The Russell Family Foundation is ‘meeting the moment’ with all of its $100 million in assets

I'm David bank and from Impact Alpha. This is an Agents of Impact podcast

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in our catalytic climate Finance program. I think what's getting me really excited is we made a net zero commitment, but really where we're evolving to is that we're moving. That is not a mathematical exercise. It is a mathematical exercise, but that we're not so focused on meeting the math. But where are we going with the portfolio that's going to have real world implications?

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That's Kathleen Simpson of the Russell Family foundation, the legacy of the family behind the Russell 2000 index. The foundation over the last decade has aligned about 95% of its $100 million endowment with its impact mission. Five years ago, Russell made climate its priority, established a net zero goal, and launched its Catalytic Climate Finance program. The Russell Family foundation is a founding partner of IMPACT lp, Impact Alpha's platform for asset owners for, for whom LP stands for leadership potential. With that, let's jump right into our conversation. Kathleen Simpson, welcome to the podcast.

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Thanks for having me.

1:04

We've been tracking along with the Russell Family foundation for a number of years. You've been on a journey around climate, around alignment of the endowment. I really want to see if you could help kind of take us through that journey and just kind of like the moment we're in. Like you said, you know, we're on a 2 degrees climate scenario that has all kinds of implications on the risk side, on the opportunity side, I imagine. So just maybe take us to where we are now and then I'd love to drop back and hear the saga of how the Russell Family foundation has been walking this path. But what's so important now about climate investing and why have you kind of stayed the course?

1:07

Well, we think climate investing, we need to have investments in climate solutions and really highlighting where the opportunities are, because we do, we are honest that, you know, temperature rise will still exceed 2 degrees Celsius. And it's a clear signal that we need to keep pushing. And at this moment in time, when you're seeing a lot of pullback, our board has said it's important that we stay true to our values. We are an environmental foundation and we have decided that addressing climate as a key component of our work is really where we need to stay the course and that now is not the time to be shifting.

1:47

And you've just put out a report and it's quite detailed with the portfolio and with the framework and the strategy around your catalytic climate finance. So just give us a broad overview of what you were tracking in that new report.

2:23

Yeah, that report is in 2021, our board went through a strategy shift and as I said, we declared the climate crisis as a. We wound down a few program areas and started up two new program areas. One was the Food for Climate Solutions program, which is a granting portfolio that's supported with investment capital. But the board was asking, our investment portfolio at the time was about 95% impact aligned. And they said what more can we do for climate solutions with that investment portfolio that we had already decarbonized? It was 80% more carbon efficient than the MSCI benchmark. And they said, well, let's look at making a net zero commitment. That's where the catalytic climate finance program was created. And that program is unique in a foundation because it leads with the investment portfolio and then is supported with grant capital. So we're looking at the entire portfolio, the broad portfolio. We're a perpetuity foundation and, and we need to have investments in there that have the opportunity for us to have growth in the portfolio. We also have a portion of it that we need to have liquid for our operations and then we also have a portion in there that we call aspirational that are intended to be highly mission aligned and they may be high risk or they may be, you know, have a high return because we're early in, in a solution that may have a financial result. And we also recognize with that program that investment capital may not be the right tool all the time and that we want to be deploying several tools. So we lead with the investment portfolio, but we also have a grant portfolio that supports that, particularly on promoting resilience in communities where these transitions actually create opportunities for communities versus it being a challenge for them. We have that and then our communications that we, you know, we want to inspire, inspire others and share what are we challenged with, what are the opportunities that we're seeing and are there ways that we can be working with other

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peers and all that in a kind of place based notion as well. And I know you're up there in Gig harbor near Tacoma and that Pacific Northwest is important to the foundation. So why don't you just drop back a little bit and give us a little bit of the history of the foundation. I know people might know the Russell Index, but just sort of how the family and the foundation kind of came to be on this path.

4:43

The Russell Family foundation was created in 1999 when George and Jane Russell sold Russell Investments, which was headquartered in Tacoma, Washington. They used a portion of the proceeds to endow the foundation at that time and so we, because they were here locally, our grant making is local. Our investment portfolio, however, is a global portfolio.

5:07

And I think you occupy sort of an interesting part of the ecosystem of the capital ecosystem, I suppose, as it were. There's obviously the large foundations and the very large institutional investors, pension funds. I think some of them are in your colleagues in the Net Zero Asset Owners Alliance. But Russell is relatively small something, I think like $100 million in the endowment. And so there's a number of folks and families and foundations sort of in that range. How do you think about having an impact with those kind of assets?

5:31

I actually look at it as we have a unique opportunity. So we are part of the Net Zero Asset Owners alliance, which, as you said, they're large pension funds and insurance companies and there's highly regulated industries. We are a family foundation that are. We don't have quite as many regulations. And what I see as the size we are, including having a small staff and a small board, we can move a little bit faster. We can take maybe more, not fiduciary risk, but more risk in that aspirational portfolio and testing. We can maybe be doing some of these modeling that can then for more regulated funds, smooth the path perhaps, or be more innovative where they may not have that flexibility. And the other opportunity that we have is that we can use multiple forms of capital, which is grants and investments, and convening others for solutions where others may not have that opportunity.

