Making Sense of Mission-Aligned Investing for Endowments and Foundations

Importantly, the data supports this framing. The GIN, the Global Impact Investing Network, has done research that shows that roughly 90% of institutional impact investors actually target market rate returns and about 80% have reported financial performance in line or exceeding expectations with respect to those impact investments. So reported returns on impact assets have matched or exceeded non impact returns across nearly every asset class. Hello, everyone. I'm Amanda Novello, Associate Director at Commonfund Institute, and this is Espresso Chats, a podcast by Commonfund Institute where we deliver short strong shots of governance and leadership insight. Today, we're kicking off a new series here on Espresso Chats focused on mission aligned investing. Over the coming episodes, we'll be digging into how boards and investment committees are thinking about aligning their portfolios with their mission, as always aiming to explore the opportunities, the challenges, and the practical questions that come up along the way. I'm especially excited because joining me as both my guests today and co hosts for this series is my colleague, Caroline Greer, Managing Director at Commonfund. Caroline brings deep expertise in guiding clients in mission aligned investing at any stage. So, Caroline, thanks so much for joining me today. Thank you for having me, Amanda. So, let's kick off. Tell us what you do at Commonfund, and particularly about how you work with clients in mission aligned investing. Sure. I lead our mission aligned investment research across asset classes, and what that means is that I work directly with Commonfund's outsourced CIO teams to build customized impact programs for endowment and foundation clients. The OCIO team owns and leads each client relationship, but my role provides that specialized expertise and support specific to mission aligned investments. The scope of what clients need varies very widely, and I'm here to help guide them and the OCIO team through a process to get to the endpoint that they are seeking, regardless of what that may be. It can be as simple as helping consider governance issues around ESG or portfolio restrictions, or as detailed as guiding clients through the process of establishing investment opportunities aligned with their mission. Another thing that I aim to do with the OCIO team is be a resource for best practice questions around mission aligned investing. I collaborate or And Commonfund collaborates with Capshift, which is our outsourced impact investing provider. And we can go into more details about that at a later stage. But they really help support this process and serve as an extension of the Commonfund team to bring these specialized investments to bear. you so much. That's helpful context. You mentioned a few terms, so I want to start with some fundamentals. How do you define mission aligned investing, first off, and how might that relate to the other terms that you may have mentioned and terms that are, you know, thrown around in these conversations, ESG, impact investing, or the range of other terms that people use? Yes. There's lots of terminology out there, and it can get confusing. We use the term mission aligned investing as an umbrella term. We're very deliberately broad about it because clients arrive with very different starting points and vocabularies that encompass a spectrum of application from program related giving to screened investments and ultimately to fully aligned impact investment portfolio construction. In terms of an ethos with respect to mission aligned investing, our philosophical approach is adapted from the Global Impact Investing Network, or generally referred to as the JINs, definition of impact investing, meaning that these investments are intended to generate a positive, measurable social and or environmental impact alongside a financial return. It's applicable across asset classes and underlying this effort for those clients that are interested in that more fully aligned portfolio, we have a commitment to measure and report the outcomes. There are four defining characteristics to mission aligned investing for us. As I mentioned, that positive social and environmental focus, an expectation of financial return if within the endowment or foundation, that flexibility across asset classes, and ultimately that measurement and public reporting. Related terms to get to the second part of your question, Amanda, are narrower but within that spectrum. So, we hear the phrase ESG integration, meaning environmental, social, and governance integration factors. These tend to be factors that are inputs into a risk return analysis for a portfolio. You may have a client that wants to lean into environmental factors such as a low carbon exposure or social factors, such as ensuring appropriate treatment of workers in the industrial environment. Another area of terms is values alignment or exclusionary screening. And these are really meant to keep the portfolio consistent with the mission. So for instance, we have religious organizations that want to align their values with their investments, and they may screen out exposure to certain industries that they feel do not meet their objectives. So there we're building an exclusionary screen to align with that mission. And then finally, impact investing, as I mentioned earlier, is that intentional capital that is allocated toward that defined outcome with the tracking element. That was a really helpful foundation setting. I hope everyone's following all of the terms, and we'll get into some more examples throughout the series. So, follow along. I want to get into some more practical details here. So, you work with a number of clients, but when someone comes to you kind of in the beginning of their mission aligned journey and first raises this desire for a more mission aligned portfolio, what does that conversation often sound like? And what do you think the key questions are that people should be asking to explore those first kind of practical steps in the direction towards mission alignment? Yeah, thanks, Amanda. You know, often the conversation starts with a board member or a new committee chair, who brings up a topic at either a board meeting or an investment committee meeting saying something along the lines of shouldn't our investments reflect what we actually do as an organization? Sometimes this can be prompted by a specific event or a controversial holding within the portfolio. A donor may ask a question of the organization and they feel like they have to respond and think about it, or they may see news reports about peer institutions that are doing something along the same lines, and they, you know, feel compelled to explore that as a possibility. When this happens, we move into a fairly structured, process with the client, and this process is drawn from international standards set by the Impact Management Project and, the International Operating Principles for Impact Management. These were created, about eight to ten years ago to help standardize the process of making mission aligned investments to reinforce the the exchange of knowledge with respect to impact investments and mission aligned investments, and to, improve the sort of, rigor and, operational structure around these investments. So the first thing we do is we establish the organization's social and or environmental priorities. This comes through conversations with staff, the investment committee, board dialogue. We may also conduct surveys to get independent views of how the key members of the organization think about the application of their mission with respect to investment. And key questions at this stage that come up are things like, what is the mission concretely? What does the organization actually do day