Building an Impact Portfolio

Our strategy focuses on using all of our capital and all the financial tools available to us to invest in enterprises, which is where we believe the most measureable impacts happen. We are part of a growing movement of impact investors, values investors and others attempting to ensure that their investments maximize social and financial performance together. Learn more about the progress we have made in building our portfolio.

 

What are our investing principles?

We believe there are hidden costs and benefits to society when money is invested. Therefore, we have begun weighing the social performance and risks alongside our financial return expectations for every enterprise in our portfolio. Heron, along with others, is also collecting data and developing metrics so that we can invest in those social benefits and mitigate social costs as part of a long-term investment strategy.

Four main operating principles outline our thinking in broad brush strokes.

“Take an enterprise view.” At Heron, we see enterprises as the unit of impact because it is enterprises that employ people, use or abuse natural resources, serve community needs through their products and services, cause pollution and so on. An enterprise’s impact is not primarily its corporate philanthropy, promises of good behavior or even its return to investors. It is the manifestation of its operations, supply chain and products and services on people, place and planet.

Many investors think about their portfolios in terms of the various asset classes that they invest in, using modern portfolio theory to guide their choices. Investors use a variety of financial vehicles depending on the investment and the asset class. For example, they might invest in stocks or private companies through funds.

Yet, when you peel back the layers of financial instruments and intermediaries, nearly all of those dollars are invested in enterprises. Ultimately, whether you’re an accredited investor or an individual with a 401(k), your investment portfolio is a collection of enterprises that are putting your dollars to work for better or for worse.

Second, know what we own. If we don’t know what enterprises we’ve invested in, it’s impossible to know how they might be positively or negatively impacting society and the planet. Many financial vehicles don’t allow investors to know with any certainty what enterprises they own. Heron has been moving away from these kinds of investments in order to have greater visibility into our own portfolio.

Third, “all investing is impact investing” because every enterprise is having some kind of impact as it goes about its business. Often, enterprises are having positive impacts in some areas and negative in others. For example, a company could be providing well-paid jobs in a low-income community, but doing so by extracting a natural resource in a way that damages the environment and negatively impacts the health of people in the community.

Finally, we see investing as an influence strategy. Directing capital toward enterprises that are having a net positive contribution to society is one way Heron hopes to use our investments to help people help themselves out of poverty. We hope to help others invest with their values, help improve the quality and availability of impact data, and much more.

To read more about our thinking, check out our Investment Policy Statement or continue on to the Investment Approach page.

Why take an enterprise view?

When investing, Heron focuses on enterprises—meaning all forms of business in the economy—as the agents of change and impact. Investing with the overall needs of an enterprise in mind promotes the resilience that enterprises and their leaders require to succeed. We think that strong, positive impacts come from enterprises of all types that are stable, well-managed and well-capitalized. For us, a “home run” investment (a) improves a business’ ability to succeed, (b) allows it to build on its track record as a good employer, (c) is not creating outsized social problems, and (d) performs well financially for all parties to the transaction.

 

 

Investing in jobs is a complex effort in a world where mechanization and globalization are the norm. We also recognize that seasonality and macroeconomic trends will inevitably force enterprises to hire and fire people. Negotiating these challenges as part of an investment practice is complex and imperfect, but our view is that enterprises that take the long view, invest well and value their employees and communities also thrive over time.

How We Invest in Enterprises

While we are intensively involved in directly investing in a few individual enterprises (primarily nonprofits), most of our dollars are invested in enterprises indirectly, through funds. When we invest through funds, we try to maintain visibility into the enterprises within those funds.

Among the enterprises we invest in and the instruments we employ as an investor in those enterprises are:

  • Public companies
  • Government entities
  • Private For-profit companies
  • Nonprofit enterprises
  • Cooperatives
 

 

Our return expectations vary based on the nature of the deal and the enterprise. Click here for more information on the full range of financial tools we’re using at the moment.

Read more about our investment approach »

What have we learned from our initial examinations?

We did not build this impact portfolio from scratch, but started with an existing portfolio, which forced us to ask the question: How can we take better responsibility for what we own today?

In our early attempts at reevaluating, we chose to view our portfolio through a mission/non-mission lens. Eventually we had about 40 percent of our endowment classified as “mission-aligned.” This mission portfolio was comprised of various investment vehicles and tools; the common thread was that both social and financial criteria were used to identify investments.