6:05

And just so folks understand, you said you're a perpetuity foundation, which means you need to have some returns to cover expenses and the outlays. But you're also gone far beyond, I think, what the bare minimum, legal minimum, is for payouts for foundations. So you're sort of working, walking the talk in a way, and putting out real money, whereas others stick to the sort of 5% minimum.

7:06

That's right. We historically have given out. Our spend rate has been a little over 6 to 7%. 20, 25, 26 and 27. The board's approved 10% spend, what we're calling meet the moment. And so that does put challenges on the investment portfolio when we're thinking about liquidity. But we also are thinking about what are the opportunities that we have at this moment in time. And the board's always been seeing the 5% more as the floor than the maximum.

7:32

That's impressive. 10% and meeting the moment. How did those board meetings go?

8:03

There's a lot of conversation being a perpetuity foundation and what does that mean for the longer term? And There's a lot of analysis and when you're thinking about going into the corpus, real implications. But they also recognize that the opportunity to have real impact in climate, it's the carbon value of time. So if we invest now versus waiting until later, will we have a better return on those dollars on the climate impacts that we're trying to have?

8:09

Okay, well, that's a great place to jump in a little bit on how you see the impact across the portfolio. You do have public equities, you have private equity, you have grants, as you say, and other tools as well. And just how do you put that all together into a single strategy?

8:42

I opened up a little bit. We think about our portfolio in three portfolios. One is operations. And so we need liquidity to meet our operations and grant making. And so we think about what are opportunities in that part of the portfolio in fixed income and cash. So we do bank with beneficial state bank who we find them highly mission aligned with us. Our fixed income is in Breckenridge, which has had a net zero, part of the net zero asset managers alliance. And then we think about the global portfolio, the growth part of our portfolio. We have both public markets and private markets. A couple of examples that we think about being a Pacific Northwest foundation. We've got quite a bit in forest and natural climate solutions. We have EcoTrust, forest management. Agriculture Capital Management recently made an investment in Dirt Capital which is in alignment with our Food for Climate Solutions program.

9:02

That's a fascinating one. That's a great example. If you just do another beat on dirtt Capital, because that did jump out of the report at me.

9:59

Yeah. Dirtt Capital, we made an investment out of what we call the aspirational portfolio. And that investment actually came through our grants committee. We deploy what I call a total resource activation model, which means looking at what are we trying to accomplish and then looking at the tools. And so this investment was actually the first investment that the grants committee actually approved. And they approved it because they oversee the Food for Climate Solutions program. And we felt like it was. They're starting to get activated on looking at investments that will go alongside the grant capital. As I mentioned earlier, Food for Climate Solutions leads with the granting portfolio, but is supported by investment capital. So dirtt Capital, we've been talking with Jacob for years and finally this opportunity really aligned with our program because the Food for Climate Solutions programs focused on Western Washington in a regional food system. And looking at regenerative agriculture and dirt Capital, why it's a. It's a fund. And we felt like it was an easy entry for Grants committee members. They were actually working with one of our grantee partners. So we felt like there was a really high alignment and it was a easier first investment for a grants committee member to absorb and get used to.

10:06

And this aspirational portfolio, that's really where you kind of go above and beyond in terms of either risks or sort of innovation to try to see if you can get in early on Climate solutions.

11:31

That's right. We created the aspirational portfolio in 2016. We have specific criteria. It's got to be aligned with our portfolios and it's actually directed by staff. So we have an OCIO partner. But sometimes these investments are, they wouldn't be recommended by our partner just for fiduciary responsibility. So we, we actually do the diligence and bring them forth to the investment or the grants committee and they are typically highly mission aligned or very regional based with a lower interest rate for the mission we're trying to accomplish. An example is we also have a loan fund with a local CDFI that is supporting the food system. It's a lower interest loan that was partnered with Grant Capital to have loan counselors alongside the loan dollars that are going out the door.

11:45

The OCIO you mentioned and of course that's an outsourced chief investment officer and it's a structure that a lot of foundations and family offices use. But you mentioned that they don't want necessarily to have this aspirational portfolio as part of their mandate. They have the rest of the portfolio. So it's an interesting dynam between the asset owners like, like Russell and the, the outsourced CIO or the advisor. Just how does that kind of dance work in terms of people's incentives aligned around, you know, what their return hurdles might have to be and that sort of thing.

12:36

That's a great question. And I think it's really important that those whose responsibility, where each responsibility lands. That's why we created what we call the aspirational portfolio policy and it clearly outlines that staff is making this recommendation. Staff are bringing the PIP pipeline in the model that we have the investments that are going to be right on the ground affecting the communities. Our OCIO partner, they're not going to be the ones to source those or to even have the capacity to be doing the diligence just because the model of a larger OCIO is it needs to be on the platform for multiple clients. And a lot of these opportunities are really unique. Like when we're in the process that we were Looking at it as an investment, it wasn't really investment grade. And we're now making it as a recoverable grant because we know that there's higher risk. And those are really coming through conversations with our partners where if we were just relying on the ocio, they just don't have those relationships. And we also recognize their fiduciary responsibility as our ocio. And so that's why we make that delineation on who's responsible. They will report on it. They will help us do all of the usual capital calls and operational items. And it's just a recognition of where our responsibility starts and there starts.

