Impact Investing for Small, Place-Based Fiduciaries: The Research Study Initiated by the United Way of the Bay Area

Abstract

This research discusses the process used to develop model equity and fixed income portfolios that could, if adopted by an organization, align 100% of the assets in its endowment fund with a mission to reduce poverty in the San Francisco Bay Area. Given that endowments funds must follow fiduciary standards of maximizing risk-adjusted performance, the model portfolios in the study were analyzed and tested against traditional, institutional non-impact benchmarks and portfolios and were found to provide similar risk and return expectations.The stock and bond model portfolios studied were screened for Environmental, Social and Governance (ESG) factors that are proxies for a poverty alleviation mission and for a geographic focus on the San Francisco Bay Area. The custom universe was analyzed and portfolio of equities was optimized against the Russell 3000. The tracking error was measured to indicate a low degree of risk associated with these constraints (less than 2%). The model fixed income portfolio of Bay Area-based affordable housing and community development bonds was deemed to be more likely to show higher levels of impact than the equity portfolio, but the equity portfolio was deemed, by those participating in the study, to be a viable and prudent part of an overall impact investing endowment strategy.This research could result in an increased interest in impact investing by fiduciaries of institutional assets, such as large endowments, private wealth pools, and defined benefit plans. It can also provide a rationale for institutions to develop a process and strategy for making impact investments in local or regional opportunities. Attracting the large investors to impact investing missions could provide a significant new source of funds to offer liquidity and to help identify and fund solutions to some of the social issues our communities face.