As we continue our journey as an endowed foundation to use more of our assets in support of our charitable mission, one of the key steps we’ve taken has been to carry out an in-depth review of our Investment Policy Statement (IPS). This sets out how we go about investing our c.£170M endowment and we published the new version of that Statement in June 2024. In this first of a new blog series documenting that journey, Chief Investment Officer Andy Gnaneswaran shares his reflections on the process…
Charitable foundations are well-known for the broad range of activities that they fund – from supporting local community projects to financing medical research. They are less likely to be thought of as active investors. The nature and structure of endowed foundations means that, historically most invest their assets in a way that simply enables them to support their grant funding programmes. Typically, this means that only a small portion – usually around 5% – is used in direct support of their charitable mission. Many are now starting to be more active in considering how their assets are invested and giving that equal priority with considering how they use their grant funding pots. Here at the DMT, we aim to be one of those “pioneers”, working towards the aim of using all our assets to contribute towards our mission to support a healthier later life. We have now chosen to make this an important part of our investment approach, incorporated within our newly updated IPS. It has been a challenging journey, with three key lessons I’ve learned so far. I’d like to share them here…
1. Embed the foundation’s mission within investment time-horizons
The previous version of our IPS stated that the priority of the investment strategy was to preserve the value of our endowment. The policy wording followed a traditional private endowment approach, which, effectively, enabled the perpetual existence of the organisation. However, we felt that this didn’t truly reflect the endowment’s purpose. It was never to simply support the organisation’s indefinite existence, but rather, to enable it to fulfil its charitable mission. We felt that managing the endowment with the assumption that it should be indefinitely perpetuating, limited our ability to consider the full range of options of how to best use our assets to support our mission. This could include a range of possibilities – from fully spending down the endowment to support some potentially high-impact solutions in the short-term, to preserving capital and providing sustained support for researchers over a longer-term time horizon.
Involving the whole Board of Trustees in revising the IPS, rather than simply delegating the process to the Investment Committee, was essential in challenging some of the assumptions embedded within a traditional investment approach. The discussions helped the Trustees take ownership of the Policy and clarify the potential timelines surrounding the organisation’s existence, understanding how and where it could best contribute to research into healthy ageing, whilst also reflecting our organisation’s principles and values. Ultimately for DMT and our mission, 25-years was taken as the required time horizon for existence – enabling us to support the ageing research sector for a further generation. Importantly the policy stipulates “the objective of our investment activity is not to simply increase our wealth, but rather to … use our endowment in ways that enable us to do more for our mission.” This provides the flexibility for our Trustees to review the investment approach in the future and make changes to better support our mission, when required.
2. Define a risk appetite that is relevant for a mission-driven organisation
Many institutional investors set low risk appetites, seeking primarily to provide financial returns from their portfolios, leading to a preference for tried and tested investment approaches. However, charitable foundations do not need to be constrained in the same way; indeed, many want to try out more innovative approaches. Some foundations have highlighted how traditional investment approaches could inadvertently lead to reinforcing existing social inequalities, effectively working against a charity’s mission.
For us, the updated Policy reflects our willingness to push the boundaries and adopt approaches that could better contribute towards our mission, acknowledging these could lead to some divergence from market benchmarks. One example is our appetite for short-term volatility. As a long-term investor, we don’t consider this a key risk as we are able to tolerate potential market downturns and economic shocks. This enables us to prioritise managers who take long-term decisions around value and growth in their investment approaches.
When it comes to impact risk, we consider how our underlying portfolio companies can impact on our mission, either positively or negatively. So we take an approach of (1) Explain, (2) Engage and (3) Exclude. Firstly, we look to understand and explain the rationale for holding an investment. Secondly, we expect managers to engage with portfolio companies to influence their aims and actions positively. Thirdly, if we believe a company / sector is incompatible with our mission of healthy ageing, we look to exclude it from our portfolio. In 2019 we formalised the exclusion of tobacco companies, and more recently we agreed to set about excluding large oil and gas companies from our investment portfolio.
Many passive index products on the market include exposures to the largest oil and gas companies as standard. Leading charitable investors such as the Church Commissioners, have highlighted that these companies are not taking sufficient steps to address the issues that climate change presents. We concluded that continuing to invest in organisations which have failed to engage sufficiently in reducing the harmful impacts on people and the environment from their business, was conflicting with our mission. Therefore, in addition to our tobacco exclusion, our IPS now excludes “companies that generate a significant proportion of their revenue… from the extraction of fossil fuels”. The risk of divergence from market returns is one we are willing to accept, when weighed against the risk to our mission.
3. Give impact equal importance as risk and return
Traditional investment approaches are based on the risk-return trade-off principle, making decisions which typically seek to minimise the former, whilst maximising the latter. However, for purpose-driven investors there is a third aspect in decision-making – impact. All investments have an impact on people and the environment, be that positive or negative. Therefore, for mission-driven investors, it is important to understand how those investments impact on the mission.
Our IPS now requires investment decisions to balance three objectives: impact, risk and return. While setting risk and return objectives is straightforward, articulating relevant impact objectives has been more challenging. Our policy outlines our approach across public and private markets and impact focus areas, but it does have its limitations. Measuring impact across broad investment portfolios consisting of hundreds of underlying companies spread across sectors, presents a significant task. As a starting point, the policy helps ensure that the trade-offs between impact, risk and return are considered when making investment decisions. When it comes to delivering impact from our investments in line with our mission, ultimately our approach is to “understand the intentions of partners, using our resources to support those who share our values and principles.” We’re going to be saying much more about this when we publish our new Strategic Framework for 2025-30 in spring next year.
What next?
As we continue our journey of becoming an impact-conscious investor, we’re keen to share our learning along the way. If your organisation is interested in adopting a mission-aligned investment approach, the Impact Investing Institute’s guide for charitable foundations provides a great starting point. And for an opportunity to speak with other foundations on topic, register for the EIRIS event in October 2024, which will be focusing on “Utilising whole endowments for mission.”
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