Mission Possible: How Foundations Are Shaping the Future of Impact Investing
Mission Possible: How Foundations Are Shaping the Future of Impact Investing
This series, produced in partnership with Mission Investors Exchange, will explore what’s next in impact investing and what we can learn from some of the most innovative foundations.

At a moment when our planet faces daunting challenges, it is worth reminding ourselves what is possible when we use every lever of influence to create positive social and environmental impact. It’s a lesson I took to heart at the Paris climate summit, where I saw the transformative effect of using diverse levers of influence—both on the streets and in the negotiating halls—to establish a landmark climate agreement. I attended the summit as part of a delegation of institutional investors, rather than in my traditional role as a grantmaker. Participants included asset managers, as well as the heads of global brands, some of the world’s largest pension funds, and insurance companies—but I was often the only foundation president in the room.

Fast forward a year later, and there is another opportunity to act—this time through a public statement calling on the new administration and Congress to create jobs and boost US competitiveness by building a prosperous low-carbon economy. An impressive roster of Fortune 100 companies, private businesses, and institutional investors like The McKnight Foundation reaffirmed the need to meet or exceed the Paris Agreement commitments. If McKnight had acted alone, our voice—and the $2 billion endowment behind it—would have meant very little. The power of this action comes from us pooling our assets to amplify a collective voice and underscore that market actors are seeking ambitious policies to address climate change. Yet only one percent of the signatories are foundations.

These experiences leave me wondering whether the philanthropic community is leaving behind some of our influence. If the lenses through which we chose to see ourselves included institutional investor, it could very well open the door to powerful new networks, new conversations, and new market-driven strategies.

As I consider the future of impact investing, one challenge to overcome is how to convince more philanthropists to see themselves as institutional investors. McKnight’s experience has taught us that acting as institutional investors and flexing our collective muscles to drive more sustainable and transparent markets can effectively advance our mission. What’s more, doing so is much more manageable than it may seem. Here is a look at some of the steps we’ve taken.

1. Signing to Lend Support

The barrier to entry for leveraging our institutional investor standing is quite low, and philanthropic institutions can easily participate in initiatives that other investors are leading. For example, as a member of the Investor Network on Climate Risks, McKnight recently signed a letter to the US and Canadian governments urging an agreement on methane reduction from the oil and gas industry. Simply lending our signature adds $2 billion in economic weight to the request, while joining with other investors gives us an outsized influence we could never have on our own. The odds of policymakers feeling any pressure to pay attention increase exponentially with an increased number of participants, especially when those participants have a combined asset value of trillions of dollars.

There are a growing number of these networks that pool investor voices for greater authority and impact. In another example, the RE100 group is helping investors ask companies to use 100 percent renewable energy—a powerful way to stimulate demand in the green energy market. Foundations already keenly appreciate the need for scale. Having a set of powerful investors with tens of billions of dollars behind them is action at scale.

2. Speaking as a Shareholder

Foundations that aren’t ready for a strategy that redeploys assets can still use their standing as a shareholder to influence companies’ behavior. We now request the proxy voting policies from all our pooled fund managers and review how they cast our ballots. We also have selected a voting policy for our domestic managers that reinforces our work to shift to a low carbon economy and protect our endowment from climate risks.

Other institutional investors file shareholder proposals. While we haven’t done that yet, we sometimes speak directly to companies we own. In 2015 and 2016, McKnight wrote to 170 US companies in energy-intensive sectors that don’t report their greenhouse gas emissions using a comparable format. This data is important for making investment decisions and for helping companies reduce their emissions footprint. In our case, such data provides useful input for our fund manager, Mellon Capital Management, who runs the Carbon Efficiency Strategy. The fund tilts our investments toward companies that produce fewer carbon emissions relative to their industry peers. So far, we’ve counted a dozen companies that became first-time reporters.

The more companies hear from their owners that issues such as water risk, climate change, and other social and environmental business considerations are important long-term business factors, the more transparent and proactive our markets will become.

Asking for data as an institutional investor could also lead to an effective inflection point in advancing environmentally sustainable markets. We can ask for a price on carbon as a grantmaker using moral reasoning, and we can demand a price on carbon as an institutional investor. Pricing environmental pollutants aligns incentives so that businesses can plan properly, use energy rationally, and more. Such market certainty is material for portfolio management.

3. Making Direct investments

Like many foundations, McKnight has long supported nonprofits working toward market solutions. As we more fully embrace our role as an institutional investor, we’re discovering we can also support our grantmaking objectives through direct investment. For example, we recently invested $5 million in Midwestern BioAg, a Wisconsin company that sells soil health services that help replace fossil fuel-based fertilizers. This is a financial investment that aligns with our goal to advance environmentally friendly farm practices that improve the water quality of the Mississippi River.

More importantly, our conversations didn’t end with the decision to invest in the company. Program staff finds these new private sector market perspectives invaluable for nuanced grantmaking, which remains the core of what we do at McKnight. For example, our Mississippi River program colleagues are using insights about Midwestern BioAg to inform a developing grantmaking strategy on improving agricultural supply chains.

Moving forward, The McKnight Foundation will continue to seek out opportunities to advance public benefit as an institutional investor, and we urge others to join us. The Paris agreement was a turning point in how investors think about climate change. Now we need a turning point in how more foundations think about investing.