The Next Evolution of our Impact Investment Portfolio

As Inspirit’s seven-year impact investing journey has formally come to an end, we have been asking ourselves what’s next? How can we push ourselves further? We believe we have one answer.

Back in 2016, Inspirit made a commitment to a 100% impact investment portfolio, with the intent of transitioning a relatively traditional portfolio to one solely composed of impact investments. Since that commitment, we have worked diligently to transform our portfolio to increase its impact. By the end of 2022, we met that goal; our entire portfolio consisted of impact investments.

A major component of our 100% impact portfolio was selecting an investment manager who offered a mandate that satisfied our financial, carbon, and impact goals for each of our three public asset classes: fixed income, Canadian equities, and global equities. In 2018, Inspirit launched the search for the first of these asset classes, fixed income. This was the first step to deepen the impact of our public market investments. Searches for investment managers for the two other public asset classes followed.

Our search led us to Addenda’s Impact Fixed Income Fund, as we determined it to be best-in-class on optimizing financial returns and positive impact. You can see the effect on our portfolio through the jump in allocation to impact investments in 2018, due mostly to the capital managed by Addenda. Since our initial investment, when we became the fund’s first outside investor, our perception of the Fund being best-in-class hasn’t wavered. Financial returns have been above benchmark, while the social and environmental impact generated through the underlying holdings have been as expected. Five years later, Addenda’s Impact Fixed Income Fund has over $230 million in assets under management as of the end of the second quarter of 2023—a testament to the wider market’s appreciation of the product.

But now the Foundation is evolving again. Inspirit has decided to transition our entire fixed income allocation of our portfolio from externally managed investments in publicly traded securities, to an asset class managed in-house and exclusively composed of private investments. That means that over time we’ll be liquidating this position to fund our private fixed income investments. We’ve loved working with our friends at Addenda and wish them continued success.

The rationale behind this decision is twofold. The first is financial. We believe that a transition to private investments will increase the likelihood of higher financial performance than continuing to invest in public fixed income securities.

To test this hypothesis, we’ll be benchmarking our private fixed income investments against the most common public Canadian fixed income benchmark: the FTSE Canada Universe Bond Index. When Inspirit first embarked on our commitment to a 100% impact portfolio, we hoped that Inspirit’s investment strategy would provide anecdotal evidence of how a portfolio composed entirely of impact investments could perform relative to a traditional portfolio. Our current benchmarks are industry standards, rather than ESG or impact indexes. By comparing our investments to what we transitioned from, we were able to highlight performance between the differing approaches to investing.

The main drawback to bringing the entire fixed income allocation in-house is lack of liquidity. While private investments tend to have set terms, it’s possible to plan liquidity events based on maturities and exits. But we can’t really count on that for our capital needs. The most significant liquidity risk is a potential scenario where public equities markets are down considerably. Without a public fixed income allocation, it’s likely we would be forced to redeem a portion of our public equities to fund operations and granting, despite the decreased size of the equity asset classes. This could be painful for our portfolio, so to counter this risk, we increased our target allocation to ‘cash equivalents.’ By bumping up liquid cash, the hope is to provide a big enough buffer for the equity markets to recover before necessary redemption requests.

The other reason behind the decision is about potential impact. The publicly traded bonds in our current fixed income portfolio tend to finance large structures, institutions, projects, or companies that historically have had access to large pools of financing. Although allocating funds to provincial and federal green bonds, bonds issued by clean energy companies, universities, hospitals, and credit unions is inherently impactful, it isn’t catalytic in nature. These fixed income instruments would almost certainly be funded without contributions from Inspirit.

By asking ourselves how our capital can be catalytic, we have decided to dedicate a portion to investments that bear zero interest. Our intent with these investments is to support projects and organizations that are tightly aligned with our mission. Our hope is that our capital will catalyze significant other funding to these crucial, urgent, and consistently underfunded investments.

An example of an investment that fits this profile is Inspirit’s recent contribution to the Afro-Caribbean Business Network (ACBN) Microloan Fund. The fund is a partnership between ACBN and Alterna Savings; low-interest loans are offered to Black-owned businesses, particularly at the early stages of operations. Last year, Inspirit parked a $250,000 deposit into an Alterna account that is being leveraged for loans to businesses identified by ACBN. Inspirit earns 0% on the deposit, so that the cost of capital to the entrepreneurs can be as affordable as possible. We are the first investor in the Fund and are currently in discussions with others to join us in supporting ACBN.

While we technically accomplished our goal of reaching a 100% impact portfolio, we’ll probably never be fully satisfied and will continue to iterate to deepen the impact of our portfolio. That may look like making changes to components of our portfolio that are already working well. While we won’t always know the outcome, we can lessen the risk for others to walk alongside us.