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Sustainability Focus, Extraordinary Performance

On Reaching New Milestones

Humming the iconic bars to Pomp & Circumstance, the McKnight investment team celebrated the “graduation” of its first impact investment. On October 2, an early market-rate mission-related investment — Generation’s Global Equity Fund — “graduated” from the experimental impact portfolio to the main $2.2 billion endowment. Increasing our original $25 million to a $75 million investment is proof that our impact investing program can have financial success. 

And it gets better. Since our initial investment three years ago, Generation Global Equity has been the best performing equity fund in the entire McKnight endowment. McKnight’s investment has returned 17.3% against the MSCI World benchmark’s 6.6% (as of June 2017). In three years, our initial $25 million investment blossomed to over $38 million – extraordinary outperformance by any measure.

Generation Investment Management uses a longer-term investment horizon than typical active managers. Its staff intentionally explores the economic opportunities arising from a planet under pressure — and the resulting investments capitalize on trends such as the growth of cities, increasing water scarcity, and global efforts to reduce greenhouse gases. They see sustainability as an organizing imperative of the new global economy – a point of view that harmonizes with McKnight’s grantmaking goals.

Old school thinking asks whether a fund manager can succeed in spite of sustainability consideration. The reality is, it’s possible to find success because of it.

“New managers with new investing approaches mean new risks,” said David Crosby, Chairman of McKnight’s Investment Committee and Managing Partner at Piper Jaffray. “Our committee was naturally skeptical of impact investing, but we’ve come a long way. With rigorous diligence we’re evolving our investment approach — taking thoughtful risks to ensure the endowment grows as markets change. And we’re finding interesting opportunities and good managers along the way.”

The McKnight Foundation Board of Directors empowered its investment committee to invest differently when it carved out $200 million (10% of the endowment) for public and private investments that more closely aligned with its mission. In addition, new consultant Imprint Capital (now part of Goldman Sachs) researches and recommends fresh ideas.

McKnight is learning that its impact investing program can be a stage upon which to safely audition new fund managers; impact investment amounts are one quarter to one third the size of a regular allocation. This allows us to get to know a manager’s process, research and performance more fully and then decide whether to move a strategy up into the endowment or out altogether. (You can explore McKnight’s impact investments here.)

In addition, the decision to invest in Generation has grown into broader discussions about fund managers’ integrated environmental, social, and governance (ESG) thinking – or lack thereof. Most due diligence meetings now include ESG questions. McKnight assesses fund manager proxy voting in pooled funds annually. And every two years we evaluate the carbon intensity of our public portfolio and the ESG capacity of our fund managers.

There is much hand wringing in investment circles about the limitations that could arise from thinking comprehensively about social and environmental factors. Research has long examined this question with increasingly conclusive answers. One particularly useful 2015 meta study looked at the findings from 2,200 different empirical studies – over 90% of them concluded that ESG factors had a neutral or positive impact on corporate financial performance. As an investor, McKnight wants managers who think broadly and deeply about complex business and economic risks and opportunities.

Old school thinking asks whether a fund manager can succeed in spite of sustainability consideration. The reality is, it’s possible to find success because of it. That’s certainly what happened with Generation’s deeply integrated and thoughtful approach to sustainability in investing.

Disclaimer of Endorsement: The McKnight Foundation does not endorse or recommend any commercial products, processes, or service providers.

Topic: Impact Investing

October 2017