Go Big, But Go Slow: How McKnight Is Approaching Impact Investing

Years from now, we may shake our heads in wonder at foundations that didn’t bother to put their endowments to work to improve the world and instead invested in whatever would make them a steady buck, including companies doing bad stuff. Duh, we’ll think.

That future sure seems to be coming in fast right now, with impact investing gaining more adherents all the time and even the White House now pushing things along. One of the biggest new converts is the McKnight Foundation, which last week announced an initial commitment of $200 million in impact investment strategies.

This is a decent chunk of change, representing about 10 percent of the foundation’s current $2 billion endowment.

McKnight’s impact investing will be targeted at aiding the transition to a low-carbon economy and increasing regional development in the foundation’s native Minneapolis-St. Paul area. The shift is the result of a year-long exploration by McKnight’s board and staff of a question that every foundation should be wrestling with: How do we align the way we manage that big pile of endowment money with the program work we do every day?

What emerged at McKnight was a conviction that the foundation should stop compartmentalizing these two parts of its work. As board chair Ted Staryk said, “foundations no longer need to choose between financial returns and programmatic returns. Increasingly, there are opportunities to accomplish both at once — aligned with mission and without concessions on returns.”  

If you take a look at McKnight’s stock holdings as of the end of 2012, you can see why there might be a keen interest within the foundation to achieve more alignment. Even though McKnight is a leader on climate change in the Upper Midwest, it owned shares of ExxonMobil, ConocoPhillips, and Chevron, as well as other energy companies. McKnight was also invested in two of America’s worst low-road employers, Walmart and Yum! Brands, as well as major banks that have been implicated in financial scandals like Goldman Sachs.

Of course, this sort of thing is typical for major foundations, a situation long overdue for scrutiny as advocates on climate and other issues are turning more to disinvestment strategies to pressure socially irresponsible companies. And on a practical level, it's not so smart for climate funders like McKnight to hold oil stocks when their program work, if successful, will drive down the value of those stocks. 

McKnight’s communications director, Tim Hanrahan, says the foundation has no plans to quickly shed its investments in fossil fuel companies or anything else. Instead, it plans to go slowly, “starting by learning as much as possible—first getting a deep, shared understanding of the full context of our investments, considering both opportunities for greater impact and any potential misalignments... whatever we do will be informed, intentional, and supported across the board.”

The foundation is looking to hire new staff to manage its impact investing and help figure out the whole process. I can see the logic of going slowly, given that this terrain is new for McKnight. On the other hand, just how much “learning” is needed to see how weird it is for a climate funder to be into oil stocks, especially after mulling things over for a year already? Climate advocates, after all, keep telling us that we’re in an emergency situation and knocking anyone who’s dragging their feet.

But back to the bigger picture, which is that McKnight is staking out a leadership position on impact investing, which is significant, given both the size of the foundation and how far they seem to want to take this.

One last thing worth noting, though, is the broad way that McKnight defines impact investing, a concept that remains rather loose. Such investing, according to the foundation, includes both putting money into stock and bond funds that are oriented toward social and environmental impact, and also direct investments that specifically advance the foundation’s program priorities.

So while some people think of impact investing as the more narrow kinds of direct investing, such as MacArthur's $26 million investment in an energy efficiency initiative, it’s worth keeping in mind the broader definitions also in play.

Is the fuzziness here a problem? Maybe, since the riskiest (and arguably most impactful) kinds of impact investing are represented by what MacArthur just did, while a broader definition can be seen as allowing other funders to talk the talk without really walking the walk.