Foundations come in many shapes and sizes, but generally, they rely on investment returns from their central ‘endowment’ to fund their operations and make grants that support their mission. 

A conservative estimate suggests there is $50bn sitting as endowed capital on the balance sheets of Trusts & Foundations, often under ‘traditional’ investment strategies where impact or mission is an afterthought.

On the surface, it would appear that ‘impact investing’ and the expansion of blended capital models to address social and environmental issues would be a good match for this endowment capital. An ideal opportunity for these purpose-led and charitable organisations to link their investments to their values, and their reason for existing?

But no, there are obstacles, relating to legacy processes, experience or knowledge, and uncertainty about fiduciary responsibilities, that are holding foundations back. Despite being at an inflection point in the growth of Responsible Investing and ESG-styled investing in Australia and abroad, as accelerated by the pandemic, trusts & foundations generally remain laggards where they should be taking a lead.

There is a significant direct opportunity cost to their organisations and the community, not to mention the signalling and leveraging effect their collective behaviour can have on the broader investment industry.

Simon Lewis knows these challenges well. He’s been a director of foundation boards, an advisor to the trusts & foundations sector for many years, and invests in a couple of social purpose organisations . And through the creation of GoodWolf Partners, an advisory  firm helping the broader transition to the impact economy, he is hoping to tackle this problem head-on. 

“As a director of the Reichstein Foundation, we are exploring this exact question of how to bring impact across our whole organisation. As a luminary in the sector, Jill Reichstein is Chair of one of Australia’s most progressive grant making foundations, and having reached its 50th Anniversary, it seemed an opportune time to explore how to bring its endowment more in line with its mission.” Simon Lewis says.

“As a traditional investment portfolio with some important negative screens in play, we started to explore what the next steps might be to move forward on this journey. We’d seen what progress ACF (Australian Communities Foundation) had made, we’d had conversations with a few others, and we thought, well, let’s go on a journey here Jill, but let’s not do it alone.”

With Jill’s encouragement, Simon brought together a group of 11 other trusts and foundations that were exploring this same opportunity themselves, representing around $0.5bn in combined endowment capital.  

“The 12 foundations that were invited were a deliberate mix, because we wanted this pilot to represent the live conversations happening at the trustee and director level across the different types of Foundation, and between senior management, on this issue. We were joined by couple of family foundations, some institutional trusts and foundations, and some government linked entities as well holding endowment capital for community programs. The feedback was fantastic, and there was overriding support to take this program out more widely into the sector and try and help move the dial.” Simon says.

While impact investing is well understood as a concept, it’s the implementation and execution process that needs work.

“There are some great materials out there, but it’s just wallpaper. And it is loud and noisy wallpaper at that! And there isn’t enough tailored support to activate these new ideas and concepts in the Board Room. So we approached this pilot as a peer group learning model, with monthly meetings of representatives from the Trusts & Foundations, working through the issues, the myths, the barriers, and inviting in Subject Matter Experts (SMEs) to provide case studies, frameworks, tools and solutions. Some of the key take-outs were around centering the Board on a common language and framework, how to rethread investment governance and skill up, rewriting an IPS (Investor Policy Statement) to include mission, values and an explicit reference to the blended capital products, how to tender for impact managers, and overall, how to bring ‘impact’ into play as a third dimension alongside ‘risk’ and ‘return’”.

Laws Are Starting to Shift With Community Expectations

Trusts are highly technical legal documents, for a reason. They protect the beneficiaries, and the mission, and they guide directors on how funds should be used. And their charitable status wraps them up in additional governance that can be layered and complicated.

Investment responsibilities and granting responsibilities within trusts & foundations have historically been governed and managed by separate committees, management and processes. But this strictly binary approach is starting to be dismantled by progressive Foundations that see both arms working in unison towards the impact objectives of the Foundation.

The challenge in shifting the trust and its investment strategy to embody impact beyond just the financial return and risk considerations, is both a fiduciary issue and a portfolio one.

“How do we inform and empower Directors and Investment Committees to take more leadership around the impact agenda for the Foundation, in terms of its mission, and make a demonstrable commitment rather than remaining passive or agnostic and focused solely ?”

