Aligning Investments with Impact: A New Frontier for Trusts and Foundations
by Sandy Carvajal, Impact Manager at Brightlight
As an impact investment firm, Brightlight has a unique vantage point to observe how trusts and foundations are driving meaningful change through both their grantmaking and investment strategies. However, bridging the gap between these two realms remains a challenge for many organisations. In recent conversations with leaders in the impact investing space, some fascinating insights emerged on how trusts and foundations can better align their investments with their missions to unlock greater impact.
The Current Landscape: Silos and Missed Opportunities
What we've observed is that many trusts and foundations still operate with an artificial distinction between their investment strategies and their impact goals. There's often one pot of money focused solely on maximising financial returns, while a separate pot is earmarked for grantmaking and impact. This siloed approach means they're potentially missing out on opportunities to amplify their impact across their entire portfolio.
As Mark from White Box Enterprises pointed out, "It's as if we have two doors to an organisation or one door that's got two pathways." And at the moment, those pathways rarely intersect in a meaningful way. This disconnect can lead to some puzzling scenarios - for instance, Mark shared that "it's probably easier for us to get grants for our fund than it is [to secure impact investments from the same foundation]."
Bridging the Gap: New Models for Impact-Aligned Investing
So how can trusts and foundations begin to bridge this gap? Our conversations with Fund Managers revealed several promising approaches:
Embracing Concessional Capital
One key theme that emerged was the power of concessional capital - investments that accept below-market returns in exchange for greater social impact. As Bryan from First Australians Capital explained, concessional capital can play a critical role in "catalysing the market where we see a market failure." Perhaps it's important for trusts and foundations to reconsider their understanding of market-rate returns when factoring in impact-risk protocols and building new markets.
However, we see that many trusts and foundations are still grappling with how to evaluate and incorporate concessional investments into their portfolios. There's often no framework in place for balancing financial returns with social impact, and investment committees may not have the right expertise to assess these opportunities.
Rethinking Portfolio Construction
Rather than seeing impact investments as a separate asset class, trusts and foundations need to start thinking about how to build holistic portfolios that deliver both financial returns and meaningful impact. As Mark suggested, "I think it's about building a portfolio of investments which includes impact investment, which includes concessional within that portfolio, so not just seeing a portfolio as 8% plus returns, but seeing a portfolio as delivering impact as well as higher returns."
Following Trusted Leaders
Tom from LendForGood highlighted an interesting trend of "followership models" emerging in the impact investing space. These models allow investors to access curated deal flow that has been vetted by trusted intermediaries. For trusts and foundations just starting their impact investing journey, accessing deals that have been recommended by experienced impact fund managers or platforms can be a great way to build expertise and confidence.
Overcoming Barriers to Progress
While the potential is exciting, our discussions also surfaced some key challenges that trusts and foundations face in aligning their investments with impact:
Measurement Complexities
Harry from Purpose Investment Partners raised an important point about the difficulties of comparing impact across different sectors and interventions: "We can't even benchmark between our investments like how do you compare, you know the benefit that we have in aged care to one in housing or one in education? It's just not possible."
We've observed that this can make it challenging for trusts and foundations to evaluate impact investment opportunities, especially when trying to fit them into existing grant themes or due diligence processes designed for traditional investments.
Organisational Silos
Another barrier we often see is the disconnect between investment teams and program teams within foundations. As Mark noted, "I actually think philanthropy and philanthropic trusts need to bring, you know, their incredible expertise together to make these decisions. The IC committee needs to work with the programmatic area to actually make these decisions probably in a way that they don't traditionally work together across the organisation."
Timing Mismatches
Harry shared a common frustration among impact fund managers - the mismatch between their fundraising timelines and foundations' internal capacity to deploy impact investment: "Often you know that you're having a conversation at the wrong time... your pitch deck lands on the desk of someone at a foundation and they say, 'Oh, we're just actually going through a process of setting our strategy on this, can you come back to us in 12 months,' and we're sort of like, 'oh, well, capital raise is the next three months.'"
Moving Forward: Practical Steps for Trusts and Foundations
So where do trusts and foundations go from here? Based on our conversations, here are some practical steps they can take to better align their investments with impact:
Be bold: As Harry emphasised, "Leaning into it... shooting for perfect, when sometimes getting started is the right way to approach it."
Build a diverse portfolio: Look for opportunities across asset classes, and if possible, consider market-rate impact investments and more concessional options.
Collaborate across teams: Break down silos by involving both investment and program staff in impact investment decisions.
Partner with experts: Consider working with experienced impact fund managers or platforms to access curated deal flow and build internal expertise.
Streamline processes: Look for ways to make decision-making more agile and responsive to opportunities in the impact investing space.
The Road Ahead: Exciting Possibilities for Greater Impact
As we reflect on these conversations, what becomes clear is the immense potential for trusts and foundations to drive transformative change by aligning their investments with their impact goals. By breaking down artificial barriers between grantmaking and investing, they can unlock new possibilities for addressing complex social and environmental challenges.
The journey may not always be straightforward, but the rewards - both in terms of financial sustainability and amplified impact - make it well worth pursuing. As Bryan so eloquently put it, this work is ultimately about creating "a more just, fair and equitable society where everyone gets to participate in the economy."
We encourage all trusts and foundations to take bold steps in exploring how they can align their investments more closely with their mission. Whether it's allocating a portion of their portfolio to impact investments, partnering with experienced impact fund managers, or rethinking their entire approach to portfolio construction - every step forward helps build momentum in this crucial field.
The future of philanthropy lies in leveraging all assets - financial, human, and social - to drive meaningful change. By embracing new models of impact-aligned investing, trusts and foundations can unlock their full potential to create lasting positive impact in the world.
Contact Ivan Chew, at ichew@brightlightimpact.com to learn how Brightlight can support your foundation's impact journey.