An under-the-hood look at Inspirit Foundation’s portfolio makeover: fired two investment managers, prioritized DEI

This story is part of the Future of Good editorial fellowship covering the social impact world’s rapidly changing funding models, supported by Community Foundations of Canada and United Way Centraide Canada.

In a soaring boardroom overlooking the confluence of the Red and Assiniboine Rivers, Mitchell Anderson debated with his colleagues at the Inspirit Foundation.  

“I’ve never seen it that heated at Inspirit,” recalls Jory Cohen, the foundation’s director of social finance and investment. 

It was May 2016, and Anderson was a member of the board of directors of the public foundation, then, worth $36 million and focused squarely on promoting inclusion and pluralism through the arts. 

The board meeting was focused on coming to a consensus on a tricky question: whether Inspirit should divest completely from fossil fuels, as part of the burgeoning Divest-Invest movement. Just five months earlier, the foundation had publicly announced its intention to invest its endowment aligned with an ‘100 percent impact’ strategy. And this moment put that commitment to the test. 

“It was challenging,” Anderson says. “The conversation around the climate transition is deeply political, then as it is now.” 

There was no disagreement amongst the board that transitioning to a low-carbon portfolio should happen, Anderson says, but there was “vigorous debate” about how to get it done. One group of board members argued for an explicit and immediate commitment to divestment from the top 200 oil, gas and coal companies. Anderson, for his part, was one of a cohort of board members who argued for something different: a “holistic review” of the environmental impact of the foundation’s entire portfolio. 

“I live in Saskatchewan,” he says. “I have family and friends who work in energy or energy-adjacent sectors. So it was why I thought, ‘Let’s be holistic about it. Let’s look at every investment as opposed to screening out one sector.’”

On that day, in the boardroom of the Canadian Museum for Human Rights, it was Anderson’s side that prevailed. And moreover, it has been this perspective — of a patient, ‘holistic’ approach to impact investing — that has guided the foundation’s journey, over the last six years, toward a ‘100 percent impact’ portfolio.

The pre-makeover portfolio: fossil fuels, Walmart and heavy financials

The foundation’s shift to an impact portfolio didn’t happen overnight. 

In 2014, there was an investment committee trip to a conference in Santa Fe, where Anderson and others learned the emerging social finance lingo and about impact investment possibilities. Then, the following year, there was an internal audit of the foundation’s existing investments. 

“The results weren’t surprising,” says Cohen. “[But] we were displeased with the impact of our portfolio.” 

Inspirit’s portfolio at the time was pretty typical of what you might find at any other foundation. They had investments in big and small Canadian companies, a whack of government and corporate bonds and investments in a bunch of big global companies. Some of these investments the board’s investment committee deemed to be just fine, like bonds with Ontario or Quebec. 

Others, however, raised eyebrows. 

The foundation had holdings with a troupe of major fossil fuel companies, including Exxon Mobil, Chevron and Husky Energy; in large, socially-dicey multinationals, such as Walmart and Nestlé; and in major Canadian financial institutions, such as RBC, Scotiabank and CIBC, which are significant investors in fossil fuel companies. 

With this knowledge in hand, the board got to talking, wondering aloud together about what a different portfolio could look like. 

“We started having these conversations about, instead of just using the 5 percent or so that we grant every year, what about [using] the whole 100 percent [of our investment portfolio]? How do we use all of that to advance pluralism?” Anderson says. 

This deeper questioning was spurred, in part, by a wave of new, more diverse board members joining the foundation.

New board members offer ‘different sets of assumptions’ about investments

“The board that I joined, it was a lot of people, you know — senior partners at Toronto law firms and a former [Mayor] and people with the Order of Canada,” says Anderson. “Very distinguished, but of a certain era.” 

Anderson joined the board in 2012. At that time, many of the existing board members had recognized the benefits of adding new perspectives to the team and were engaged in a determined campaign to “transition power from one generation to the next,” Anderson says. 

By 2015, as the Foundation inked its first first impact deals, the board was about half new, more diverse members and half long-standing members. This created very different sets of assumptions about what was possible with the foundation’s investments.  

