Why Not 100%?
Impact investing, harnessing the foundation’s endowment capital to drive its goals and mission, is having a moment. Hailed as “the next generation of innovation in philanthropic impact” by The Ford Foundation, impact investing represents a brand new approach for some philanthropists. But for Kristin Hull, impact investing has been the warp and woof of her foundation right from the start.
In 2007, Kristin’s family had just set up The Hull Family Foundation to strive for social justice and environmental sustainability, when she decided to attend a Global Philanthropy Forum session. “It was called ‘Two Percent,’ and going in, I had no idea what it was about,” Kristin admits, “but it turned out to be a discussion about using two percent of the funds in your endowment, not just your grant dollars, to advance your mission.”
The idea of impact investing made perfect, intuitive sense to Kristin. “Our family business was made by entrepreneurship,” she says. “And some of the proceeds from the sale of that business to Goldman Sachs became the basis of our family foundation.” However, one particular goal of the impacting investing advocates at the session rankled. “The Ford Foundation and others were arguing about whether you could get two percent of your foundation’s endowment aligned with mission, and I had this lightbulb moment. I asked, ‘Why two percent? Why not 100%?’”
Kristin immediately took action on behalf of her family’s foundation: “I began by working with advisors, identifying and investing with seven community banks that made loans to small businesses, women, and people of color.” Kristin’s own foundation, Nia Community Foundation, in Oakland, California also made program-related investments (loans, loan guarantees, and equity investments) to help advance her philanthropic objectives while returning earnings to the foundation.
“We helped a charter school in Oakland by making a loan guarantee, so they could buy a building,” Kristin explains. “It worked out perfectly. We received 4% interest on another part of the loan when interest rates were below 1%, so it was financially savvy as well. The funds get recycled for charitable use, so we can do even more. To be an effective philanthropist, it’s important to have your endowment work for you and your goals.”
Today, The Nia Community Foundation is 100% impact invested, with all of its funds in service of its mission (“even our phone service and credit cards, and everything I own personally,” Kristin says), and Kristin has made impact investing her profession as well as her calling. She serves as the founder and Chief Investment Officer of Nia Impact Capital, a firm that creates impact investing solutions with an emphasis on women and gender equality. Its flagship portfolio product, Nia Global Solutions Equity Portfolio, delivers a competitive rate of return while creating positive impact for investors. In 2017, the portfolio delivered a 37.59% return, outperforming the S&P 500 by 15.77%.
Naturally, we asked Kristin to share her advice for foundations that want to reap the financial and social benefits of impact investing. Here’s what she had to say:
Open the Envelopes
For foundations that want to get started with impact investing, Kristin has some very specific advice: “I call it ‘opening the envelopes.’ You want to get all the foundation investments out on the table and really look at them. What’s in the index fund? What’s hiding behind the index stock symbol? Impact investing begins with knowing what you own and determining whether it aligns with your goals and mission.”
If you open the envelopes and don’t like what you see, you might assume that the next move would be to remove the “bad apples” from your index. But Kristin cautions that a so-called negative screen may not be your best option. “Screens can help you remove tobacco, alcohol, gun manufacturers, and other objectionable businesses,” Kristin says, “but that can leave you with mediocre companies.”
According to Kristin, a better solution is to build a portfolio around your goals and actively seek out “good apples” by applying ESG (environmental, social, and governance) screens. “Look at where you’re granting and back up,” she suggests. “If your foundation is involved in global water issues, look for an investment that also deals with global water issues. Then, choose companies with products and management teams that exemplify your values and further your goals—that’s really where we want to be.”
By seeking out companies that make positive contributions to the world and are well run, Kristin claims, you eliminate both bad actors and financial underperformers. “When you add ESG, you’re doing a deeper level of due diligence, and that plays in your favor,” Kristin says. “Because you’re seeking excellence, you end up with a portfolio of innovative, forward-thinking companies.”
Move Your Money
Another good starting point is the foundation’s cash. “Is it in a bank making no interest? Move it to a community bank, CNote, or RSF Social Finance,” Kristin suggests. “They can often increase your impact in the world while providing better interest rates and financial returns.”
“It’s a myth that you get lower returns with impact investing,” Kristin says. “In fact, I’d prefer to call impact investing ‘smart investing’ because, if you do it right, you hit all of your goals, including the financial ones.” As Kristin sees it, profits are an important metric of success because they demonstrate the efficacy of your overall strategy. “If an investment doesn’t work out financially, you may not be achieving your social or environmental goals either,” Kristin explains.
“I love to work with foundations because they have so many entry points to impact investing, and there are so few limitations,” Kristin says. “Individuals have to worry about the tax implications of capital gains, but private foundations can change strategy at any time without that worry. Private foundations hide behind fiduciary duty sometimes, but they are ideally positioned to lead the way with impact investing. They need to be the ones to innovate.”
If your foundation is ready to take impact investing to the next level, Kristin recommends looking at the people behind your investments. “Who are your financial managers and fund managers? If you value diversity, which can lead to innovation, choose companies with diverse teams and managers who are women and people of color. There are only 14% of fund managers who are women, so it’s a harder ask, but it’s incredibly impactful.”
As a shareholder, you can also work to improve companies from the inside out. “Sign on to different organizations like As You Sow in Oakland that promote corporate responsibility to learn how to you can hold corporations accountable,” Kristin suggests. You can use your leverage in publicly traded companies to advocate for everything from introducing paid family leave for employees to eliminating ocean-polluting plastic straws.
“Using your foundation to offer program-related loans and loan guarantees are other great ways to go deeper,” Kristin says. “Grants are one way to provide support, but they’re not always appropriate for every situation. Sometimes, a small business that could benefit the community needs a loan and isn’t organized as a nonprofit. Sometimes, it’s a favorite nonprofit that could receive a grant, but what they need is a loan or a loan guarantee to buy a building.”
Finally, consider making impact investing your personal as well as foundation strategy, and spreading the gospel. “The next step is to expand the impact investing movement by democratizing it,” Kristin says. “Private foundations have access because of their endowment size, and yet the way we will really change things is by empowering everyday investors.” While separately managed accounts start at $100,000, Nia Financial currently has products for individuals with a minimum investment of $10,000, and a lower-priced mutual fund may be available soon. Kristin also notes that there are other options available for individual investors. “You can open an account at RFS with as little as $1,000, and CNote has no minimum whatsoever. Everyone can become an impact investor.”