McKnight’s vice president of finance and compliance Rick Scott was recently interviewed by Goldman Sachs Asset Management’s (GSAM) Perspectives magazine about the Foundation’s impact investing program. An abridged version is reprinted here with permission; the full interview is available at GSAM online.
Q&A with Rick Scott, Vice President of Finance and Compliance
GSAM: How has your thinking about environmental, social, and governance (ESG) and impact investing evolved since you began employing the strategy?
Rick Scott: 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.
How do you think about the divide between investing and philanthropy?
I do not necessarily see a divide; I see them as complementary and not mutually exclusive or at odds with each other. Investing allows us to engage in philanthropy with the assumptions that we are a foundation in perpetuity and that we want to maintain the purchasing power of our endowment. There can be a natural tension that develops within certain foundation structures, such as when independent investment offices sit in a separate silo from the program functions; however, that is not the case at McKnight. Here, we have long collaborated across all functions within the Foundation, even well before we formally began our impact investing program.
We don’t see a binary “either/or” situation when it comes to achieving financial and social returns. It’s “both/and.”
What are your board’s key considerations for ESG and impact investing, and what opportunities and challenges do you see?
One key consideration is that we achieve a triple bottom-line for financial, programmatic and learning return. The learning return that has come out of the impact investing program is distinctive in part because we are committed to transparency and sharing lessons learned, both positive and negative, with our foundation peers. It’s learning by doing. Some institutions never get past the theory and conceptualization phase. Rather than suffer from paralysis by analysis, we implement, then adapt and make adjustments to our practice as necessary. We bring real-life impact investments to our investment committee, which clarifies our tolerance for illiquidity, risk, uncertain performance and types of high-value impact. We then incorporate what we have learned from each impact investment idea back into our program work, adding value to our core grant-making strategies, which loops back to our impact investing work. In addition, we have built a program with significant flexibility in terms of tools and types of investments, varying risk/return characteristics, and the impact we want to achieve. This gives us options for matching the right tool to the task, as the sector has historically lacked tested tools developed for benchmarking or evaluation of impact. There is a lot of hype in this sector, so impact investing must be approached with healthy skepticism and discernment. Care must be taken to sort through the noise and avoid greenwashing, whereby companies spend more time touting their ESG efforts than actually addressing the issues. Another opportunity presented itself this past summer when Goldman Sachs Asset Management acquired Imprint Capital Advisors, our impact consultant. Imprint has experience with many of the issues we face and diligently guided our staff and board through our process of developing an impact investing program. With the acquisition, we see an opportunity to tap resources beyond Imprint’s specialized knowledge.
What are the key principles of your investment philosophy and portfolio construction approach in this space?
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.