“The issues we face are so timely and so real, for so many of us on the board. They’re not abstract. They’re our everyday life,” Anderson says. 

Anderson, for his part, is a member of the English River First Nation and a minister with a United Church in Saskatoon. He’s also a guy for whom the importance of alternative investment is personal.  

When Anderson’s parents were in high school, his mom became pregnant with him. “My dad needed to get a job to help pay for the baby food. And to get a job he needed a vehicle,” Anderson says. His father turned to the bank, Anderson says, but they wouldn’t offer him a loan. Fortunately, Meadow Lake Credit Union, a local alternative lender, was willing to offer a loan to help his father purchase a vehicle. “There was a business that decided that it was worth taking a risk on this fellow,” Anderson says. “The loan got paid back. They made a profit. And they changed my dads’ and my life, because they were willing to do business differently. 

“When businesses are willing to behave differently, we get different outcomes.” 
 

From ‘dabbling’ in impact investing to ‘100 percent impact’

In 2014 and 2015, the foundation made its first impact investments in several socially and environmentally-focused funds. Dollars flowed to the Community Forward Fund, which provides loans to Canadian non-profits and charities; to Renewal, which invests in sustainability-obsessed consumer product and environmental technology companies; and to InvestEco, which invests in sustainable food companies like MamaEarth Organics, and Organic Meadow. 

The investments weren’t huge. By the end of 2015, the foundation had about $1.5 million (4 percent of their total portfolio) invested in these sorts of high-impact ‘private market’ impact investments — but they were mighty, and helped to demonstrate to the board what was possible, whetting their appetite for more.  

In October 2015, they hired Cohen, who had been running the Youth Social Innovation Capital Fund, an impact lender that Inspirit had been scoping as a potential investee. They also had meetings with several foundations leading the way in impact investing to learn from them. And, crucially, they commissioned a report, analyzing the potential financial returns of a ‘100 percent impact’ portfolio. 

“We [learned] that if we invested our asset base for impact we also increased the potential for higher financial returns over the short and long-term,” Cohen says. 

In late 2015, the board met and committed to shift to ‘100 percent impact’ — agreeing that 10 percent of their endowment would go toward high-impact private investments (like InvestEco and Renewal) and that they would “apply impact investing tools” to the other 90 percent of their portfolio. (More on this later.) 

“The meeting wasn’t contentious,” Cohen says. “There was unanimous agreement.” In January 2016, with a flashy report, the board publicly announced their intention. 

Now, there was just the small detail of pulling it off. 

‘Threw out’ traditional portfolio, fired investment managers and pursued DEI 

There was no road map for ‘100 percent impact’. Few foundations had done it before and so the Inspirit team was largely starting from first principles. 

The first step in their process was to redesign their investment policy — the document that guides investment managers who are hired by the foundation to make investments. In doing so, they started with the impact that they wanted to create. 

Their north star became the foundation’s mandate to promote inclusion and pluralism. 

They did research and identified four key conditions that increase the chance of an inclusive and pluralistic society: increasing livelihoods, supporting climate change solutions, building community infrastructure and increasing access to arts, culture and services. They then mapped these onto the United Nations Sustainable Development Goals, giving a rubric against which to assess the impact of all of their investments. 

“We didn’t just tweak a benchmark and go ‘best-in-class, low-carbon [investments]’ and ‘best-in-class high-ESG [environmental, social, governance]’. We threw that out and we had to recreate it,” says Cohen.  

In the transition to impact, they sought investment advisors with specialized expertise in particular ‘asset classes’ (big Canadian companies, bonds, etc.) In 2018, they released an RFP, looking for advisors who could manage their impact-oriented bond portfolio. And over the next two years they repeated the process, but for their global investments and their Canadian investment portfolio. 

Over these three years, they fired two of their previous asset managers — their impact credentials just weren’t up to snuff. And they used the process to try and make the finance industry more inclusive and pluralistic. 

“The investment sector is very male and very white,” Anderson says. 

