Many investors, and in particular philanthropic foundations, want their investments to be aligned with their values. Putting this objective into practice and navigating the plethora of investment options available can be challenging for foundations, board members, and individual investors.

The Edwards Mother Earth Foundation (EMEF) is a philanthropic foundation that faced this challenge. In accordance with their mission of enhancing sustainability and addressing climate change, in 2014 EMEF decided to pursue an impact investing strategy for their entire $35 million portfolio.

This case study reflects in detail of the experience that EMEF had in implementing an impacting investing strategy. The study sets out reasons for their impact investing decisions, their use of environmental, social and governance (ESG) principles, and experiences with investing in illiquid private investments to advance their social mission. In doing so the case study provides a detailed roadmap for similar sized foundations and small institutional investors wanting to undertake a substantive impact investing strategy.

EMEF draws several conclusions from their process. The first is that converting to a throughly ESG-screened portfolio can be implemented in a matter of months, generating similar returns to composite bench marks. To do this, EMEF excluded several sectors including most fossil fuels, weapons, and nuclear power, split their investments between passive and active impact investment strategies, and selected specific bonds that advanced their mission.

In contrast, it has taken EMEF several years to deploy capital to private equity and other non-market strategies.
EMEF concluded that a traditional portfolio of stocks and bonds would not achieve their desired returns, and pursued illiquid long-term securities and private debt as a result.

This experience demonstrated the importance of relevant expertise among the foundation’s board, which EMEF initially lacked, in assessing and expanding investment options. In part to address this gap in knowledge, EMEF partnered with a public charity called PRIME Coalition, which assists philanthropists in making investments focused on climate change solutions.

Investing in illiquid assets revealed several challenges, including that constructing such a portfolio is time consuming and should be done over many years, many private market funds pursuing impact investing strategies may have large management fees, and returns from illiquid investments may not occur regularly. These are particularly important for philanthropic foundations that may be expecting regular annual returns to fund grants.

1. Foundations wanting to pursue 100% impact investing strategies aligned with their values can do so without necessarily sacrificing returns.
   
2. If a foundation or investor lacks experience with impact investing, a variety of specialist fund managers, charities, and advisors can assist in building a suitable portfolio.
3. Aligning a conventional portfolio of stocks and bonds with climate solutions and sustainability objectives can be done in a matter of months.
4. Impact investing in illiquid assets is challenging and should be conducted over multiple years.
   
5. Including illiquid assets alongside stocks and bonds may allow foundations to earn higher long-term returns while pursuing impact investing strategies.
6. An important tool in the impact investment toolkit is shareholder engagement. Foundations, as shareholders, can engage in numerous activities to compel better corporate environmental, social, and governance (ESG) practices.
7. Public equity portfolios can now be built such that they mimic the financial performance of composite benchmarks and incorporate a client’s values. Mission-aligned portfolios can display minimal tracking error after applying negative and positive screens.
8. Fiduciary responsibility does not end with maximising return and minimising risk, foundations can include an objective to invest assets in sustainable and impact investments, and this can be incorporated in mission and values.
9. Quantifying the non-financial impact of an impact investing strategy is a challenge, and methodologies for doing so are lacking.