Impact Investing for Foundations: Are You Ready?

Impact investing for foundations is a hot topic, but often mis-understood. This post will demystify impact investing for foundations by providing practical advice to aid your foundation’s impact investing journey.

Impact investing has become a powerful tool for foundations looking to align their financial strategies with their mission. By making investments that generate both financial returns and positive social or environmental impacts, foundations can expand their influence beyond traditional grantmaking. However, venturing into impact investing also brings new challenges. And, requires some additional resources. So before diving in, it’s essential to assess your foundation’s readiness to ensure that impact investments align with your mission, meet legal requirements, and include appropriate management processes.

Impact Investing for Foundations

This post describes what foundations should do to make successful impact investments.

Take our free Impact Investment Readiness Quiz that will provide a readiness rating while also identifying key impact investment focus areas your foundation can work on.

Aligning Investments with Your Foundation’s Mission

The first and most crucial step in impact investing is ensuring that your investments align with your foundation’s mission. For example, if your foundation’s mission is to support environmental conservation, investing in affordable housing might not be the best fit. It’s vital to assess how potential investments contribute to your mission and whether they advance your long-term goals. Align your potential impact investments with your foundation’s mission. Reflect on your foundation’s mission and focus areas. What types of impact investments fit within these themes?

Board Support and Education

Impact investing requires the full support and understanding of your board of directors. The board holds fiduciary responsibility and must be educated on the risks and benefits of impact investing. A well-informed and aligned board is an essential first step for approving and overseeing impact investments. Consider whether your board is prepared to take on the additional risk and responsibility that comes with impact investing. Do any board members have impact investing experience? If not, creating an educational program for current board members is warranted.

Legal and Tax Considerations

Impact investing involves navigating complex legal and tax considerations. Foundations must ensure they have access to legal counsel and financial advisors who can review investment documents and ensure compliance with regulations. Additionally, tax support is crucial to understand the implications of these investments on your foundation’s tax status and to ensure that professional advisors are equipped to handle the intricacies involved. Who is your team of professional advisors? Do they have experience and capacity to advise on impact investing?

Establishing a Dedicated Investment Committee

A dedicated investment committee, either standalone or part of the board, is vital for evaluating and advising on impact investments. This committee should include members with expertise in finance, social impact, and the specific sectors in which you plan to invest. Furthermore, your foundation needs a documented Investment Policy Statement (IPS) that incorporates impact investments, outlining how these investments fit within your broader portfolio. Your Investment Policy Statement will guide the Investment Committee or Board’s investment decisions. Does your foundation have a written investment policy that includes allocation for impact investments? If so, how are impact investments defined and what management and decision-making processes are outlined?

Formalizing Asset Allocation and Due Diligence

Asset allocation should be formalized and documented in your foundations Investment Policy Statement, clearly defining how much of your foundation’s portfolio will be dedicated to impact investments. Additionally, a thorough due diligence process is essential and should be documented and refined over time. This process should include top-level requirements, such as sector focus, size criteria, and specific impact goals, to ensure that potential investments align with your foundation’s goals and mission.

Defining Decision-Making Processes and Impact Measurement

Clear decision-making processes are critical in impact investing. It’s important to define who makes the investment decisions and ensure that the process is transparent and accountable. Moreover, measuring the impact of your investments is just as important as financial returns. Establishing key performance indicators (KPIs) and benchmarks for social and environmental impact allows you to track progress and adjust your strategy as needed.

Determining In-House Versus Outsourced Functions

Decide how much of the impact investing process will be managed in-house versus outsourced. Smaller foundations may benefit from outsourcing certain functions, such policy documentation, impact measurement or due diligence, to specialized firms. In fact, our family office provides many of the services required to make successful impact investments. Click here to learn more about how we can help your foundation find impact investing success. Larger foundations with more resources may choose to internalize these processes to maintain greater control over their investments.

Accounting and Documentation for Impact Investments

Impact investments must be properly accounted for within your foundation’s financial records. This includes establishing clear bookkeeping processes to handle these investments and ensuring that all necessary documents are maintained in an organized and accessible manner. Is your foundation using up-to-date digital record keeping methods including shared drives and cloud accounting? The amount of documentation required for impact investments is often much greater than for traditional stocks and bonds portfolios. So, your foundation will need up-to-date digital processes to handle this documentation successfully.

Regular Reporting and Performance Reviews

Regular reporting on both financial performance and impact is essential for maintaining transparency with stakeholders. Decide on the frequency and format of these reports, whether using Excel, Addepar, or other financial management tools. Additionally, establish a review process where the investment committee assesses the portfolio’s performance, ideally on at least quarterly or annual basis. Impact investments should be included in total portfolio performance. Can your foundation’s current investment managers provide consolidated performance reporting that will include your impact investments alongside other portfolio investments?

Using Impact Investing to Spur Fundraising

If your impact investments are successful, they can serve as a compelling case for fundraising. Demonstrating the positive outcomes of these investments can attract donors who are interested in supporting innovative and impactful strategies. When your foundation can measure and report your impact investing outcomes, these results can be used to encourage more financial support from your community of supporters. Our family office has helped foundations use impact investing as a fundraising tool. Contact us to learn more about the services we provide foundations.

Assessing Your Readiness for Impact Investing

Impact investing offers foundations an opportunity to leverage their assets in ways that align with their mission and drive positive social and environmental change. However, it impact investments require careful planning, alignment with your foundation’s goals, and a well-structured approach. To help you assess whether your foundation is ready to embark on this journey, click here to take our free Impact Investment Readiness Quiz. This quick assessment will help you determine your readiness to make a difference through impact investing. And, identify areas for improvement.