To promote an inclusive shift, Inspirit put DEI (diversity, equity and inclusion) metrics in their scorecard for assessing asset manager’s proposals. And, with each firm that they decided to work with, they included a contract clause that stipulates that firms must work toward advancing DEI within their own company. 

On this point, Anderson says that they haven’t “drastically changed the investment sector,” with their foundation, but they have, he says, pushed investment CEOs on their definition of inclusion (from counting the number of women in management, to also considering disability, sexual orientation and gender identity). 

And DEI wasn’t the only way that the foundation’s new impact orientation required the sector to adapt. 

When they searched for investment advisors, they were unsatisfied with existing investment products on the market, so firms created new ones just for the plucky, mid-size foundation. 

For their bond portfolio, Addenda Capital created a new high-impact bond fund just for them. And the same was true with their global equities portfolio, where CI Global Asset Management created a new Impact ETF. 

Portfolio reveal: goodbye, fossil fuels, Canadian banks and insurance; hello, higher returns

In keeping with the decision made at their meeting in Winnipeg in 2016, Inspirit didn’t require their asset managers to divest from any one sector or industry. 

“We didn’t go in saying you can’t invest in these sectors. We wanted the best solution to meet our needs. And it so happens that the best solution for high-impact and low-carbon doesn’t include major Canadian energy companies or financial institutions,” says Anderson, who became Inspirit’s investment committee co-chair in 2015. 

Today, their portfolio has no fossil fuel holdings, nor any high-carbon investments with Canadian banks or insurance companies. (A close-read of the foundation’s investments shows that the foundation does have holdings with both Sun Life Financial and Manulife, but Cohen says that both of these investments are in green bonds issued by the respective institutions.) 

In Canada, divestment from fossil fuels is rare. Rarer still, is divestment from banks or insurance companies, but Anderson says that it just made the most sense, given the foundation’s commitment to pluralism.  

“Canadian financial institutions are still funding a high-carbon, low-impact economy and so that’s why they didn’t make a suitable investment at this time,” he says. 

And, it seems that the higher-impact approach is paying dividends, not only in reducing the carbon-emissions of the foundation’s investments, but also in financial returns. 

“My big story here is that we’ve transitioned essentially our entire portfolio to impact and we’re making more money because of it. We are outperforming our benchmark,” Cohen says. 

Since the foundation began it’s impact investing journey in 2014, it has outperformed the non-impact benchmark in five of eight years. 2020 was a banner year for the portfolio, out-performing the benchmark by 7 percent (and netting a return of more than 16 percent). 

“You increase your impact, you align your assets with your mission. And look, you’re actually outperforming financially,” says Cohen. 

No doubt, it’s compelling stuff, but I’m always a little suspicious when things seem too good to be true, so I put a couple of tough questions to Cohen and Anderson. 

Can you really call it a ‘100% impact’ portfolio if you’re invested in Kimberly-Clark? 

Eight and a half years ago, as the Inspirit board was first learning about impact investing, I was beginning my own journey with social finance. It was May 2013, and I was a basket of nerves, as I walked toward the MaRS Discovery District, on College Street in Toronto. The building is imposing in its beauty — all exposed brick, glass walls and soaring ceilings. It was my first day at my first job, post-university graduation. And I felt about a million miles out of my depths. 

I’d been hired by MaRS to manage SocialFinance.ca, a now defunct blog that covered early news of the burgeoning impact investing sector. And in my first few weeks on the job, I tried to wrap my head around what an ‘impact investment’ actually was. 

What I learned was that an impact investment was any investment that created a positive social or environmental impact and generated a financial return. People were jazzed up about investments like SolarShare — a co-op that creates solar projects to fuel a green transition; and about the Centre for Social Innovation’s community bonds — a finance tool that allowed the socially-focused co-working space to fund the acquisition of their office buildings. 

That’s why I was a bit surprised when I looked under the hood of Inspirit’s ‘100 percent impact’ portfolio and found Kimberly-Clark, the Keelex manufacturer, Sherwin-Williams, the multi-national paint company, and Colgate-Palmolive, makers of Speed Stick deodorant, Irish Spring soap, and Colgate Total. 

