Field Notes: ‘New Perspectives’ on Crafting an Impact Portfolio

Based in Minneapolis, MN, the McKnight Foundation dedicated 10% of its $2 billion portfolio to impact investments in 2013. Particularly interested in the clean energy space, McKnight is hoping to accelerate a transition to “a low-carbon economy, ensure a clean and resilient Mississippi River and contribute to a thriving and sustainable region.” Like Heron, McKnight aims to invest in opportunities that support its mission while still generating substantial financial return. Goldman Sachs Asset Management recently interviewed McKnight's Rick Scott, vice president of Finance and Compliance.

Our thinking has evolved considerably, as our learning has granted us new perspectives on our approach to the broader portfolio. While McKnight started with 10% of our endowment dedicated to impact investing, we see value in using an ESG mindset in approaching both our dedicated impact investments as well as the entire portfolio.

Scott discusses how McKnight's view on environmental, social and governance (ESG) and impact investing has evolved:

Our thinking has evolved considerably, as our learning has granted us new perspectives on our approach to the broader portfolio. While McKnight started with 10% of our endowment dedicated to impact investing, we see value in using an ESG mindset in approaching both our dedicated impact investments as well as the entire portfolio. We have found more levers for advancing our grant-making goals as we look at our position as an ESG- and impact-conscious institutional investor with a $2bn endowment.

We see power in our role as: (i) an asset owner who can dictate how our capital is allocated, (ii) a customer of financial services with the capacity to request new approaches or products, (iii) a shareholder who can vote proxies and request better ESG transparency from companies; and (iv) a peer investor who can work with other institutional investors for a better regulatory framework at the SEC, or collaborate with other foundations on deals. So while our endeavor may have started with a keen focus on a subset of our endowment, this approach has seeped into our overall investment thinking. 

McKnight underscores the strong collaboration between their Investment Committee and philanthropic program functions, rejecting the notion that sacrificing return is necessary for significant ESG impact:

Like most impact investors, we demand both high-impact investment and strong performance, which drives a higher standard in the industry. We don’t see a binary “either/or” situation when it comes to achieving financial and social returns. It’s “both/and.” We work under the principle that we do not need to sacrifice return or assume outsized risk to achieve impact. There are certainly times we will knowingly make a higher-risk investment for greater impact. The guiding principle is to develop enough tools so we can choose the right one to get both the financial return and the ESG impact we want.

Finally, Scott addresses popular concerns that impact investing is too risky, especially for foundations concerned with maximizing programattic grants:

There are many risks to ESG and impact investing, but we should be mindful that traditional investing is risky too. Endowments with a mission face headline risk as well as the risk of their investments undermining the work they are striving to do year in and year out. With a shift to impact investing, however, you can cast your net too widely and risk losing focus on your core values by trying to incorporate every social or environmental challenge. As with traditional investing, risks can be minimized with credible data, independent analysis and diversity in the portfolio.

In the future, Scott anticipates that ESG screening and impact investing will become the norm in investing. In the next three to five years, he is prepared for financial services to gain sophistication regarding the “widespread materiality of ESG trends and practices,” diminishing the approach to ESG vehicles as a separate product class.

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