13:11

And then by the same token, on the OCIO side, they help you with the kinds of engagement strategies that you're trying to do. For example, on the public equities, which I know is part of is a pillar there. And how does that kind of play out? I mean, is that something that where you decide you want to take on a shareholder issue or they bring one to you? How does that dynamic work?

14:40

Well, they are really looking for what are the best investments for our portfolio, for our goals. So we did revise our investment policy statement and we have three main goals and that is we have a net zero commitment. We have return mandate which is benchmark or better. And then we want to make sure that we've got diversity across all asset classes. And so when we're thinking about what they bring to the table, they're looking for the best opportunities in the various spectrum in the public equities market, in the private assets. And they're bringing those to us based on what they know of us as the client. They've really helped us with this net zero work. And they're doing the carbon accounting for us and bringing that forth. When we first made a net zero commitment, we brought in an organization called Carbon Direct that did a baseline on our operations on how much emissions we had. But what they also did is they did an analysis, peer review of our advisors carbon accounting on our portfolio so we could validate that what they were sharing with us was a good baseline. So what they help us with is they help us, they've got the technology to be able to do this to do the carbon accounting. They're using Clarity AI to look at the kinds of impacts that we can have in our portfolio. And when we're talking about active ownership, they also have a partnership with as you sew. So they'll share a list of you've got these holdings. Do you want to make investments or make sign on to resolutions. So they do help us with that.

15:02

These are all great resources and we'll put some notes in the, in the show notes as you so helps shareholders understand the resolutions that are, that are clarity. AI is one that's, that's quite interesting for impact reporting. And then you mentioned also Iconic, which is a way to help folks vote I think more effectively on those shareholder resolutions. So you've got, you've been sort of testing out the tools of the trade, as it were.

16:43

That's right. We just partnered with Iconic last year to really dive into looking at our proxies. We have historically been voting our proxies, but we didn't really have a lot of transparency into them. And so making the shift to the Iconic platform really allows us to have that visibility. We can set our profile, but then we also have alerts, particularly on our top 20 emitters, so we can be monitoring those votes even more closely.

17:09

Well, so just maybe give us a sense of you've gotten most of the way towards alignment. You've got an aspirational portfolio that puts you kind of on the cutting edge, but as you said, meeting the moment. So what is kind of next? What gets you excited about where you can make impact going forward in our

17:38

catalytic climate finance program? I think what's getting me really excited is we made a net zero commitment, but really where we're evolving to is that we're moving. That is not a mathematical exercise. It is a mathematical exercise, but that we're not so focused on meeting the math. But where are we going with the portfolio that's going to have real world implications. And so we were wrestling with this last year and we had one of our, our communication partner interview some peers as well as standard setters on how can we have a real world impact if we're making these investments. And some of what came out of that is we actually, while we were on the trajectory in our portfolio going down in carbon, if we want to have real world impact, we may need to be willing to have it go up for a while before it will go down. Like in these hard to abate sectors. A specific example is we made an investment in Galvanize. They're really addressing some of the hard to abate sectors. But between avoided emissions and maybe having those harder to abate sectors come down, is that more of a real world impact than investing in already low carbon companies?

17:56

With low carbon companies, you can make your portfolio look better, but they've already decarbonized. What you really need to do is get the high carbon emitters to move down that path, and so it might make your portfolio more carbon intensive.

19:09

That's right. That's right.

19:21

That's a kind of system level view. I know that's coming into vogue among many investors, but it's kind of a way to think beyond just your own portfolio.

19:22

That's right. And as we're thinking about systems level investing, we're also thinking about who are our peers. And we're moving away from impact investing to systems level investing. Where I see impact investing being, we're looking for funds that align with our mission in our portfolio. But I want us to take a step up and think about what is the system, who are the partners, how can we all be investing in transparency and in partnership for real solutions versus just looking at our specific portfolio?

19:33

We've been talking at impact alpha about LPs equal leadership potential, and I know that means a lot to you as you've staked out these kind of practices and approaches to both obviously manage Russell's portfolio, but also to kind of signal to other LPs. What do you want your sort of peers as asset owners to think about

20:08

as we're thinking about our portfolio? And who are the LPs that we're working with that we are, we're rowing together? What are the goals that we're trying to have in each one of the funds and making sure that they're aligned with not only the return targets, but the mission and the impact returns that we're looking for.

20:35

Well, terrific. Kathleen Simpson, Russell Family foundation, it's been a pleasure and we'll have you back to report in on the progress as you go forward. And we'll be relying on you to keep us smart and in the loop as well. So thank you so much, Kathleen.

20:56

Thanks for having me, David.

21:13

That's going to do it for this Agents of Impact podcast. Big thanks to Kathleen Simpson and the Russell Family foundation, to our producer Isaac Silk, to the whole team at Impact Alpha, and to all of you agents of Impact, with gratitude for all that you do. Sam.

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