Yes, I’ve been out of the impact investing game for several years, but has the definition slipped so much during that time that it now includes multi-national paint companies? I put this to Cohen. 

He said that while each and every company in their portfolio might not meet that strict impact investment definition that — at the whole portfolio level — it does. 

In defining their impact standard for their ‘public market’ investments, Inspirit required their advisors to invest in companies where at least 50 percent of the company’s revenue is earned engaging in activities that contribute to the SDGs. For instance, to be counted as an impact company, more than half of Sherwin-Williams’ revenue would need to be achieved by, for instance, helping to ensure responsible consumption and production, or promoting decent work and economic growth. Cohen says that some companies may not individually meet that threshold, but that they do, on aggregate — at the portfolio level. 

“So for something like a paint company, you can probably — I mean, I’m sure they’re high-performing ESG and they’re low-carbon, but in terms of exposure to the SDGs, it’s probably very limited,” he says. 

Cohen says amongst their five categories of investments it’s toughest to find high-impact companies in their ‘global equities’ portfolio, which houses the big, multi-national ones, like Kimberly-Clark. He says that in order to achieve higher impact, they’d likely need to invest in smaller public global companies. And to achieve the highest impact, they’d need to make more private market investments (like with SolarShare or CSI’s community bond). 

It’s always a bit awkward to ask people questions that suggest that they could be doing better, but that’s the job, so I press. I ask Cohen why the foundation doesn’t make those switches, investing in smaller global companies or more private market deals? 

He says that while private market companies offer better impact, the foundation needs to invest in public companies for three key reasons: to reduce risk, improve financial performance, and ensure that the foundation has enough cash on hand to pay their bills and give out grants.

About 20 percent of Inspirit’s investments are private market impact investments, Cohen says — a much higher percentage than most investors. (Inspirit was in fact an early investor with SolarShare, with CSI’s community bond, and with many other community-rooted investment initiatives). But while these investments have performed well, both socially and financially, they often lock capital up for five or ten years. As a granting body, the foundation needs ‘liquid’ funds to donate to their grantees, something that could be tricky if they held only private-market investments. 

Moreover, private investments can come with higher risk. When you invest in an exchange traded fund (ETF), as Inspirit does with their global equity fund — your investment is sliced up and re-invested into dozens of other companies. One company might have a rough year, but another might be a star, reducing the overall impact of any one investment on your portfolio. 

I more or less buy these two arguments, but I wonder, what about changing the third variable — the foundation’s mandate to achieve a 5-6 percent financial return on their portfolio each year? 

Targeting a 1-2 percent annual return might require giving out less grants over time. But in the long-run, couldn’t the impact be greater, if their main leverage point really is the bulk of their investment capital? 

But Cohen says that’s not on the table. “There isn’t really an appetite to sacrifice — to go deep under the benchmark to create positive impact, because we think we can create positive impact by either tracking the [financial] benchmark or even out-performing it a little bit,” he says. 

On this point, he encourages a look at other, perhaps higher-impact companies in the foundation’s portfolio, such as Vestas, a Danish company that makes wind turbines, Boralex, a Quebec company that produces solar, hydroelectric, and thermal energy, or WELL, an Vancouver-based company that develops healthcare technologies. 

‘Gone further than divestment’

Earlier this year, Anderson was named the chair of the foundation’s board. And in an interview in December, he expressed satisfaction with the decision the board made in 2016 to defer an immediate commitment on fossil fuel divestment in favor of engaging in the long, slow work of moving toward a low-carbon, impact portfolio. 

“I think in the end, we’ve actually probably achieved better carbon reductions in our portfolio because of that holistic approach. It was less satisfying at the moment, but probably better in the long run,” he says. 

He says that the board will continue to review the impact that they’re creating, constantly tweaking to align with the strategies that can support the foundation to best achieve their vision of a pluralist society. 

And he’s bullish on the belief that every single other Canadian foundation should be doing the same. 

“I just believe to the very core of my being that we can live in a different society — one with lower carbon and with more care and inclusion. We just need to want to do it and to make it happen,” he says. 

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