Kate Wolford: Shift to impact investing borne of deep commitment, rigorous debate

McKnight president Kate Wolford

McKnight president Kate Wolford

This March, McKnight announced its commitment to invest an initial $200 million, roughly 10% of current endowment assets, across four strands of impact investing. On the heels of a relatively quiet year of board and staff learning and program design, we have plunged into the vortex of an incredibly dynamic field of activity. I’ve been inundated with inquiries from prospective fund managers, invitations to a dozen seminars, and lots of related research.

Although the field is growing, impact investing is still finding its footing among foundations nationally. Since McKnight’s announcement, many foundation and nonprofit colleagues have asked how we arrived at our decision. One colleague wrote, “I cited you as an example of a foundation that’s figured out how to get going with an impact investing program (rather than spending a few more years handwringing about whether to do it!) So great to see you and others move from talk to action…” Although I appreciate the sentiment, I know our real test will be in how well we execute our approach, learning and adapting our practice while sharing our experience to contribute to the broader field.

In that spirit of shared learning, I offer a few thoughts on how McKnight got to this point. In the future, I’ll post updates on our progress and lessons learned in real-time.

McKnight isn’t totally new to this arena. The Foundation made its first Program-Related Investments in the 1980s. Different from a grant, a PRI functions as a low-cost loan, provided at below-market rates to strengthen the recipient’s mission-focused work. About five years ago, McKnight rebooted our PRI program — which by then had fallen somewhat dormant — and we’ve now invested about $21 million in PRIs aligned with goals in our Region & Communities and Mississippi River programs. (That’s in addition to grants totaling about $28 million last year across those programs.) Also, McKnight employs eight investment firms, representing over $1.3 billion of our portfolio, who are signatories of the UN Principles for Responsible Investment.

A combination of factors led McKnight’s board of directors to embark on a systematic learning and program design agenda around impact investing in 2013, including:

  • A family foundation to the core, McKnight’s very active board still includes direct descendants of the founders. Fourth-generation family members are keen to align more endowment dollars with program goals, mobilizing our “other 95%” beyond grant dollars. (Federal tax laws require private foundations to distribute just 5% of net investment assets annually for charitable and administrative purposes.)
  • In 2012, McKnight adopted a Strategic Framework focused on strengthening our adaptive leadership and credible influence, and signaling impact investing as an emerging interest.
  • Among McKnight’s staff and some grantees, interest has been growing to explore more direct market-oriented levers for change, alongside our longstanding policy work.
  • Given the Foundation’s major program commitment to accelerate the Midwest’s transition to a low-carbon economy, as well as growing global efforts to shift incentives and investments away from fossil fuels, timing seemed right for us to explore related tools and opportunities.

Recognizing value in Foundation-wide engagement, the board established a work group comprising our board chair, two directors who serve on McKnight’s Investment Committee, one director who does not serve on the Investment Committee, and several staffers representing key administrative, program, and finance functions. The board also hired consultant Imprint Capital to guide our process. During a year of intensive exploration, we learned about opportunities and challenges across asset classes, about the current field of impact investing, and about field enhancements philanthropy might be able to help incent or create. We explored a variety of ways to structure and staff a program. And we sought out the informed wisdom of philanthropic colleagues; for example, former W.K. Kellogg Foundation president Sterling Speirn spoke with our full board about Kellogg’s experience in mission-driven investing.

Although the work group was most actively involved, its members updated our board at each quarterly meeting, and the board focused its annual retreat around the topic. One huge retreat outcome was unanimous board approval to develop an impact investing program composed of four stands with initial allocations of $50 million each — Mission-Related Investments (Public Markets), Mission-Related Investments (Private Markets), Mission-Driven Investments, and Program-Related Investments. The board also agreed to extend our relationship with Imprint Capital to advise and support us in implementing the program.

These decisions were a long time coming and the result of deep learning and exhaustive conversations among our board and staff. Ultimately, I believe those conversations will emerge as our “secret sauce” — vigorous debate, and an inherent commitment to thoughtful implementation.

As implementation unfolds, interesting dichotomies arise. By design, our exploratory work group represented a breadth of philosophical and practical perspectives on impact investing. There remains both enthusiasm and a healthy skepticism about what we can accomplish, and whether we’ll meet the financial, program, and learning benchmarks we are setting for ourselves. For some, our ramp-up will probably feel painfully slow; others will insist that doing it right is more important than quickly deploying capital.

And although our process may feel “messy” at times, a constant churn of learning and refinement, we’ll do well to embrace this disruptive push and pull — messy, fast, slow, or otherwise — as precisely what it feels like to be adaptive leaders in emergent space.

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NOTE: McKnight does not accept unsolicited proposals for program-related or mission-driven investments.

KFWKate Wolford
President, McKnight Foundation