All Investments Have An Impact – Beyond Grants

Henrik Mahncke from Danish foundation Realdania gives a first-hand account of a learning journey in impact investing.

It was a late afternoon meeting in 2018, held in one of those dark New York City meeting rooms with no windows. To be honest, after a long day of meetings and commuting the energy level was rather low. My head was spinning, as I felt a bit of jet lag as well. But then, one sentence stated at the meeting changed everything:

“All investments have an impact.”

This was the moment that defined our journey in impact investment. Looking back, it seems obvious that all investments have an impact, negative or positive. But at that time, there were shutters between investment and philanthropy. We realized that afternoon that no matter how we frame it, all our investments do matter. We do not have “neutral investments” – there are always alternative ways to seek the revenue we need for our philanthropic grants – and they will have different impacts on the world.

Consider the reaction to most international crises, such as when Russia invaded Ukraine. The very first actions are normally financial. We withdraw from trading, consumers start to boycott, accounts are frozen, and stocks are sold. So, if these financial mechanisms work as punishment in times of crisis, the question is: How can we use this powerful tool proactively, to support our philanthropic ambitions?

Our journey

Realdania has roots in the mortgage business and has a mission to improve quality of life through the built environment. We support projects and initiatives where improving the built environment can make a positive difference in people’s daily lives, relationships, well-being, and health.

In this case study I will explain how impact investing was implemented at Realdania, and what decisions we took during that journey. As head of analysis in the philanthropic department at Realdania, I spend much of my time the last 8 years planning, implementing and measuring our mission-related investments. Today, Realdania has approximately EUR 200 million invested, based on a portfolio of 20 impact investments.

Internally, we held the first discussions on impact investing as far back as 2011, but despite interesting and challenging discussions in the following years, nothing really happened until much later. However, at the end of 2017 the board of Realdania asked for more research on impact investing in order to obtain a better understanding of the potential and risks. Very wisely, they told us that a desk-based study would be insufficient, as we would risk getting only one side of the story. The board therefore asked us to conduct our own empirical due diligence.

In April 2018 we went on a field trip to the USA and visited several foundations who were already engaged in impact investing. We met with both the investment and philanthropic staff and listened to their stories. Our aim was to gain insight on how they viewed their impact investments so far. How did they really see it? How much money had been allocated? And what types of investments had they made? In other words, we did not need to know why they did impact investing; it was a question of how.

We were welcomed by all the foundations we reached out to, and we enjoyed listening to the honest assessments of the staff and management. Willingness to share experience is a rather unique feature of the philanthropy sector, and we learned a lot. We learned for example that we had to walk before we could run: start slowly, with maybe 5-10% of the endowment. Be careful and learn along the way. And we realized that since all investments have an impact, we should check for harmful investments in the traditional investment portfolio as well.

Returning to Denmark, we were able to submit an overall plan to our board of how we could implement impact investing. But we lacked one crucial element: how should we organize it?

We knew from our field trip that this part was delicate. In fact, impact investing is about merging two ways of thinking and two very different cultures: philanthropy and business.

In 2019 we undertook a new field trip to the USA, visiting other foundations and returning to some of those we had visited the previous year. This time we only wanted to learn about the practical part, such as the formal decision-making process and the team structure. As a result of this trip, we concluded that every individual foundation had its own model: no two foundations shared the same model for impact investing.

Some foundations developed the impact investing team from their philanthropic department, while others expanded their investment team. Other foundations created a new, separate team consisting of staff from both the philanthropic and the investment side. We collected feedback on the various ways to organize impact investments and returned to Denmark to develop our model based on the experience and learning from the American front runners.

