Mission-Driven Returns

Impact investing presents something of an existential challenge for foundations. Convention dictates that investors manage a corpus to maximize risk-adjusted financial returns, in the hopes it will underwrite philanthropic giving for social impact into perpetuity. By seeking to deliver a blended financial and social return, impact investing forces two culturally distinct practices be simultaneously pursued: money management and grantmaking.

At the urging of numerous provocateurs and pioneers many foundations are exploring the intersection of these two worlds and have begun to slowly change their practices; they are embracing mission-related investing, even while acknowledging strong financial performance is essential to financial sustainability.

But the understanding of how a foundation may interrelate its pursuit of social change with financial return is still limited. Despite communities of interest arising, such as Mission Investors Exchange and subgroups within the Global Impact Investing Network who site a handful of recent experiences, many skeptics still believe trade-offs between financial returns and social impact outweigh the opportunities to align them.

This is happening even as, outside of the walls of foundation investment committees, we see more and more individuals asking for new kinds of transparency regarding the impacts of their investments. Michael Bloomberg’s recent appointment as co-chair of the Sustainability Accounting Standards Board to help set corporate standards on environmental reporting, and the recent decision by the European Union requiring every public company with over 500 employees to report on environmental, social, and governance factors point to a clear trend: People want to know what impacts their investments are having on the world at large. How long can philanthropic foundations and charities—institutions given life in our tax code to promote justice, equality, education, and other “charitable” purposes and values—not work to find ways to align their investments with their values?

Luckily, there already are some concrete lessons drawn from deep experience that several foundations can share. The two new case studies from our “Impact Investing 2.0” series, on the experiences of the W.K. Kellogg Foundation (WKKF) and RSF Social Finance (RSF), provide prime examples. (The multi-year 2.0 project focuses on the factors that drive high performance in impact investing; it includes three published reports, 10 case studies to date, and a book to be released in the fall.)

One of our new case studies documents the impact investing experience of an endowed foundation, the other of an investment fund run by a public benefit charity. Each provides useful guideposts for other funders working to align money and philanthropic mission. Here are just a few insights:

Use direct investments to maximize alignment with internal programs.

At WKKF, trustees launched a $100 million impact-investing program called Mission Driven Investments (MDI). They named it that because they felt the term “mission-related” inadequately described the degree of alignment the foundation was seeking in terms of having its investments directly support the foundation’s focus on the whole development of vulnerable kids. In practice, the foundation’s commitment to “learning by doing” led to one of the field’s great experiments: It made six direct investments in for-profit companies, delivering two exits with impressive internal rates of return (46 and 64 percent), with Kellogg’s share of ownership accounting for the delivery of products and services to more than 50,000 underserved children.

While direct investments in individual enterprises are highly unconventional for an institution of WKKF’s size ($8 billion), the foundation discovered it was an innovative method to align the MDI program with WKKF’s mission, was generally more impactful than fund investments as measured by WKKF’s own programmatic measures, and provided deeper insight into new models of social service delivery.

In addition, once staff began searching, they found these investment opportunities were abundant. “There’s all this entrepreneurial talent out there that traditional investors are overlooking. ... I continue to believe that we barely scratched the surface. If you are really into both financial and impact returns, then you need to find these [social entrepreneurs] and fund them,” says Tom Reis, the first director of the MDI program at WKKF.

Maximize external alignment among borrowers and investors.

RSF Social Finance is a public benefit financial services organization. Inspired by the work of the famed economist and scientist Rudolf Steiner, RSF is dedicated to exploring how money can connect people and their values and strengthen the bonds of community. With more than 1500 clients (mostly individuals and small family offices), RSF has built its lending program on the premise that the most successful financial transactions occur when different stakeholders’ interests are transparent and aligned.

According to Mark Finser, who served as president and CEO of RSF from 1991 to 2007: “Trust is in the small details of any financial transaction. You have to become a listener to figure out new ways of guaranteeing, pledging, and securing loans. RSF is really about building community, creating the counter-position to the complexity and opacity in the current banking system, and working on direct loans that are long-term and based on personal relationships. The fundamental principle of RSF is that money does not move unless it’s built on trust and confidence.”

And while many give lip service to these concepts, RSF takes them to a radical end. RSF’s $75 million Social Enterprise Lending Program provides working capital and asset-backed loans to U.S.- and Canada-based for-profit and nonprofit social enterprises whose work focuses on food and agriculture, education and the arts, and ecological stewardship. The interest rate for its loans is actually set in consultation with the fund’s borrowers and investors. Each quarter, the groups come together face-to-face to discuss “RSF Prime” (the interest rate RSF charges its borrowers), and the split between what goes to RSF in fees to run the loan program and what goes back to investors as interest.

This deeply transparent practice works in part because investors know exactly what the borrowers are achieving—they are not just reading an annual report that focuses on financial return. Through these quarterly pricing meetings, RSF has enlarged the information flow so that investors can learn how their dollars are used, what’s working, and what requires more money.

Both WKKF and RSF provide insight into some fundamental elements of successfully aligning charitable investment dollars with mission:

• Act with a laser-like focus on the outcomes you seek. WKKF seeks to fund enterprises that improve educational and nutritional outcomes for underserved children, among other highly mission-aligned priorities. RSF lends to social enterprises that can sustainably expand their services, meeting the needs of more people in ways that strengthen communities. RSF has developed other unique practices discussed in the case study that work toward this end as well.
• Align with stakeholders. For WKKF, stakeholders certainly included beneficiaries—and a mission squarely focused on their needs—but also the foundation’s trustees and program staff, whose buy-in was essential. MDI was launched explicitly as a “learning initiative,” providing the institutional flexibility needed to fuel innovation, and has since become a more embedded part of the investment function at WKKF, reflecting the program’s maturity now that most capital is committed. Alignment with stakeholders is RSF’s reason for being; the case study documents its exceptional impact evaluation practice, which considers the value RSF creates for borrowers, investors, employees, and the field at large, using field-wide benchmarks wherever possible.
• Define the best unit for measuring success. Both WKKF and RSF have had failures and adjusted their strategies along the way. Both started with much larger objectives, but honed in on social enterprises as a powerful unit of analysis that allows them to easily measure, manage, and attribute specific outcome objectives.

Disruption of norms in an established area happens when the right confluence of skills and circumstances align. As our case studies show in more detail, these two charitable investment funds are disrupting the field of philanthropic impact investing by tapping into the important concepts of a more engaged and collaborative capitalism: transparency, alignment with stakeholders, and attention to outcomes. And they have many exciting lessons to offer others that want to succeed on the most intentional, high-touch side of the mission-based investing marketplace.

Read more stories by Cathy Clark, Jed Emerson & Ben Thornley.