Harvard Case - THE VELUX FOUNDATIONS: Selecting Impact Funds
"THE VELUX FOUNDATIONS: Selecting Impact Funds" Harvard business case study is written by Vikram Gandhi, Caitlin Lindsay Reimers Brumme, Nathaniel Schwalb. It deals with the challenges in the field of Finance. The case study is 20 page(s) long and it was first published on : Sep 5, 2018
At Fern Fort University, we recommend that Velux Foundations adopt a diversified investment strategy focused on impact funds with a balanced approach across various sectors and geographies. This strategy should prioritize investments in emerging markets, climate change mitigation, and social impact initiatives, while maintaining a robust risk management framework.
2. Background
The case study 'The Velux Foundations: Selecting Impact Funds' centers around the Velux Foundations, a philanthropic organization with a mission to improve living conditions for people worldwide. The Foundations are seeking to allocate a significant portion of their endowment to impact funds, aiming to generate both financial returns and positive social and environmental impact. The case study highlights the challenges faced by the Foundations in navigating the complex and evolving landscape of impact investing, including:
- Identifying and evaluating impact funds: The Foundations need to carefully assess the potential impact of investments and ensure alignment with their philanthropic goals.
- Balancing financial returns and impact: The Foundations need to find a balance between generating financial returns and achieving positive social and environmental impact.
- Managing risk: The Foundations need to manage the inherent risks associated with impact investing, including market volatility and the potential for impact funds to underperform financially.
The main protagonists in the case study are the Velux Foundations' investment committee, tasked with making investment decisions, and the various impact fund managers vying for their capital.
3. Analysis of the Case Study
To analyze the case study, we can utilize a framework that combines financial analysis, impact assessment, and risk management:
Financial Analysis:
- Financial Statements Analysis: Analyze the financial statements of potential impact funds to assess their financial health, profitability, and cash flow.
- Valuation Methods: Employ various valuation methods, such as discounted cash flow analysis and comparable company analysis, to determine the fair market value of impact funds.
- Risk Management: Assess the financial risks associated with each impact fund, including market risk, credit risk, and operational risk.
- Capital Budgeting: Evaluate the potential return on investment (ROI) of each impact fund, considering the expected financial returns and social and environmental impact.
Impact Assessment:
- Impact Measurement: Develop a framework for measuring the social and environmental impact of investments, considering key performance indicators (KPIs) aligned with the Foundations' mission.
- Impact Reporting: Evaluate the impact reporting practices of potential impact funds, ensuring transparency and accountability.
- Alignment with Mission: Assess the alignment of each impact fund's investment strategy with the Velux Foundations' philanthropic goals.
Risk Management:
- Risk Assessment: Identify and assess the various risks associated with impact investing, including market risk, liquidity risk, and reputational risk.
- Risk Mitigation: Develop strategies to mitigate the identified risks, such as diversification, hedging, and robust due diligence.
- Risk Monitoring: Establish a system for continuously monitoring and managing risks associated with impact investments.
4. Recommendations
The Velux Foundations should adopt a diversified investment strategy focused on impact funds, with a balanced approach across various sectors and geographies. This strategy should prioritize investments in emerging markets, climate change mitigation, and social impact initiatives, while maintaining a robust risk management framework.
Specific recommendations include:
- Diversification: Invest in a range of impact funds across different sectors, geographies, and investment strategies to mitigate risk and maximize potential impact.
- Emerging Markets: Allocate a significant portion of the endowment to impact funds focused on emerging markets, where the potential for positive social and environmental impact is high.
- Climate Change Mitigation: Invest in impact funds focused on climate change mitigation, such as renewable energy, sustainable agriculture, and green infrastructure.
- Social Impact Initiatives: Invest in impact funds focused on social impact initiatives, such as affordable housing, education, and healthcare.
- Risk Management: Implement a robust risk management framework that includes thorough due diligence, diversification, hedging, and regular monitoring of investments.
- Impact Measurement: Develop a comprehensive framework for measuring the social and environmental impact of investments, considering key performance indicators (KPIs) aligned with the Foundations' mission.
- Impact Reporting: Require impact fund managers to provide regular and transparent impact reports, detailing the outcomes and progress of their investments.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with the Velux Foundations' mission to improve living conditions for people worldwide by focusing on impact funds that address pressing social and environmental challenges.
- External Customers and Internal Clients: The recommendations consider the needs of both external stakeholders, such as beneficiaries of the Foundations' investments, and internal stakeholders, such as the investment committee.
- Competitors: The recommendations take into account the competitive landscape of impact investing, ensuring that the Foundations are investing in funds with a strong track record of performance and impact.
- Attractiveness: The recommendations are based on a thorough financial analysis of potential impact funds, considering factors such as financial returns, risk, and impact potential.
- Assumptions: The recommendations are based on the assumption that the Velux Foundations are committed to long-term impact investing and are willing to accept a lower financial return in exchange for positive social and environmental impact.
6. Conclusion
By adopting a diversified investment strategy focused on impact funds with a balanced approach across various sectors and geographies, the Velux Foundations can achieve their philanthropic goals while maintaining a robust risk management framework. This approach will allow the Foundations to generate both financial returns and positive social and environmental impact, contributing to a more sustainable and equitable future.
7. Discussion
Alternative Options:
- Traditional Investments: Investing solely in traditional asset classes, such as stocks and bonds, would provide a higher potential for financial returns but would not align with the Foundations' impact goals.
- Direct Investments: Making direct investments in specific companies or projects would offer more control over impact but would require significant expertise and resources.
Risks and Key Assumptions:
- Market Risk: Impact funds are subject to market fluctuations and may underperform financially.
- Impact Measurement Challenges: Measuring the social and environmental impact of investments can be complex and subjective.
- Reputational Risk: Investing in impact funds that fail to deliver on their promises can damage the Foundations' reputation.
Options Grid:
| Option | Financial Return | Impact Potential | Risk |
|---|---|---|---|
| Traditional Investments | High | Low | Low |
| Impact Funds | Moderate | High | Moderate |
| Direct Investments | Moderate to High | High | High |
8. Next Steps
The Velux Foundations should take the following steps to implement the recommended investment strategy:
- Develop a Clear Investment Policy: Define the Foundations' investment goals, risk appetite, and impact priorities.
- Establish a Due Diligence Process: Develop a rigorous process for evaluating potential impact funds, considering financial performance, impact measurement, and risk management.
- Build a Portfolio of Impact Funds: Invest in a diversified portfolio of impact funds across different sectors, geographies, and investment strategies.
- Monitor and Evaluate Investments: Track the financial performance and impact of investments regularly, adjusting the portfolio as needed.
- Report on Impact: Publish regular reports on the social and environmental impact of the Foundations' investments, ensuring transparency and accountability.
By taking these steps, the Velux Foundations can effectively allocate their endowment to impact funds, achieving both financial returns and positive social and environmental impact, and making a meaningful contribution to a more sustainable and equitable world.
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Case Description
After much internal debate, THE VELUX FOUNDATIONS of Denmark have decided to allocate a small percentage of their investment portfolio to impact investments. Cambridge Associates, one of the leading investment advisory firms in the world, has been engaged to assist them in developing and implementing an "impact strategy." VELUX only invests in funds (as opposed to direct investments) and must now decide on fund selection criteria and on specific fund investment options that have been presented to them.
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