Impact Voices | May 30, 2024

Designing Kataly Foundation’s investment strategy for non-extraction and racial justice

Lynne Hoey

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Guest Author

Lynne Hoey

In our previous post in this series, I reflected on the challenges we’ve faced in the process of designing an investment strategy that aligns with our values, and the moments when we thought we had a great plan before we saw all the roadblocks in our way.

Looking back, dealing with obstacles early on was a gift because it prepared us for the challenges that lay ahead and the pivots we would have to make during the final stages of designing our investment strategy. 

Before we could start placing money with institutions, we knew we needed to do research on who was truly committed to racial justice for the long-term, and who was only talk and no action. The question was: How could we assess this important distinction?

The solution came from our wonderful chief financial and operations officer, Joleen Ruffin. Joleen’s work at the Kataly Foundation and her presence, expertise, and insight through this process was instrumental in the investment strategy we have today. Her solution was for us to develop a racial-justice vendor matrix to assess whether or not a vendor, in this case an investment manager, was truly invested in doing the internal culture work required to address racial justice issues. 

What we have seen so often is that companies put out statements, glossy brochures, or thought pieces to say they are doing justice work. But is the Chief Diversity Equity and Inclusion Officer involved in every single major product decision for the firm? Has the firm engaged in a racial-justice or civil-rights audit? Have the results been made public? Does the firm see racism as a systemic risk to the financial system? These were just some of the questions we asked when we were undertaking due diligence with potential asset managers. 

Ultimately, we realized we needed to keep some money in a very liquid fixed income product and that we weren’t open to taking equity risk (in fact, we generally have a critique on the extractive nature of equity). That meant our options on how to move forward were limited.

When we started our journey, we had nearly $400 million in assets under management – and there was no mission aligned bank or credit union that could absorb those assets. How could we keep funds liquid, and not hold deposits with the large banks, who currently invest in surveillance and militarism? How could we diversify our asset holdings to preserve capital and maintain our integrity? Could we truly divest completely from Wall Street?

The answer ended up, as it so often does: yes-ish. But it would require a lot of additional work. It would require walking the path alongside organizations to either support them with building internal infrastructure or partnership. It would require developing additional screens for companies to make sure we were not investing in harm and then granting money to solve for the harm that our investments created. We had to be intentional and methodical. But what does that mean in practice?

Our investment strategy, in practice

For one half of our investment strategy, we decided to place funds in four places: cash deposits, municipal bonds, private debt through community development financial institutions, or CDFIs, and a couple of alternative investments.

Cash will be held in term deposits with credit unions and cooperativas through Inclusiv, which has a social-impact deposit product. We developed specific criteria for Inclusiv and agreed to place deposits for two-plus years at 0.25% interest (or 25 basis points), which aligns with our commitment to non-extractive terms.  We will be one of the first foundations to invest directly in Cooperativas in Puerto Rico, a market that is often overlooked but has cooperative economics baked into its DNA.

We will also place funds through Next World Assets, which is a registered investment advisor (RIA) created from Activest. As a fiscal justice municipal bond company, Activest looks at municipal bonds in Black communities and how those bonds are being spent in service to the material needs of those communities.

By working with Activest, we aim to disrupt the ‘Black Tax’ where Black residents pay a higher cost to issue bonds or, to put it differently, Howard has to pay a higher cost to issue a bond then Harvard. It also sends a very clear message to other investors: Black  communities are equally as credit-worthy and deserve to have bonds issued at the same rate as white communities, with the same level of interest. We are also working with Activest to invest in some of these bonds below their coupon rate (aka the interest rate, for bonds). 

Additionally, we are working with long-time partners, Oweesta Corporation, to invest directly into Native CDFIs at a non-extractive rate, similar to Inclusiv. Through our longstanding relationship with Oweesta, we rely on their knowledge as the experts in Native American CDFIs and will leverage their own underwriting process to make these investments so the individual CDFIs can also demonstrate their ability to raise funds outside of Oweesta.

Finally, we want to be strategic in how we can leverage our balance sheet and cash position to support large scale projects. We are discovering that many community-led infrastructure projects (energy, water, internet systems, etc.) need significant cash resources up front to move the process from pre-development to construction.

Because of the historic financial extraction that Black and Indigenous communities and all people of color have faced, they don’t have immediate access to those resources, so the projects get stalled or they have to give up ownership and control of the project to move it forward. We have seen this particularly with larger scale, community-led renewable energy projects. Therefore, we are maintaining a large cash reserve to support these opportunities as they arise.

Bumps in the road

One of the hardest parts of writing this series has been knowing that our final investment strategy wasn’t fully determined yet, and things may not work out as planned. That is certainly true for designing the second half of our strategy. 

Candidly, we had been far down the path with an asset manager to separately manage a corporate bond portfolio that would be screened specifically for justice metrics, not just ESG metrics. We decided to engage with an asset manager partly because we didn’t have a lot of good options for fixed income diversification, so holding well-screened corporate bonds for a limited period seemed like a reasonable strategy, especially if we could work with an asset manager who had been clear on its ongoing commitment to diversity, equity, and inclusion, and racial justice, with measurable and reportable goals, and who was working with our trusted partners. 

Sadly, we realized that some of the choices made by the firm we were considering were out of step with our values at Kataly, so we are pausing on that portion of the strategy and re-assessing. This is painful to share. We spent over a year of time, emotional labor, and social capital on this part of the strategy. And truly, if I have learned anything in my life, it’s that integrity is demonstrated in the hard moments, when there is real and tangible loss. But what is gained by standing in solidarity, in community, and in values, is immeasurable. Because when we stand in our integrity, people see us for who we are and when we stand in solidarity, we see others for who they are. This is the root of belonging.

Regardless of this decision to re-assess, we know that people will be critical of Kataly working with an asset manager because, and we fully understand, asset managers are known for voting against the interests of the communities we serve in service of wealth holders. We know that many of their diverse manager initiatives do not support those diverse managers to build the necessary infrastructure to compete and continue to grow. We know that they can give millions of dollars to Black and brown funds and initiatives, but that only represents a tiny fraction of the billions they receive in cash every year. All of this is true and something we very much held in our decision-making. 

On the other hand, we often hear from foundations that they passively invest in their endowment, or they don’t know how to invest it from a mission or justice lens. We hoped by going through the process with an asset manager and doing the initial work on creating a portfolio of fixed income investments that screened out companies that invest in immigrant detention, the occupied territories and surveillance; and screened in companies that have been highly rated for their racial justice commitments and those commitments are actively monitored, we could provide a pathway for others interested in a similar strategy.

By doing so with an asset manager, we had hoped that those investment advisors and trustees would see this is a solid investment strategy and one that would lead their clients to stop talking about doing the work and actually do the work beyond their program-related investment, or PRI, portfolio carve-outs.

In this series, I have written about how complicated it is to design an investment strategy that is aligned with justice. Complicated is a true understatement. There have been technical complications, as well as emotional ones. In the final piece in this series, I look forward to sharing our reflections on why we embarked on this journey publicly, what we have learned and the feedback we’ve received, and our hopes for the future of Kataly.