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GROWTH OF IMPACT INVESTING

CREATING CHANGE WITH VALUES-BASED STRATEGIES The world of impact investing—which deploys investors’ money to address social and/or environmental issues—is growing rapidly within the socially responsible investing landscape. The goal is to generate a measurable impact in an area of need, and the value goes beyond dollars and cents. Three Chicago-area executives shared their impact investing insights with Crain’s Content Studio.

How is your organization involved with impact investing?

Michael Miranda: In the last quarter alone, BMO issued a $750 million Women in Business Bond to support women-owned businesses.

We also launched our BMO Climate Institute, which harnesses science and analytics powered by innovative technology and industry-leading expertise, and donated $10 million to Rush University System for Health to create the new Rush BMO Institute for Health Equity in Chicago. I’m proud to say that we continue to allocate both our purpose and our capital to these important areas.

Impact investing is key to who we are.

Jill O’Donovan: YWCA Metropolitan Chicago is the impact partner for the Impact Shares Women’s Empowerment ExchangeTraded Fund (NYSE: WOMN), which provides investors with a socially conscious option to invest in companies that empower women.

We consult on the criteria used to evaluate companies for inclusion in the fund, then engage companies in discussions around how they can improve policies and practices to support gender equality. We also work to educate the public on ways they can use their investment dollars to create positive social impact.

Chicago and internationally, as well as environmental, social and governance investment offerings. We’re currently expanding the program to reach a greater number of donors and look forward to adding additional investment options aligned with our goal of a thriving, equitable and connected Chicago region.

What’s driving the increasing interest in impact investing?

Kernaghan: Investors are seeing that their assets can generate social benefits alongside financial returns and are increasingly seeking opportunities to support a specific vision for change through their investments. This is happening as more options are becoming available with enhanced corporate transparency, information and insight into how companies are making a difference.

O’Donovan: Investors are looking for ways to move beyond traditional philanthropy in their quest to “do good” and a desire to take “conscious consumerism” to the next level.

Additionally, the number of women investors—who are more likely to prioritize ESG factors—continues to increase. All of this is happening concurrently with a growing body of evidence that companies with more diversity and stronger ESG

“INVESTORS ARE LOOKING FOR WAYS TO MOVE BEYOND TRADITIONAL PHILANTHROPY IN THEIR QUEST TO ‘DO GOOD’ AND A DESIRE TO TAKE ‘CONSCIOUS CONSUMERISM’ TO THE NEXT LEVEL.” — JILL O’DONOVAN, YWCA METROPOLITAN CHICAGO

LAURA KERNAGHAN

Senior Director of Investments The Chicago Community Trust lkernaghan@cct.org 312-565-2933

are now able to specifically tailor their portfolios in areas such as ESG, innovation, diversity, engagement/ advocacy and more, so that they can achieve both a market return and have an impact.

What changes and trends are you seeing regarding the services and solutions offered to achieve impact?

MICHAEL MIRANDA National Head of Investments BMO Wealth Management – US michael.miranda@bmo.com 312-461-6742

Kernaghan: Consumers have become much more engaged and sophisticated in their understanding of how to achieve impact goals through their investments. Investment providers have responded in multiple ways, such as expanding ESG investment approaches. We’re seeing a similar expansion of impact investment opportunities with more direct and intentional impact, across a

JILL O’DONOVAN Chief Innovation Officer YWCA Metropolitan Chicago jill.odonovan@ywcachicago.org 312-762-2754

range of asset classes, and many of our donors are interested in this approach for the philanthropic funds they have at the Trust.

Miranda: The term “impact” is relatively new when considering how long investors have aspired to have market returns alongside environmental and social advancement. Historically, investors

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Laura Kernaghan: Since the early 2000s, The Chicago Community Trust has intentionally sought manager diversity, specifically women or minority-owned or managed firms. Prioritizing diversity in our investment portfolio is not only a way of aligning our assets with our mission, but it also supports strong investment returns; diversity can lead to better investment decision-making and improve the functioning of teams. In 2020, we piloted a platform that enables donor-advised funds held at the Trust to be invested for impact across a curated menu of options expected to achieve impact in

practices often have stronger financial performance. We also observed more interest in impact investing following recent events such as COVID-19, the murder of George Floyd and increased instances of severe weather—presumably leading folks to consider more purposefully how to invest in solutions focused on addressing root causes of these complex issues.

Miranda: In years past, investors would often focus on generating market returns and then later make an impact through their philanthropic efforts and initiatives. As investing becomes more sophisticated, investors

IN OUR COMMUNITY AND BEYOND. LET’S MAKE IT HAPPEN.

Contact Kristin Carlson Vogen at kvogen@cct.org

GROWTH OF IMPACT INVESTING

CREATING CHANGE WITH VALUES-BASED STRATEGIES may have looked at exclusionary screens as a primary way of executing such a strategy. Now, with greater amounts of information and better data available, there are additional, more nuanced strategies being employed. For example, more investors are able to look at broader ESG scoring and metrics for their portfolio. Others might craft mandates that look to engage with companies across areas such as activism, corporate governance or proxy voting. Diversity, equity and inclusion continues to grow in its importance for client portfolios.

