What are some common ways foundations engage in impact investing?
Individual or one-off transactions—Small-staffed foundations can make investments sporadically as opportunities arise that align with their goals. This approach allows a foundation to be flexible; however, it may reveal capacity constraints because since staffing and structures are not designed to support frequent impact investing.
PRI approach—Some private foundations make only below-market rate investments that count as a part of their 5% annual payout. This approach consistently integrates impact investing into the foundation’s broader strategy while preserving capital. Foundations without in-house expertise can easily fill capacity gaps by bringing on outside consultants and practitioners to support PRI sourcing and due diligence.
Mission-related investment (MRI) approach—Mission-related investments (MRIs) aim to achieve social and environmental impact while targeting risk-adjusted market-rate returns. In some cases, a foundation’s existing advisor can support those transactions. Foundations commonly use MRIs in combination with PRIs or alongside screens (see next approach); it is less common for a foundation to use an MRI-only portfolio approach.
Hybrid PRI/MRI with screens approach—Foundations also may integrate socially responsible investments (SRIs) or integrate screens for environmental, social, and governance (ESG) factors. Taking a hybrid approach—incorporating PRIs, MRIs, and SRI and ESG investing—can require significant foundation capacity. In addition, this approach often requires integration and coordination of consultants and advisors.
Full portfolio activation—Foundations may choose to activate their entire portfolio through PRIs and MRIs, as well as SRI or screens for ESG factors. Full portfolio activation also can require substantial foundation capacity and often necessitates integrating consultants and advisors. In investing their entire portfolio, foundations may encounter challenges sourcing the volume of transactions required to invest available capital. Despite the challenges and capacity requirements involved, foundations that take the full portfolio activation approach are able to use all their available resources to achieve impact while realizing financial returns.