In my first conversation with Simon Lewis he explained the theory behind the work GoodWolf was doing, along with Brightlight, to help foundations and endowments align their investment capital, with their mission, through impact investing.

We spoke to Simon again this week and asked him a few questions about the opportunities for foundations to embrace impact, the 100% model from Toniic and to get a prelude for the panel he will be moderating at the Impact Summit: Endowments For Impact: Overcoming the barriers to mobilising the billions invested by philanthropic trusts and foundations.

1. What are the key factors holding foundations back from allocating their investment capital towards impact investments that are aligned with their mission?

Every now and then, external forces shift, values and behaviours change, and new paradigms arise that compel society and the industries that serve it to adapt and innovate. The advent of the growing ESG industry and the ‘impact investing’ sector is such a paradigm shift for Trusts and Foundations.

It has been on the radar of Board and Senior Management for years, and the invitation to explore what this evolution of capital markets and the ascension of responsible investing means for charitable endowments and associated investment strategies is compelling.

However, conservative forces hold this sector in a tight grip.

Despite the leadership and progress we see internationally from prominent Foundations, like Ford and Rockefeller who have committed their endowments to the objective of 100% responsible investing and impact, and the growing number of ‘100% Foundations’ convened by TONIIC (US), the $50bn Trusts and Foundations sector in Australia still has a long way to go to shift its traditional investment mindset.

There are a select few who have the capacity to move quickly and transformationally, but they’re generally the exception.

Some have trialled the so-called ‘side-car’ approach, allocating a small percentage of their asset pool to a strategic impact fund, with the balance of the portfolio remaining in a traditional or screened portfolio at best. Others are hamstrung by the complexity of concepts and language that bedevils the sector. Understandably, there is resistance to stepping ahead of the crowd.

In Australia, there are only a few examples of ‘traditional’ Trusts and Foundations who have successfully transitioned their whole portfolio to 100% responsible and impact investments.

The learnings from a four month pilot convened by GoodWolf including Directors, Trustees and CEOs from 12 Trusts and Foundations last year helped us boil this resistance down to seven main factors.  This will form the basis of our breakout sessions­­ during the Impact Summit in March.

Some of the most prominent factors include:

  • Persistent dualism, and the resistance to change from a traditional dualistic model of ‘investing’ and ‘granting’ with commensurate committee structures, to more a holistic model, aligned by an overall framework that recognises how social capital now works across the spectrum of financial returns and impact
  • Prevailing myths, the most prevalent being that incorporating ‘impact’ as an additional trade-off to risk and return leads to compromised financial performance of the endowment. T100 surveyed a group of Foundations in the US with mission-aligned investment strategies, and in the longer term, their portfolios were expected to deliver at least the equivalent to a traditional portfolio, with 38% expecting stronger portfolio performance. We need to develop a similar evidence base for the Australian context, but that will take time. In our 2021 pilot study, impact investment management firm Brightlight designed a model portfolio around these risk:return:impact settings from the participating Foundations to illustrate what is possible
  • Trust Governance, Trusts and Foundations seldom have the right mix of experience, or realigned governance and Investment Policy Statements, to lead into this new paradigm in a way that accommodates and comprehends both commercial and impact dimensions of private enterprise business models, real estate or concentrated public equity impact portfolios

2. For investment advisors and managers, this can represent a profound shift in their mandate. How can the sector help build capacity for change?

Investment advisors and managers, as masters of their craft, provide an essential service to Trusts and Foundations.

Comparatively, the volunteers on Trust and Foundation Boards or Investment Committees who engage them often lack the comparative knowledge or experience in investing principles. As long as the portfolio delivers the investment objectives of CPI + 4.5% return, for example, and performs above agreed benchmarks, there are usually no further questions asked.

Indeed, the IPS that governs the relationship and performance often has only cursory consideration to impact (via screens), and there is no reporting beyond the ups and downs in capital values, income (and franking credits!).

So who initiates this shift in mandate? This is unlikely to be the investment manager or advisor (although some are reading the tea leaves more closely than others…). The shift has to be led by the Trustees and Directors. And yes, once they lift the bar on their expectations and rewrite an IPS that reflects the principles, values and impact philosophy of the organisation, it creates a chain reaction.

