As part of its excellent series “Stronger Foundations”, highlighting best practice in the foundation sector, the Association of Charitable Foundations recently published its report on investment practice.
The report is a great introduction to how foundations can seek to align their investment approach with their mission. A few key themes stand out.
The first is how decisions about investments are made. The traditional model of foundation governance tends to separate decisions about how the endowment is invested from those about the overall mission of the charity, with different groups of trustees thinking they are solving different problems.
One challenge is how to maximise the available cash, and the other how to deploy it in the best way. But trustees are responsible for all aspects of the organisation’s work, and non-investment experts can bring huge value to discussions about how to invest and how it links to mission.
According to Nicola Parker, who has supported a number of foundations including The Joseph Rowntree Charitable Trust, the traditional view of investment management can lead to a narrow focus on risk and return metrics.
Expanding the discussion to include other trustees can help illuminate the impact of the investment approach on people and planet, and how to manage broader risks, such as reputation.
Secondly, what might prioritising mission in your investment approach actually look like? Initially this might be hard to see.
Most of the work a foundation funds, by its nature, is not something that can generate financial return. But the report offers some useful ways to think about this.
For example, a good place to start is for trustees to consider how investing might work against mission. What companies or industries might you be supporting with your capital that could be actively causing harm which your grant-making is seeking to mitigate? (There are a number of high-profile cases to reflect on, including Comic Relief and the Church of England.)
Next trustees should consider what their financial goals actually are. Rather than thinking of simply maximising the cash from the endowment, it is helpful to consider how much income is actually required to meet grant-making objectives.
Trustees can then start to think about where it makes sense to invest to both support the mission and meet those financial objectives. Pragmatism is key here, and perfect alignment is unlikely – especially at first.
Rather, mission alignment might mean looking to support the broader ecosystem in which the charity’s grant-making is targeted, or investing in support of an economic model that will benefit the people the foundation is trying to work for.
In the case of Access, our grant-making is focused on supporting access to finance for smaller charities and social enterprises. The fact that this work requires grant subsidy means we needed to draw the net more widely when defining our investment approach.
Also constrained by our 10-year life, we set ourselves the simple goal of getting as much of our capital working for the charity and social enterprise sector as possible.
Where it is not possible to invest in a suitable product (usually a charity bond with an appropriate term) we then look for other social purpose organisations, and finally those with high environmental, social and governance scores.
We visualise these on concentric rings, with the charity sector as our bull’s eye.
The third theme to highlight from the report is how to find an investment manager who can deliver your investment priorities and with whom you can build a good relationship based on trust and challenge.
Our own experience of this was mixed. Back in 2015 we engaged with eight investment managers to find one to deliver our goals. Not many had a track record of delivering the impact we sought (some said it was impossible) and my colleagues were occasionally patronised along the way.
But one investment manager stood out, and we have been very pleased with the relationship we have built with Rathbones, which manages our bond portfolio for us.
The market for impact investing has also grown significantly over the past five years, and I am sure we would have a better experience if we repeated our process now.
Areas to consider in your relationship with your asset manager include: how they will measure performance, in terms of financial performance and mission alignment, and report to you on it; how you will hold your asset managers to account and how frequently; and how they are representing you and your interests – for example, are they voting at company AGMs on topics that can further help to enhance your mission?
Finally, as with so many areas across the charity sector, transparency is central to avoid reputational harm and overcome the information imbalance that can make investment activity appear so specialised to non-investment people.
Many foundations are now publishing their investment policies, like the Esmée Fairbairn Foundation, and JRCT. Others, like us at Access, have also published their full portfolio and impact reports covering their investments.
All foundations can make progress to better align their investments with their mission. To not do so is unsustainable.
Seb Elsworth is chief executive of Access, a foundation that helps to widen access to social investment for charities and social enterprises