Our approach

By the end of 2019 we had a plan approved by the board, which was implemented in our 2020-2026 Investment Strategy. The mandate from the board earmarked a carve-out of up to 5 percent of the endowment, to be invested with a triple bottom line:

• Firstly, investments must support our mission
• Secondly, we do not compromise on financial returns
• Thirdly, we will share our experiences in public along the way

We decided to be “impact first”, by which we mean that all investments are evaluated on their philanthropic contribution before we undertake financial due diligence. In other words, if there is no potential philanthropic impact based on a clear theory-of-change, there will be no impact investment. If, on the other hand, there is no risk-adjusted market-aligned return, there will be no investment, either. At a practical level both the philanthropic and investment due diligence are conducted in a parallel process, but always with philanthropic approval preceding the final investment decision.

Furthermore, we adopted an approach in which we do not compromise on returns. This reflects the third bottom line: if impact investing is to become widespread, we need to show that it is a viable strategy not only for foundations, but for a broad range of institutional investors. In our view, impact investments must be evaluated by the same financial criteria as any other investments. Impact investing is part of the toolbox of philanthropy, but it is not grant making.

We decided to form a “virtual team” consisting of two core members, who represent (and are integrated into) the philanthropic and the investment teams. The core group is backed by other staff members from the philanthropic and investment teams, depending on the type of investment opportunity we are looking at. This model ensures that impact investing is integrated into our philanthropic discussions as well as being on the agenda for the investment team. This is crucial, as it creates a direct line of cooperation between the investment team and the philanthropic team. This integration was not common at Realdania previously but is vital for success.

The next thing we did was to screen our current portfolio of investments. This was based on a “know what you own” approach. As all investments have an impact, we needed to take a close look at our existing portfolio to see if we had any investments that could potentially harm our mission. Even with ESG screening already in place, we realized that a deeper understanding was needed. We hired third-party consultants to conduct a screening of all our investments – which they still do every six months.

We also needed to clarify the link between our philanthropic strategy and our investment opportunities. Most importantly, we decided to invest globally, even though Realdania is for the most part restricted to Denmark in terms of grant making. This is essential due to the sourcing opportunities. Secondly, not all of our philanthropic ambitions are “investable”: it is easier to find good investments in the field of preventing climate change than in the social area. We decided to go for those areas in which we can find the best investments, rather than trying to balance our impact investments so that they represent our full philanthropic strategy. Accepting this imbalance is important, as most foundations have for good reasons very broad statutes, with a variety of different ambitions of grant making. Not all are equally investable.

Finally, we decided to undertake an impact report. We made our first impact investments in 2020, but it takes a while before it makes sense to perform an impact assessment. However, by the end of 2022 we felt the time had come to undertake our first impact report, assisted by third-party consultants. We did not wish to wait until the data for the impact report was perfect: that would never happen, so we decided to publish while being aware of its limitations. Since then, we have published an annual impact report, which we improve upon every year, as we obtain more investments and further develop our impact framework. We believe monitoring is necessary, and we wish to share this broadly. This is part of our third bottom line – giving back to the impact investment community – that also includes an annual “investor day”, at which we share our thoughts and invite others to share their views on impact investing.

Our first impact investment was made in April 2020, and since then we have undertaken 20 investments in areas such as the circular economy, low-carbon real estate, proptech and climate solutions. Since we began our journey the supply of impact investment opportunities has been rising in terms of both numbers and quality. Furthermore, we have noticed an increasing number of innovative first-time funds that can be attractive for investors with a high appetite for risk, while more and more second or third-time funds are also now on the market. Finally, we see a growing interest in impact investing almost everywhere we look, both on the supply side and the demand side. This makes us feel optimistic towards the coming years.

Thinking back to that late afternoon in New York City, sharing our experiences will be a fruitful and necessary way to ensure capital investments help to fulfil whatever mission we follow in our philanthropy. My point is that we should care about our investments as much as we care about our grants. It is no longer time to focus on why we should invest for impact: we need to discuss how.

Realdania is a foundation based in Denmark supporting quality of life through the built environment. Henrik Mahncke is head of analysis at Realdania and is co-leading the impact investment portfolio.