One Foundation’s Journey into Impact Investing: From Missteps to Success

 

There is a saying that “mistakes are the doorway to discovery.”

 

In investing, calculated risks are inevitable. And in a field where there are no guaranteed outcomes and negative results can mean losing money, experimentation can be especially intimidating. However, we at The Russell Family Foundation (TRFF) strongly believe that philanthropy should embrace a funding and investing framework that upholds mission-aligned financial management with positive social impact. The benefits of sticking to such a commitment far outweigh the risks.

 

From our first days, TRFF’s approach to all aspects of our work has been rooted in the idea of learning by doing. Founders Jane and George Russell with their family believed boldly in the power of the beginner’s mind. Experimentation and learning from mistakes remain essential components of TRFF’s impact investing journey today. We are grateful for the various “teachable moments” we’ve encountered in our journey, growing the Foundation’s portfolio from seven percent to nearly 75 percent mission-aligned investments in four years, as of December 31, 2018.

 

In the first blog post of this series, we explored the pilot stage, which offered a glimpse into the world of impact investing. Through the pilot, we gained precious knowledge that informed the next stage of our journey (more on that here.)

 

Moving beyond the pilot stage, we want to share some of the “instructive failures” that proved invaluable in shaping the successful impact investment strategy and process we have today.

 

In the early days of impact investing at TRFF, our program staff worked independently from the Foundation’s outsourced investment advisors. After a key misfire, we realized we could do better by combining our talents.

 

In 2006 and 2007, TRFF invested a total of $500,000 in loans with a two percent interest rate for five years to the Interra Project, a nonprofit promoting local sustainable businesses in the Puget Sound region of Washington. The funds were used to finance the expansion of the Project’s loyalty card, which was intended to provide a vehicle for consumers, merchants and nonprofits to foster a more socially and environmentally responsible economy. After making initial interest payments, the Interra Project began to falter. Unfortunately, the organization lacked several tools it needed to succeed, including sufficient capital, robust operational systems, adequate staffing and expertise in retail commerce. Interra ceased operations in April 2009, and the loans were written off as grants a few months later.

 

There were many reasons why this project, and in turn, TRFF’s investment, failed. Both the organization and the investment were overly ambitious. Though a ground-breaking initiative in many regards, it was weak in execution. At the same time, we as a foundation were not prepared to review or monitor such a complex enterprise.

 

As a result, TRFF conducted an objective post-mortem, revealing that our organization lacked the internal systems to fully evaluate such an investment. This eye-opening experience led us to change our internal processes for impact investing.

 

Thanks to the experience with the Interra Project, we knew we had to change the way our program staff and investment advisors interacted. We were excited by the possibility of impact, but needed to leverage our advisors’ financial and analytical skills.  In turn, the advisors needed to better understand our social impact goals.

 

This realization led to the creation of a new forum for evaluating investment opportunities, which we call the Mission Related Investment Committee (MRIC). The committee, established in 2010, includes TRFF’s program staff, finance staff and representatives from our investment advisor. The committee meets each quarter to vet new impact investment opportunities and share financial insights and program priorities. Thanks to this vetting process, we can evaluate potential investments so that we know we are putting our dollars in reasonably safe but impactful projects.

 

Today, our program staff work to establish mission alignment for each new investment opportunity. At the same time, our investment advisor conducts a rigorous financial assessment to gauge investment risk. MRIC reviews these findings at its meetings, and it then votes on whether to forward specific investment recommendations to the TRFF Investment and Audit Committee.

 

With these new responsibilities, TRFF’s program staff have expanded their roles beyond standard grantmaking and have gained new financial literacy skills. Our investment advisor has gained a deeper sense of TRFF’s purpose, important for recommending mission-aligned impact investments. This dialogue has led to better decision-making and stronger mission alignment across TRFF’s portfolio.

 

Although there were fumbles in the beginning, we regrouped, learned from our mistakes and eventually, met and exceeded our impact investing goals, outperforming our five-year blended benchmark by nearly three percent, as of December 31, 2018.

 

In my first year at the Foundation in 2000, Jane Russell said to me: “Richard, we don’t mind paying for your mistakes, we just don’t want to pay for the same mistakes again and again!”  With that spirit of lifelong learning, the doorway to discovery has opened and we have walked right through it into a financially more sound and successful impact investment program.