inEnterprise Community Partners to supportgreen and affordable housing in the PugetSound region. In addition, we purchased a 100,000certificate of deposit with the ThurstonUnion of Low Income People (TULIP)to put our capital to work incommunity development.Our appetite for experimentation across a rangeof tools also created the opportunity to identifyand inform other education and advocacy efforts.With help from our investment advisor, weidentified a range of field-building and advocacyactions, including: Inviting experts like Doug Bauer, who thenserved as Vice President, RockefellerPhilanthropy Advisors, to address theTRFF Board on mission-related investing,including program-related investments,proxy voting, social investmentscreens, etc. Identifying how much of TRFF’s totalinvestment portfolio was undermanagement that uses InstitutionalShareholder Services (ISS)*, the world’sleading provider of proxy voting, whichincludes social investment research andvoting services.*After we discovered that 43% of our holdings werecovered by ISS, we instructed ISS to vote our proxiesin keeping with our environmental mission. Organizing Northwest foundations tosign the 2006 investor letter from theCarbon Disclosure Project – an investorsmovement to address greenhouse gasemissions by global corporations.8
A combination of all these investments and fieldbuilding efforts helped to get the ball rolling. Theyprovided momentum and encouraging results,which gave us the confidence to explore further.Following this reflection, TRFF staff proposeda multi-year investment allocation budget forProgram Related Investments (PRI) and othermission related tools (e.g., green infrastructure,affordable housing loans).Over the following nine years, we continued tomake periodic impact investments in service ofour mission. During this time, we weren’t lookingto make systemic changes to our investingstrategy – but that all changed when we gotinvolved in the DivestInvest movement.Learning from the DivestInvest MovementAs we were experimenting with impact investing– and the many tools to help maximize ourmission – the DivestInvest Movement wasgaining steam. It was also during these years thatformer Vice President Al Gore gained notoriety forhis campaign to educate the public about global9warming (his efforts were documented in the2006 film An Inconvenient Truth).Against this backdrop, the DivestInvestMovement began to take shape. On the front lineswere college students who had grown frustratedby failed efforts towards shared standards (e.g.,the 2009 UN Climate Conference). Taking a playfrom the anti-Apartheid movement, students ata handful of U.S. campuses demanded that theircollege endowments divest from energy sourcestied to climate change – namely fossil fuels.The Wallace Global Fund and the EducationalFoundation of America provided invaluablesupport to these early campaigns, and thenumber of campuses involved exploded. Theapproach called for a two-pronged approach toenergy investment – the divestment of fossilfuels and the re-investment of that capitalinto climate solutions. This message gaveinstitutional investors “permission” (for lack ofa better word) to shift capital flows away fromthe problem and into alternative vehicles poisedto accelerate a transition to clean, renewableenergy. Instead of relying on governments to pass
legislation or seal a global deal, the movementtook direct action by engaging public and privateinstitutions — initially universities, but soonchurches, hospitals, pension funds, and cities. 4That’s when TRFF got involved.In the fall of 2012, two board members came tothe Foundation staff expressing concerns aboutclimate change and inquiring about what TRFFmight do to address this pressing matter. Givenalignment with TRFF’s mission, it seemed likean area worth exploring. By the spring of 2013,with research conducted by TRFF staff and ourinvestment advisors, our board agreed toaddress climate concerns by beginning to divestcoal holdings.Later that year, we became one of th