When we chose to embark on the journey to 100 percent for mission, the next step was to take a look at what was held in the remaining 60 percent of our endowment, which at the time was passively invested through marketable funds intended to achieve diversification across the U.S. and non-U.S. (developed & emerging) markets.

Using a Bloomberg terminal and MSCI’s ESG (“Environmental, Social, Governance”) Research, we viewed our portfolio through an enterprise lens. We quickly learned a few key lessons:

1. Mission/non-mission overlap. Some enterprises (such as Google) were found in both our mission and non-mission portfolios, thereby calling into question the “percent for mission” distinction by investment vehicle.

2. Imperfect social data screens. Many companies included in the mission portfolio were selected based on false positive screens. For example, certain companies that we would perceive to be ”net extractors” through a social and environmental lens happen to rank very well on corporate philanthropy and community spending metrics (e.g. Halliburton). This drove us to rethink the types of screening factors used in our investment processes.

3. How to best optimize — divest or engage? At the time of examination, two of the largest employers in our non-mission portfolio were Walmart and FoxConn (a.k.a. Hon Hai Precision), both of which are rather notorious for their extractive employment practices. This finding led us to ask ourselves: are we better off divesting from such companies, or should we engage with them in order to encourage improved employment practices? Have opinions about this? Send your thoughts to: info@heron.org.

What's grantmaking got to do with it?

At Heron, we use Enterprise Capital Grants (or ECGs) as investment capital for growth-stage nonprofits.  Just like for-profit enterprises, nonprofit organizations need capital to grow. We therefore provide equity-like capital through ECGs, which are multi-year grants that we contribute to capital campaigns alongside other co-investors. ECGs usually range from $250,000 to $3 million and contribute toward campaigns ranging from $2 million to $20 million.

In our view, the most reliable social performance comes from socially contributory enterprises of all types that are stable, well-managed and well-capitalized. Nonprofits with good management teams, strong track records and market opportunities will most likely have greater positive impact if they are allowed to invest in things that will lead to long-term revenue.

Just as with our private equity investments, our equity-like investments in nonprofits are tracked for their social and financial performance.

What does 100 percent for mission mean?

To us, 100 percent for mission means taking 100 percent responsibility for the impact of the investments we have. Therefore, this is just a starting point, not a destination: we will continue to optimize our portfolio for social and financial performance together.

Even if all foundations invested all of their dollars toward mission, this would only comprise one percent of all assets under management. Without expanding the practice of investing more broadly with a lens that includes social performance, we will not achieve our mission.

What does success look like?

Success looks like an economy of employers who truly value and reward workers and an economy of investors that reward employers for doing so. We seek an economy that produces opportunities for poor people to help themselves out of poverty.

We recognize that in such a world, our dollars are commingled and the outcomes shared. The question of what success looks like is a tricky one in a world where increasingly metrics are everything, and where so many philanthropists feel as if they must defend their work or feel the need to take credit for individual outcomes.

Although Heron values social impact metrics, we feel that the need to attribute particular outcomes to particular dollars creates constraints on the kinds of impact that funders and social enterprises are willing to imagine and attempt. We are no longer willing to allow financial performance to be the dominant success metric and to constrain thinking about how we achieve social outcomes.

In a complex economic and social system, the success of an enterprise and its financial and social performance depend on a lot of factors, of which an investor's money is only one. Most investors do not care if it was their dollar or someone else's that led to financial gain; they are content in reaping the benefits of that gain. Social good should be treated no differently.

Portfolio Journey Status

See how Heron has moved our portfolio closer to 100% for mission.

By the year 2000, Heron's impact-oriented investments reached $15.8 Million, almost 6% of the Foundation's total endowment.

By 2006 Heron's impact-oriented portfolio reached 25% of the total endowment. The majority of these investments fell into market-rate fixed income securities managed by CCM and nine private equity funds.

By 2011, Heron had developed the underlying screening process and made a sizable investment into the U.S. Community Investing Index (managed by State Street Global Advisors). The USCII, combined with several private equity investments and a growing number of PRIs, brought the impact-oriented portfolio to roughly 40% of the endowment.

By 2015, Heron made major strides to exit our Blackrock positions and move into Aperio screened investments, as well as Breckenridge screened bonds. This pushed the impact-oriented investment portfolio to 70% of the endowment. 

On December 21, 2016, Heron completed a shift from other Blackrock holdings into Blackrock's new sustainable ETFs, thereby reaching the goal of having 100% of our portfolio in investments that are screened for impact—and kicking off a process of continual optimization for both social and financial performance.