to day? Is the goal to keep the portfolio consistent with the mission, to actively advance it through capital deployment, or both? And other questions might be, where does this priority sit relative to their fiduciary duty to the corpus? And has the board reached consensus on on this? We also want to understand who on the committee cares the most, how much, is the enthusiasm unanimous or is it being dominated by a single board member that's calling for a rollout of a different plan? So lots of communication involved to really understand where the organization is. The second thing that we would ideally do, and I'm really speaking here to an organization that is most committed to incorporating impact investments as opposed to just making sure that they have screens that align their values. The second thing we want to do is develop what's termed a theory of change. A theory of change is just a short way of describing a framework that will guide and measure future decisions with respect to impact investing. Identify the problems that the portfolio is going to target, the beneficiaries of that objective, and the expected contributions from underlying managers to meet that objective. The next thing we want to do once we've gone through that process is to understand what the organization already owns. So we review the current portfolio using tools like Clarity AI, which looks into the marketable components of a portfolio. We'll do a qualitative review of private holdings and will include an inventory of any exclusions in the portfolio and and know what might be genuinely uncomfortable to hold going forward as well as what they already hold. If they want to continue and dive deeper, then we will help the client develop mission aligned categories of focus that incorporate that theory of change and the baseline review of the portfolio and create a clear implementation timeline and plan for how we will build that exposure into the portfolio and how we will plan for the outcomes that will be measured over time. Now, with that foundation set, none of the listeners of this podcast can say that they don't know where they'll be starting or what the process is like. I hear a lot of key questions that could come up and pathways to moving forward. So, thank you for laying that all out. I feel like it's important in these conversations to do a little bit of myth busting because since it's such a rigorous process and you need a commitment and a theory of change, and it really takes this type of collaboration coordination to kind of set that strong foundation, it can be easy perhaps to get derailed by some common misconceptions perhaps around, you mentioned fiduciary duty and trade offs. So, I just wanted to ask if there are any misconceptions that often come up that you have to kind of work through or explain to folks kind of where to go from there. Absolutely. I can think of three misconceptions right off the top of my head that we, as an organization and more broadly within the impact investing community, come up against. And the most common one is treating mission alignment and financial performance as competing goals. And I alluded to this earlier. Financial return sits on the same continuum as mission focus, as risk tolerance, resource capacity, liquidity. It's just integrated into the set of considerations that we take with respect to these investments. If a client has an objective of market rate returns, we will incorporate that objective into those mission aligned investment searches. And importantly, the data supports this framing. The GIN, the Global Impact Investing Network, has done research that shows that roughly 90% of institutional impact investors actually target market rate returns, and about 80% have reported financial performance in line or exceeding expectations with respect to those impact investments. So reported returns on impact assets have matched or exceeded non impact assets returns across nearly every asset class. And the only exception has been public debt where it simply matched the expected returns. A second misconception, I think, involves risk. Mission aligned investing does introduce a second dimension of risk tolerance. It's impact risk alongside financial risk. And boards benefit by evaluating both as explicitly as part of the same framework. In other words, when you're making impact investments, you have a risk that you may not achieve the impact that you are seeking. And so we have to take as much time for that assessment as we would for the underlying financial risks that we usually take into consideration. So impact is not risk free. It is something that has to be considered. The impact, in some cases, you could have unintended consequences to objectives to do good. So these are the types of things that we have to keep in mind. A third misconception, is particularly dear to my heart, is that investors and committee members may treat a theory of change as kind of an optional exercise. A theory of change sets the investment parameters that the committee and the advisor both rely on, and it holds particular value later when results are being evaluated, sometimes years down the line, by a committee that may have changed in composition. So we find it extremely valuable. It clarifies in everybody's minds exactly what we're trying to accomplish. Amazing. So, are challenges, but clear ways, whether it's lifting up research and findings in the field to kind of just having a standard process for working through these issues. I'm conscious of time. So, last but not least for today, I want to ask what's exciting to you about this work. Is there a theme that seems consistently impactful and accessible to investors or a success story that you might want to share? Oh, what's exciting? Well, two things stand out. First, the demand trend. The GYN estimates that $1,600,000,000,000 in global mission aligned assets now are active, up from about 1,200,000,000,000 in 2022. So that's an 11% increase in the past year alone. Within foundations, specifically our own 2025 Council on Foundations Commonfund study found that almost 30% of private foundations and 26% of community foundations now incorporate impact investing. And so this is clearly a multi year adoption trend and is very very exciting. The second thing that I think is really exciting is the client outcomes. One client's place based investing pro place based investing program, a health care conversion trust that is directing capital towards opportunities in its own community. Another education sector institution working to build entrepreneurship through a dedicated allocation to African managers paired with that diverse manager focus in its US portfolio. These are both examples of committees moving from an initial mission aligned focus to a durable measured part of how they invest. And in the latter case, the bespoke theory of change that we developed with the client was grounded in the university's own mission statement publicly available on its website. That pattern starting with one clear priority, building a theory of change around it, tracking outcomes year over year, that is what a well constructed mission aligned program is meant to produce, And it's the model we aim to bring to every new client engagement. Amazing. Yeah. And we can't forget the purpose of all of this work. It might not be as straightforward as a traditional investment scheme, but we're making real impact in communities. I think that it's really exciting. So, Carolyn, I think this was the perfect foundation for the rest of this series. And I'm really looking forward to the next few episodes. Thank you so much, Amanda. If you like this conversation and want to hear more from leaders in the field, visit www.commonfund.orgespressochats to view the full playlist and subscribe on your preferred podcast platform. See you next episode.