Impact Investing: 5 Lessons for Putting Your Money Where Your Mission Is

As impact investing grows more common, an increasing number of foundations want to ensure that their investments advance the same goals as their grants. But putting that into practice can be difficult.

I understand the roadblocks, because my organization, RSF Social Finance, has been there. And I’m happy to report that it’s possible to get over the hurdles and achieve greater impact.

To be sure, foundations face particular barriers, especially related to the culture of traditional investing and the staff skills needed to take on this work. Overcoming them is worth the effort, though. A new generation is demanding more of philanthropic institutions, and the opportunities for mission-related investment are growing.

Every organization will chart its own path, dictated by its mission and priorities. But RSF’s decade-long experience with deepening our mission through our investments can help our colleagues take the next step with their own portfolios.

RSF’s purpose is to transform the way the world works with money. Our goal is to build a financial system that is direct, transparent, personal, and based on long-term relationships. We began to align our philanthropy with this mission in 2002 by working with socially responsible investment managers and using customized filters to find investments that matched our values.

When we started, our philanthropic assets were held entirely in cash and equivalents. There was no investment strategy, impact or otherwise. By 2006, we had built a diversified portfolio of the most socially and environmentally beneficial investment options available. This portfolio included public and private equities, real estate, real assets like gold and silver, and fixed-income vehicles. Across all the asset classes, we had money in an array of areas, including clean technology, green real estate, health and wellness, microfinance, and affordable housing.

It was a groundbreaking portfolio that has continued to evolve. It now has a balance of more than $7 million, almost all in private equity and real assets and with no public-equity holdings. We decided to divest from the stock market after the financial crisis of 2008. We felt that working through the public markets did not advance our mission and that we could find ways to make our investments far more powerful.

We’ve learned a lot since 2002. Here are five lessons I hope will help others.

Unpredictable markets can help hone your mission.

As with any strategy, the timing of your initial investment has a significant impact on the ultimate financial, social, and environmental returns. Unfortunately, you can never be certain about where markets are headed. At RSF, we entered into many of our private-equity positions just before the Great Recession, and they never had the chance to perform as well financially as we had hoped. Many, however, have been a success from an impact perspective, building new models and achieving social returns in areas from medical technology to sustainable timber management.

What’s more, the lack of predictability in our investments spurred us to divest from elements of our portfolio that lacked transparency, like mutual funds and hedge funds. As you experience the vagaries of the market, you find out what really matters to you and how to target your investments in support of your mission.

Relationships are as important as numbers.

As you move to align your investments with your mission, you will inevitably find yourself taking a more hands-on role. Working with investment managers who have expertise in your mission — whether they work inside or outside your institution — will help you evaluate opportunities and build strong relationships with the people you are investing with or the companies you are investing in. Through these relationships, you can cultivate additional investment prospects that jibe with your work. You can also develop transparent ways to evaluate your returns in terms of impact on your mission.

Diversity of mission-investing options is important — and increasingly possible.

It’s crucial to consider diversification within your mission-aligned portfolio. For example, if your aim is improving the quality of life for women and girls in the developing world, seek out different asset classes, investment strategies, and geographic regions that generally fit that focus, even if imperfectly. This will help ensure the sustainability of the portfolio. What’s more, you might discover some surprising opportunities for impact. RSF was excited to find a fund that provided short-term bridge loans to nonprofit organizations, which both advanced our mission and offered the short-term liquidity we needed in our portfolio. Keep your eye out: New impact options appear all the time.

Market and mission make a delicate balancing act.

Even with the expansion of impact-investment offerings, odds are you won’t be able to construct a portfolio that exactly matches your mission goals. Don’t let the perfect be the enemy of the good. Find appropriate compromises that meet the market where it is but still fulfill your mission needs and allow you the flexibility to refine and deepen your mission over time.

It’s also important to consider whether your investment philosophy is geared more toward financial returns or social and environmental aims. Having a clear philosophy will help you make the appropriate trade-offs between market realities and mission goals. At RSF, we began with a mostly return-first vision for our portfolio and selected socially responsible managers who could help us meet our bottom-line needs. Over the past decade, we consistently moved closer to an impact-first model. We now consider the transformative potential of an investment ahead of its capacity to meet target returns.

Philanthropic assets have immense power to drive change.

Philanthropic assets have the potential to be the most transformational investments, supporting experimentation and testing new approaches. This belief informs our current portfolio and decisions, such as investing in a recent bond offering by SolarCity, a company that develops solar-power systems for homes, businesses, and governments.

Focusing on transformation in your impact investing means asking challenging questions of yourself and your investment advisers: What return do we need to earn on our philanthropic funds and why? Are our money-management practices in line with our grant-making strategies? The F.B. Heron Foundation has delved deeply into these questions. It ultimately merged its grant-making and investment staffs into one team focused on deploying all the organization’s capital in support of its mission.

Impact investing is challenging because it requires shifts in both the skills and the culture of people who work at foundations and those who manage their investments. But with a deep commitment to the values that motivate our philanthropy and a willingness to question assumptions — our own and those of the people advising us — grant makers can put more, perhaps even all, of our assets into serving our missions.

Alex Haber is program manager for philanthropic services at RSF Social Finance in San Francisco.