How Can A Trust-Based Approach Be Applied to Impact-First Investing?
4/4/2024
By Stacey Faella
While philanthropy can and often does support nonprofits to create a positive impact, it has been well-documented that philanthropy also has a track record of unintended negative consequences for the organizations and communities we serve. Much of the data points to foundations’ grantmaking practices that have obstructed impact and perpetuated racial inequities. However, this is also true for many philanthropies’ investing norms. In fact, many foundation’s endowments are invested in companies whose extractive and harmful practices are in direct conflict with our missions. We’re using 95% of our resources to generate the very harms that 5% of our resources are being leveraged to fix. Across grant making and investing, we also see a vast underinvestment in Black leaders, with just a fraction of total giving and investments going to Black-led nonprofits, Black entrepreneurs, and Black fund managers.
As executive director of the Woodcock Foundation, I am committed to leveraging our resources to support constructive systemic change to improve society and the quality of life. For us, this means being intentional about both how we do our grantmaking and how we approach our investment strategies. We have embraced trust-based philanthropy because we know that we will be more effective in realizing our mission if we approach our grantee relationships from a place of collaboration and mutual learning rather than compliance and control. We have found that we can also be more effective by applying these same values to our investment portfolio and approach. While investing is certainly distinct from grantmaking, there are many concepts in trust-based philanthropy that can be applied when investing to advance social and environmental impact.
What does it look like to apply a trust-based approach to impact investing?
Impact investing is the practice of investing our assets in companies, organizations, and funds that advance social impact alongside financial return. A core value of trust-based philanthropy that holds true for impact investing is the importance of centering relationships. When we center relationships with our investees, we create space to engage in mutual learning, to understand their challenges, and to support them in overcoming those challenges. When we listen to our investees—and, when relevant, their stakeholders—we position ourselves to make better investment decisions. If we all took a page from trust-based philanthropy and centered relationships with our investees, we would have more information that’s relevant to reducing risk and increasing success—both in terms of financial outcomes and the social and environmental impacts we seek.
Impact investing can take many shapes and forms, with varying degrees of prioritization of financial return and social or environmental return. From my perspective, the application of trust-based practices feels most relevant for impact-first investing, which, as the name suggests, prioritizes impact objectives over financial return. This includes program-related investments (PRIs), a tool through which foundations can provide capital in the form of an investment to advance a charitable purpose that aligns with their mission.
There are a few ways to apply trust-based practices to impact-first investing:
Give flexible financing to help investments thrive. One of the core grantmaking practices of a trust-based philanthropy is giving multiyear unrestricted funding, with the purpose of providing organizations with flexibility for planning, innovation, and sustainability. This notion is also super important when it comes to impact-first investing! Just like in grantmaking, funders sit in a position of power by owning capital, and we can choose to provide it to entrepreneurs in a way that makes it easier, or harder, to succeed. This won’t look the same for every investment, but a key principle here is that you can work with an entrepreneur or fund manager to understand what kind of capital is best suited to their business model, rather than stipulating the type of capital you’re willing to make available to them.
For example, several years ago, we made a program-related investment in the REDF Impact Investing Fund (RIIF), which provides growth capital for social enterprises that provide quality jobs to people who were formerly incarcerated, people with disabilities, and others facing barriers to employment. With a goal of making the investment more desirable for Woodcock, RIIF initially put loan terms on the table with both interest and principal being repaid each year. But because of the nature of the work they were supporting, we realized that a loan structured differently, without principal repayment in the first few years, would be more aligned with the capital they were putting out the door to entrepreneurs. So we worked together to agree on terms and ended up deploying capital in a way that gave the RIIF more flexibility.
Collaborate to reduce burdens and increase visibility for investees. In a trust-based philanthropy framework, funders are encouraged to take on the onus of getting to know prospective grantees rather than making nonprofits jump through vetting hoops. The reason for this is that many nonprofits are often pretty stretched -- and reducing the burden on them can help them stay focused on their mission-critical work. In the case of impact-first investing, many of the same ideas apply, especially for social enterprises which tend to face disproportionate challenges in securing and growing capital.