As the spectrum of impact has broadened, the tools and services being used have expanded to align with investor interest.

O’Donovan: There’s an uptick in services and solutions in the marketplace focused on creating social impact through DEI and creating more racial and gender equity in the marketplace as a whole. In addition to our role with the ETF, we’ve strengthened our marketplace impact solutions through our “Inclusion Chicago” consulting practice where we partner with organizations looking to advance DEI, and our Racial Justice League, a membership-based solution using

to invest. While this is often true, not all impact investments require a long-term investment horizon.

Overall, it’s helpful to consider the portfolio goals—from both a financial return and an impact perspective—

How is the success of impact investing measured?

cross-sector collaboration in pursuit of the advancement of racial justice.

These and similar solutions not only provide an opportunity for investment in our organization, but also create impact by supporting our strategy to create a more inclusive marketplace.

realistic influence of that strategy on the cause and timeframe for expected impact. While certain investors might be better suited for certain opportunities—for example, a foundation can be better positioned

What types of assets or investors are best suited to this approach?

“ . . . WE’VE FOUND THAT DONOR-ADVISED FUNDS, WHICH ALREADY ARE DESIGNATED AS PHILANTHROPIC CAPITAL, ARE WELLPOSITIONED TO BE INVESTED FOR IMPACT.”

Miranda: We believe there can be an implementation strategy for practically any family that has the intention to integrate impact into their portfolio. As for the types of assets best suited for impact investing, the effect and measurability of the impact sought seems to be most noteworthy in the public markets.

For many investors, this will be the largest allocation of their portfolio, so it aligns well with the magnitude of impact as well. The private markets space also provides tremendous opportunity, though the outcomes tend to be described in more idiosyncratic manners.

O’Donovan: The most suitable investors are those willing to do the research into the causes and potential revenue from a particular financial strategy, and also the

Kernaghan: At the Trust, we identify impact metrics and outputs related to the goals of our donor-

— LAURA KERNAGHAN, THE CHICAGO COMMUNITY TRUST to make a program-related investment with lower expected rate of return or longer horizon for payback—every investor can have a role in aligning investment dollars to desired social impact. They should also appreciate that all investments have impact; the question is whether that impact is positive or negative.

Kernaghan: Any investor who wants to drive positive change through their portfolio can pursue impact investing, although not all impact investments will be a good fit for all investors. For instance, many say impact investors must have socalled patient, or long-term, capital

and the investment time horizon.

Additionally, we’ve found that donoradvised funds, which already are designated as philanthropic capital, are well-positioned to be invested for impact. Doing so can maximize the transformative power of the assets before the funds are later granted out to the community. We also view this as a meaningful way to compound the social benefits of our donors’ generosity, creating a “double bottom line” for these investments.

What limitations/challenges can investors expect when implementing an impact investing strategy?

O’Donovan: A lack of standard definitions and disclosure metrics leads to confusion and oftenunnecessary disappointment as well as “greenwashing” and/or overpromising the realistic impact of the investment.

Adding to these challenges is the reality that it may take several years before positive social change from an investment is measurable and patience truly becomes a virtue.

We have a saying at the YWCA that “change isn’t fast, cheap or easy!” and change through impact investing is no different.

Miranda: Measuring impact, which relies on transparency and robust data, can often prove to be a challenge, especially when trying to attain consistency amongst measurements.

At times, it can be tough to accurately assess impact where public disclosure hasn’t yet caught up to the wishes and desires of investors striving for change. Fortunately, efforts are underway to improve the integrity of data moving forward.

Kernaghan: Impact-first investors may be challenged to find investments that match their exact goals. Not all impact investment funds check all the boxes from a traditional due diligence perspective. For instance, many are newer funds with short track records.

When evaluating an investment, investors should strike a balance that provides confidence without being overly restrictive.

advised fund holders. We also use the United Nations Sustainable Development Goals, which were established in 2015 as a global development framework and can be applied when describing and measuring the impact of investments.

As more investors utilize the SDGs, we think they have the potential to become a shared language for impact investing.

Miranda: Starting with clarity of purpose and policy definitions for success assures that the portfolio is being managed and refined where necessary. Oftentimes investors will focus on the more tangible outputs that can be measured and readily assessed. This is an important first step that should be used in conjunction with less tangible outcomes both at the asset level and portfolio view. While many clients employ a purely quantitative view, assessing impact through a qualitative impact lens can better align the impact with their values and vision.

O’Donovan: Overall success can generally be measured through positive changes in the populations or environments that the capital is designed to impact as well as positive changes in attitudes, behaviors and/ or policies creating the challenges in the first instance. For instance, while successful impact for the WOMN ETF includes a donation of the net advisory fees from its manager Impact Shares to further support our work, the ETF also provides a platform for us to engage different audiences about the importance of the fund’s empowerment criteria and resulting changes—no matter how small or how slow—from that education.

What are some suggested “first steps” for investors looking to embark on an impact journey?

