By Kirsten Andersen and Nancy Reid
We hear this story over and over again. An investor – let’s call her Janice – wants to make an investment in a social or environmental initiative she’s heard about. Maybe it’s a solar energy project, a community loan fund, or a small venture fund backing entrepreneurs of color reimagining the future of work. She doesn’t want to make a mistake, though, and so she runs the investment by her financial advisor. And that’s where the conversation ends, because the investment turns out to not be a good fit.
Sometimes an investment truly isn’t a good fit. It’s too risky, too illiquid, or too weird to fit nicely into an existing investing framework. Maybe it really isn’t a good idea for Janice to pursue this idea.
But often, the reason Janice’s financial advisor won’t approve an investment with a social or environmental focus – an investment that seeks to do well and do good – is that her advisor is following a set of instructions that prohibit them from doing so.
Ironically, Janice probably signed off on those instructions herself. They are part of a document called an Investment Policy Statement (IPS). An IPS is where investors and their investment managers document their agreed-upon investment objectives, risk parameters, liquidity needs, and asset allocation. It’s the job description for your wealth managers, a guiding document for difficult decisions, a communication vehicle between a client and their advisors, and a decision-making tool.
You probably have an Investment Policy Statement (IPS) too. We recommend digging your IPS out of your files, or requesting a copy from your financial advisor. What does it say? It probably says roughly the same thing everyone else’s says: maximize profit, minimize risk.
You may be thinking that maximizing profit and minimizing risk is good! And it is – especially if these instructions govern money you’ll need to retire on, or money that is being invested for the benefit of a special needs child.
For many investors, though, these instructions are incomplete. What’s missing from these statements is as important as what is present. By omission, your IPS says that you prioritize maximizing financial return at any expense. And because of this, our economy churns forth according to the default settings of the financial industry, often at the expense of people and planet.
Of course, profit is the basis on which our entire economy is built, and everyone has their own ideas and feelings about where tradeoffs can and should be made. Contributing to this complexity is a culture that does not encourage us to discuss purpose and profit in relation to one another. But we can make progress through an investment policy statement that integrates all of the outcomes that matter to an investor, not just the financial ones.
Aligning purpose and profit
Purpose and profit can co-exist in a broad array of ways. From pension funds recognizing the climate risks inherent in traditional oil and gas investing, to investors buying laddered Certificate of Deposit (CD) portfolios from Black-owned banks, each investor has their own sense of what risks and outcomes matter most to them.
Our work is focused on helping investors craft investment policy statements that reflect the precise ways in which they choose to integrate their philanthropic values into their investment approach. Many investors find it strategically essential to revisit and update their investment policy statements, including:
Families whose kids and grandkids are alienated by the idea that their inheritance funds political lobbying, fossil fuels, or private prisons;
Foundations wanting to avoid the reputational risk associated with certain investments in their publicly available 990 forms; or
Individual investors simply seeking to create integrity and harmony on both sides of their financial life.
Some of these investors may have philanthropic plans, mission statements, and strategic support teams to maximize the positive outcomes of their philanthropic giving. But the people who make decisions about the core assets – which may be 95% of a family’s wealth – are reading from a very different page. As long as your philanthropic intent remains documented in a vision statement instead of being integrated into your investment policy, it won’t change how decisions are made on your behalf.
One family foundation’s journey
In the wake of the Black Lives Matter movement in the summer of 2020, one family foundation signed a pledge that called for racial equity across the investment industry. In part, signatories pledged to take racial justice into consideration when making investment decisions. But like so many other organizations, the question for the family foundation became: how do we implement this?
The answer was simple but not easy: update their investment policy statement, integrating their racial equity values into the decision-making framework from which their financial advisors work.
In collaboration with the foundation’s executive leadership and investment committee, we integrated the ideals and aspirations they had for their investments alongside the very real constraints of how their investment committee interpreted their fiduciary obligations.
The resulting document introduced the foundation’s values into a tool that investment advisors are familiar with and utilize in their work. By building a common language with their advisory firm, the IPS served as a place from which to begin conversations about the social or environmental good the foundation wanted their assets to create in the world.
Why it matters
Equipped with an updated version of an Investment Policy Statement, investors are ready to have grounded and sometimes challenging conversations with their financial advisors about their portfolios. Should these conversations reveal major differences, the IPS can also guide a search to find an advisor who can implement the ideas that matter most to any particular investor.
We are not evangelists for any particular issue or investment approach. What we listen for are the specific issues you want to use your power as an investor to influence: climate solutions, the governance or employment practices you care about, the people are who make money from your money, or something else entirely.
Because whether we like it or not, the world is shaped in large part by businesses, and businesses report to their lenders and shareholders. If you want to take responsibility for the decisions being made on your behalf, taking responsibility for your investment policy is a great place to start.
Nancy Reid CTFA and Kirsten Andersen PhD bring a breadth of experience with families and foundations to their work as independent consultants. Kirsten Andersen has a doctorate (PhD) in economic sociology, bringing a research-informed methodology to investment policy design. Nancy Reid puts her Certified Trust and Fiduciary Advisor (CTFA) certification and mediation training to work helping families and investment committees reach agreement on investment policy. Their bespoke process helps clients navigate the sometimes confusing world of impact investing.