Woodcock has reduced the burden on investees by sharing due diligence with other investors and by having diligence shared with us as well. With one foundation in particular, we shared our due diligence on Potlikker Capital, a charitable loan fund that works at the intersection of racial and climate justice, providing flexible capital to BIPOC farmers to strengthen and grow their farming businesses. That foundation used our written materials and conversations with us as part of their diligence process and ultimately made an investment.
Investors can also simplify and streamline paperwork by collaborating with other investors and agreeing on similar terms and reporting requirements. For example, in the case of Community Markets for Conservation, Woodcock worked with a group of foundations who agreed to adopt the same loan documents, reporting timelines, and reporting criteria to streamline the workflow for the investee rather than having multiple sets of documents and requirements for multiple investors.
Identify and address implicit biases in your process. Trust-based philanthropy advocates for a lens of racial equity because many conventional practices and structures inadvertently favor white dominant norms and culture, thus exacerbating systemic inequities across the nonprofit sector. When engaging in impact investing, it’s equally important to evaluate how your due diligence criteria might be biased -- and how you can better center the experiences and priorities of the people closest to the issues you’re addressing. With this in mind, Woodcock has signed onto the Due Diligence 2.0 framework, which encourages investors to consider the disproportionate challenges facing women and people of color in a “system in which white, male asset managers control 98.6% of the investment industry’s assets.” As a result, Woodcock has embraced updated due diligence processes that include examining track record alternatives, reassessing risk, contextualizing fees, and being transparent. This has helped us to proactively address inequities by making it more likely that our capital will flow to women and BIPOC entrepreneurs and fund managers.
Create conditions for transparency, dialogue, and ongoing support. Trust-based philanthropy encourages an ethos of partnership and collaboration when it comes to relationships with nonprofits. This ethos is highly relevant and important in impact-first investing as well. When investees feel safe enough to share challenges and seek help from investors, it increases the likelihood of success, both in terms of financial return as well as social and environmental return. At Woodcock, we’ve supported our investees as they think through their own investment and impact criteria, structuring their capital needs, communicating about their model and impact, and connecting with other investors. In some cases, we’ve provided grant funding alongside an investment to help cover technical assistance or impact evaluation costs.
In the case of one investee, we had a series of meaningful conversations about the relationship between economic justice and environmental justice that led the founder to expand the impact criteria for the fund he was creating. The founder, who had originally focused purely on social outcomes, came to see value in adding environmental objectives to the loans made by his fund out of a recognition that these objectives were intertwined with sustainability, health, and economic goals. These conversations were built on a foundation of trust and relationship-building and wouldn’t have been possible if our approach had been transactional instead.
Next Steps: What Funders & Investors Can Do
Being a trust-based funder is fundamentally about redistributing power and influence toward advancing a more just and equitable society. Realizing this vision calls upon those of us in positions of power to consider how this applies to all aspects of our work – in addition to our grantmaking. I invite other funders to consider ways we can leverage our resources more holistically to reinforce, rather than contradict, our core values:
If you’re an impact investor who is new to trust-based philanthropy, I invite you to think about how these trust-based practices relate to your investments. Are there examples from among your own investments where these practices could have led to better relationships, opportunities to address challenges earlier, or other improved outcomes? Are there areas in your due diligence process where you can embrace trust-based practices?
If you’re a trust-based funder who is new to impact investing, I invite you to carry your trust-based ethos into your investing practice. Just like in grantmaking, as you move into impact-first investing, you can be effective by centering relationships, treating your investees as experts and partners, and taking care to provide investees with the type of support that best meets their needs.
If you’re an impact investor who already embraces trust-based philanthropy, hopefully these ideas resonate. I invite you to share your own reflections about the impact of taking a trust-based approach to impact investing!
Stacey Faella is Executive Director of the Woodcock Foundation.