O’Donovan: New impact investors, especially, should identify what type of impact they’re seeking to make and why they’re looking to make that impact. This initial introspection will help to create more realistic

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ABOUT THE PANELISTS expectations, especially as they relate to the perceived success of the investment beyond monetary returns. Investors who already have an investment portfolio also should examine their current investments and whether they’re aligned with their values and, if not, why. Once investors have a better sense of their investing history, impact goals and motivations, they can focus on the more mechanical financial questions—such as such what asset classes, return expectations and time horizons fit best into their overall investment strategy—and work with an advisor to answer them.

Kernaghan: Individuals should first identify then articulate what change they wish to make through their investments and seek out an organization that shares those values and areas of interest. For example, a financial advisor with a shared interest in impact investing could be a great partner, and for those that would like to invest their philanthropic capital for impact, the Trust can assist with beginning the journey. We also encourage investors to connect with other like-minded investors; since the field of impact investing is evolving so quickly, it’s a welcoming community with shared objectives and opportunities for continual learning.

Miranda: A critical first step for families is to be purposeful about their impact intentions since that information will be used to craft customized portfolios. Subsequent to implementation, it’s also important for clients to understand not just the returns of their portfolio, but the tangible impact they’re having with their investments, which allows for future refinements and enhancements.

Kernaghan: We expect to see a proliferation of investment options and more sophisticated measurement of social impact. The next generation of investors will be the catalysts for these shifts, similar to the shift occurring within the workplace now. Younger employees choose employers based on values alignment. Similarly, investments will increasingly be selected based on values alignment.

Miranda: The concept of asset owners with respect to impact investing is being radically transformed from a large (by AUM) but narrow focus on institutional, to the high-net-worth and individual investor space. Thought leaders such as the CFA Institute, a global association of investment professionals, will be transformational via the process of setting standards on ESG investment products. Efforts such as this will further refine investor education, thus improving the impact investing arena.

What resources do you recommend to those wanting to learn more?

Miranda: While there are a multitude of primers and educational pieces available, we’ve found that engaging directly with families has been a beneficial way of learning about how impact investing is evolving, both from a supply and demand perspective. For broad resources about the development of the impact space, the Global Impact Investing Network provides any array of useful literature.

Kernaghan: There’s a wealth of online resources and helpful tools that investors can access, including

“WHILE MANY CLIENTS EMPLOY A PURELY QUANTITATIVE VIEW, ASSESSING IMPACT THROUGH A QUALITATIVE IMPACT LENS CAN BETTER ALIGN THE IMPACT WITH THEIR VALUES AND VISION.” — MICHAEL MIRANDA, BMO WEALTH MANAGEMENT - US Where do you see the future of impact investing heading, and how do see the next generation of investors responding?

O’Donovan: We hope to see continued interest in impact investing as well as more creative products in the market. We also expect to see more demand and scrutiny from investors on the promised versus proven impact as competition for their investor dollars increases.

In this respect, we’d like to see the individuals, communities and organizations that are experts in the issues that the investments intend to positively impact being brought into the conversation as well.

websites of Omidyar Network and Principles for Responsible Investment, a United Nationssupported international network of investors working together to implement its six aspirational principles. Investors ready to take the next step might consider joining a group focused on impact investing. For instance, the ImPact is a membership community for families, while Mission Investors Exchange connects foundations interested in investing for impact.

For those who have philanthropic dollars within a donor-advised fund, our platform may provide access to, and support of, impact investments aligned to a donor’s interest areas.

LAURA KERNAGHAN is senior director of investments for The Chicago Community Trust, a foundation that for more than 100 years has connected donors with community needs. A CFA charterholder, she oversees the Trust’s investment portfolio. Previously, she served as a managing director at QBI Financial, leading the research effort for six investment strategies. Prior to that, she was an investments manager at Ann & Robert H. Lurie Children’s Hospital of Chicago.

MICHAEL MIRANDA is national head of investments for BMO Wealth Management - US, which provides individuals and families with a full suite of wealth management solutions. A CFA charterholder with more than 20 years of experience, he oversees all aspects of investment management including business and strategic planning, legal review and assessment, risk management, and leadership and development. Previously, he held senior management roles at Mesirow Financial, Calamos Investments and Northern Trust. He is a member of CFA Society Chicago and CFA Institute.

JILL O’DONOVAN is chief innovation officer for YWCA Metropolitan Chicago, which impacts thousands of women and families annually through comprehensive human services across the region. She joined the organization in 2016 after a 21-year legal career. In her current role, she applies her expertise and legal skills to maximize impact and generate revenue to support new strategies and programs. She also oversees YWCA’s Empowerment Collaborative, which provides impact, innovation and infrastructure support to mission-aligned organizations.

O’Donovan: The Case Foundation’s “Short Guide to Impact Investing” is a good starting point for those new to impact investing.

As You Sow, a nonprofit organization promoting environmental and social corporate responsibility, also has a

number of reports and free online tools that show what companies are embedded in various publicly traded funds and which funds are aligned with values related to fossil fuels, gender equality, guns, tobacco and other areas of concern.

I also recommend exploring US SIF: The Forum for Sustainable and Responsible Investment, an organization advancing sustainable investing across all asset classes with a mission to shift investment practices toward sustainability.