The laws are there for a reason, but the culture around them, and the rules, are changing in line with community expectations.  The new Charities Act in New Zealand, for example, provides a useful list of matters to consider when making investments, including thinking about the charitable purpose of the trust. Most of these can be amended – but the charitable purpose of your trust will always need to be considered, as that is a default duty.

“So our second workshop explored how Endowments For Impact reconciles with this notion of fiduciary responsibility, and all these layers of governance and Directors duties, e.g: the Trust Deed and testators wishes; the ACNC Act; the Trustee Act; the Corporations Act (for corporate trustees) and then of course Common Law that stretches back into the law of precedent. In the face of this, it is not surprising that Trustees & Directors stand behind the most conservative stance on investments” Simon says.

“It’s going to be a case of when, not if, foundations will feel compelled to make these changes. So why not get the conversation started.”

The Journey Towards Action

These pilot workshops brought together a leading group of Australian foundations motivated to look more deeply at their investments, and ask bolder questions about their mission and impact. Everybody came together having filled out a series of surveys, making it clear what their mission-led outcomes were, their values and principles, and risk appetite. And of course their financial goals and the way their operations and investments were set up.

“We collected a sample of investment policy statements and strategic asset allocations, but also the aspirations around how they wanted to shift their portfolio forward on this journey to impact. Then our SME Brightlight was invited to build a model portfolio and supporting transition plan that was representative of the group to help the participants  ‘see’ what a pro-forma model for transition would look like, and the commensurate risk, return and impact profile of this model portfolio.” Simon says.

“As many foundations remain traditionally invested in listed shares/funds through a broker or investment manager, for example, we had to consider what this could transition look like in stages, over a period of years, to reach a 100% impact overlay? What would this look like in practice? And that was the purpose of one whole session, and it was a conversation when many light bulbs were lit!”

Impact Across the Asset-Class Spectrum

A shift to 100% impact offers opportunities to look at unlisted assets, but it also puts a focus on how trustees can begin to look at driving their mission through influencing the public companies in which they’re shareholders. 

We also discussed the different strategies at the disposal of Trusts & Foundations wanting to account for, and amplify, the impact of their investment portfolio. Strategies involving divestment (moving away), integration (moving towards), engagement (nudging investees to do better on key impact areas) and advocacy (acting in concert with others when they don’t).

And as you imagine, this is well beyond what an Investment Committee of the Foundation does in the course of its 2 meetings a year with the intermittent briefing from its investment manager to report on financial performance…

“Think about how much responsibility Trustees and Directors are handing across to investment managers, requesting them to simply ‘achieve the CPI plus three and a half percent return’, and report back to us how much we’ve got to grant. That’s pretty much how a lot of the trusts and foundations operate” Simon asks.

“This is unlikely to change until the Trustees & Directors shift into a whole new gear and rethread the governance, strategy and resourcing of its investment activities as being central to mission, and not simply  servant to the grant making activities. Foundations in the US and Europe are leading the way and taking back the power and responsibility of investment activities to make a demonstrable contribution to their mission. And in doing so, they are each making a contribution to the significant gap in private capital required to help meet the SGD2 by 2030 and address the wicked problems that continue to bedevil our world.”

 What’s Ahead in 2022…

According to Simon’s estimations, there’s a baseline of $50 billion of endowment funds that could make the shift towards 100% mission alignment in Australia alone. The potential to bring this capital into play for the transition towards the broader impact economy is huge, and he is not slowing down.

“We’re getting ready for several rounds of workshops in 2022, getting some slots in the diary, inviting trustees and directors to sign up, and building a broader Community of Practice in this space across AU and NZ.” Simon says.

“If we get groups of 10-12, trustees, directors and CEOs into workshops to run through our program, and build our Community of Practice by 50 a year, we will be making progress and help create a tipping effect for the sector. Philanthropy likes to be acknowledged as progressive, innovative and courageous in how it tackles wicked problems, but this ambition should not stop at the door into the Investment Committee”

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