A large community trust in NZ (above $0.5bn) offers a useful example. It sent out a questionnaire to the investment community about how they could potentially advise the Trustees on bringing impact across its whole portfolio, and apparently it caused a real stir as they all scrambled for answers.

3. What myths still exist? Is it fear of poor financial performance?

Predominantly, yes. The net negative trade-off is what is feared most. Trustees and Directors, partly due to the prominence of their role and the public accountability of the Foundation’s financial performance, causes a natural conservatism that sits in the belly of this sector.

However, if we are reminded of the fact that Trusts and Foundations have a charitable purpose, and the first and foremost duty of a Director or Trustee is to honour and serve that purpose, then the excuse to carve out investment activity as the ‘profit making’ side of the Foundation quickly falls away.

The expansion of the ESG market (soon to be $50tr of the $150tr global investment market in 2025, according to Bloomberg), the exposure to an increasing range of direct and indirect assets across all types, including categorisation by sustainable development goals, suggests this is a question of when and not if the Trustees and Foundation Directors step forward into this new paradigm, and join the ‘Endowments for Impact’ movement.

4. Toniic released the T100 report in 2020. It offered insights into the US foundations that have committed 100% to impact, but how are Australian foundations reacting to the idea?

There are some notable examples in Australia that are starting to join the panoply of international Trusts and Foundations that have stepped into this new paradigm. Australian Communities Foundation (ACF), acting on first principles and aligned to its charitable purpose and the wishes of its donors, began the move to 100% responsible and impact investment opportunity several years ago.

It will reach the critical 3 year track-record on this transition late in 2022, and RIAA lists it as the only Trust or Foundation ranked on their league tables.

Similarly, Hand Heart Pocket Foundation is in the early years of a complete redesign of its governance, strategy and operating framework and bringing 100% alignment to its investment portfolio. It has even disbanded the dualistic model of ‘granting’ and ‘investing’ committees into one!

There are many more Foundations that are starting to make strides too, or in their private capacity, have made great progress. And larger Foundations taking the ‘side-car’ approach are now asking bigger questions about the remainder of the portfolio.

So while the buzz is building, we are still a long way from loosening that conservative grip on the +$50bn sector in Australia. The leadership of these early movers certainly paves the way for progressive Trusts and Foundations to follow, but the wider sector needs more support if it is to overcome the forces holding it back.

5. This is a topic you’ll be presenting at the Impact Summit. What can people expect to take-away from your session?

GoodWolf will be facilitating a couple of sessions to engage the Trustees, Directors and Senior Management of Foundations in a conversation about what this ‘Endowments for Impact’ sector could look like. And importantly, to consider their individual and collective role to move the sector forward:

  • Session 1 will unpack the key areas of resistance mentioned earlier, and how to navigate through them. It’s taken from the perspective of sector representatives of Family, Institutional and Non-Profit Foundations. We will also hear a summary from impact investment and advisory firm Brightlight, who has spoken to 35 Trusts and Foundations about their readiness and preparedness to put investment capital to work for impact. 
  • Session 2 will look at a few Australian case studies, including the model portfolio developed by Brightlight. It comes off the back of inputs from 12 Foundations, and the associated transition path towards 100% impact in line with this portfolio. The cadence for transition is typically 3 to 5 years, so yes, it will take time! We’ll hear from ACF and Hand Heart Pocket CEOs who have already started on their journey, and discover their learnings and reflections (and encouragement) for the rest of us.

As we think about this new paradigm, we borrow from that famous JFK line and invite Trustees, Directors and Senior Managers from the Trusts and Foundations sector to accept a bigger, bolder challenge:

  • “Ask not what your Endowment can do for your Foundation in terms of just returns; ask what it can do for your Foundation in terms of impact!”

If you are a Trustee, Director or Senior Management of a Trusts and Foundation, please sign up to the Impact Investing Summit and join us for this important conversation.

The Impact Investment Summit runs from 30th of March to 1st April, at the International Convention Centre, Sydney. Early bird tickets are still available.

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