Mission-Aligned Investing

Non-Profit organizations are increasingly aligning their portfolios with their core mission and values. This “mission-aligned investing” approach signals a fundamental shift. Organizations are recognizing that their capital can serve as a powerful tool for driving long-term impact alongside other activities such as grant-making and programming.

These investment approaches aim to achieve an organization’s financial objectives while reflecting the mission. Some organizations invest only in strategies aiming for market-rate or above-market returns, while others implement exclusions that may compromise returns or accelerate their impact by investing in high-impact, below-market rate strategies. Approaches vary depending on mission and financial objectives. For example, in our recent client experience:

• A medical foundation eliminated exposure to tobacco products
• A university endowment eliminated fossil fuel investments
• A private foundation used a custom tilt to overweight companies with certain workforce relations practices
• A Catholic organization applied custom screens to align with faith-based guidelines

Adding another dimension to a board’s investment decision-making adds additional complexity. Boards must examine how an organization’s priorities can be reflected in an investment portfolio, navigate evolving regulations, and decide whether to become fully mission-aligned or take a phased approach. Often, boards begin their mission-aligned investing journey by considering how to align their public market investments. Options range from custom separately managed accounts (SMAs) to pooled strategies like mutual funds and ETFs, and potentially include active and index strategies, each with trade-offs in degree of customization, cost, and implementation. Boards may find that engaging on these complex questions deepens their understanding of the portfolio and creates another channel for advancing their organization’s mission. Having a knowledgeable advisor or manager with experience in a variety of approaches to mission-aligned investing is critical.

The US SIF Trends Report 2024/2025 found that three-quarters of institutional investors now use some form of negative screening to exclude misaligned investments.

Some organizations choose to begin to align their portfolios by using pooled investment strategies like mutual funds and ETFs, or by implementing MAI considerations via custom indexing and direct investing. Each of these two approaches offers different customization, cost efficiency, and engagement levels. Many organizations combine approaches, using custom-indexed SMAs for core holdings and supplementing with ETFs or mutual funds for potential for outperformance or access to specialized strategies. The optimal approach for any particular organization will depend on its specific investment objectives, portfolio size, eligibility, governance capabilities, cost profile, and customization needs.

Implementing mission-aligned investing requires a structured approach, starting with clear investment priorities and policy guidelines. Some organizations pursue full portfolio integration to reflect their values, while others take a phased transition. It can be prudent to shift assets gradually while evaluating financial and values-aligned outcomes. Others stay with a partial allocation approach, dedicating a portion of the portfolio to mission-aligned strategies while maintaining flexibility in their remaining investments.

Successful mission-aligned investing requires a focus on data, communication and engagement, and regulatory awareness.

Data

Data helps establish and measure criteria for evaluating investments, ensuring intentional and measurable mission alignment. Organizations may need to define specific screening or tilting criteria, performance benchmarks, and potentially impact goals to guide investment decisions.

Multiple data sources such as ratings, proprietary research, or third-party impact measurement tools can quantify how the activities of companies held in the portfolio and managers align to the organization’s priorities. Working with an OCIO or investment advisor, can help organizations seeking access to high-quality data and thorough analysis, allowing for both accountability and adaptability as experience with mission-aligned investing evolves.

Communication and engagement

Effective mission-aligned investing requires clear communication between trustees, investment committees, advisors, and key stakeholders to ensure alignment on objectives and execution.

Foundations and endowments should develop a formal investment policy statement that articulates mission-aligned criteria. Criteria should be specific enough to be actionable while not inadvertently constraining the portfolio as markets evolve. For example, a product-based restriction should specify the revenue threshold at which the restriction applies and whether producers, manufacturers, distributors or supply chain partners are restricted.  Investment committees should work with their OCIO or asset managers to integrate these priorities into portfolio construction so that financial requirements are met. Organizations should be just as transparent and accountable to stakeholders about financial results as they are about mission-related outcomes.

Regulatory awareness

Regulatory and policy shifts can impact how organizations implement mission-aligned investing. Trustees and investment committees must stay informed on evolving agency and judicial interpretations of fiduciary guidelines and federal- and state-level policies affecting investment decisions.

Federal and state regulations also vary. Some policies encourage mission-aligned strategies, and others restrict or challenge their use.   Organizations should assess fiduciary compliance, state-level restrictions, and other requirements by engaging their own independent legal and other advisors.

Questions to Ask

PRINCIPAL RISKS of Custom Indexing

ESG. Strategies that focus on ESG factors will cause investors to sell or avoid certain stocks. Such stocks may subsequently perform better than stocks selected considering ESG factors. There is no guarantee that integrating ESG analysis will provide improved risk-adjusted returns over any specific time period. The evaluation of ESG factors will affect the strategy’s exposure to certain issuers, industries, sectors, regions, and countries and may impact the relative financial performance of the strategy depending on whether such investments are in or out of favor.

 Indexing. Limiting investment decisions to specific indices may prevent investors from responding to (or benefiting from) unexpected market events. Index investing, also known as passive investing, generally prevents hedging, shorting, or other strategies to protect investors from sudden market movements.

Information. If tools/data used in managing a strategy prove incorrect, decisions made in reliance on them may not produce desired results, and the strategy may realize losses.

Market capitalization. Securities of small-and mid-capitalization stocks involve greater risks than those associated with larger, more established companies and may be subject to more abrupt or erratic price movements.

Replication. Direct indexing strategies generally invest in and gain exposure to only a representative sample of the securities in a benchmark index; they seek to replicate the aggregate characteristics similar to those of the benchmark. As a result, they may fail to replicate the index characteristics and, therefore, underperform the benchmark index, perhaps significantly and expose the investor to greater risk than the benchmark.

Stock market. The value of equity securities in the strategy’s portfolio will fluctuate; therefore, their share prices may decline suddenly or over a sustained timeframe.

Tax-loss harvesting. Federal and state tax laws vary and change periodically. Likewise, each single taxpayer’s situation is unique and changes over time. The tax consequences of harvest tax-losses (selling) are complex and may be subject to challenge by the IRS. Investors should consult their tax advisors before considering a tax-loss harvesting strategy. Changes in tax law and/or the treatment of capital gains could impact the after-tax returns from this strategy. Taxpayers paying lower tax rates than those assumed, or without taxable income, would either earn smaller tax benefits or have no tax benefits from tax-advantaged indexing. Also, there is the risk that securities bought to replace securities harvested for tax losses may perform worse than the securities sold.

Tracking error. The strategy advisor uses quantitative tools to measure the estimated tracking error of the portfolio versus the benchmark index. Estimated tracking error is a statistic that forecasts how much a portfolio is likely to deviate from the benchmark index on an annualized basis and represents a one-standard-deviation event. For example, if the estimated tracking error of a portfolio is 1% and the benchmark index goes up 10%, there is an approximately 68% chance that the portfolio performance will be between 9% and 11%, assuming what statisticians refer to as a “normal distribution.” There is also the possibility that the account could experience a two-, three-, or higher standard-deviation outcome. While not expected, the risk of a significant deviation from the benchmark index is possible. If the deviation is negative versus the benchmark index, the portfolio will underperform, perhaps significantly, versus the benchmark index. Some accounts will perform worse than the benchmark index due to random variation.