What’s New In Impact Investing? September Roundup

Patrick DugganImpact Investing, InSight

impact investing esg

Impact investing is about using markets and money for social good. Impact investing is built on the belief that private capital can play a powerful role in solving the massive global challenges of our day, and that capital markets should work for good as well as profit. This vision is realized through investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.

Every month, PCV will give you a roundup of what’s new in the field, what conversations are taking place, and how you can get involved. Here are some highlights from September:

Responsible and Impact Investing On The March!

Responsible Investing, characterized by the incorporation of environmental, social and governance (ESG) factors into investment decisions, is on the rise. According to research carried out by the US SIF Foundation, responsible investing assets under management are approaching $10trn, and this is in the US alone. For investors who want their investments to align with their environment, social and governance (ESG) values, there are plenty of index and active stock and bond strategies to choose from.

In fact, consultants across the board are starting to warn some of the biggest holders of capital on Earth — pension funds — that they need to begin moving to ESG en masse or face the long-term consequences. This trend is symptomatic of the higher expectations being placed on global companies to be proactive in areas such as climate change and workplace diversity. Notably, it is the millennial generation that is driving these expectations: a recent U.S. Trust study suggests that 75% of millennials believe that the social and environmental impact of companies should be an important factor in their investment decisions.

New marketplaces like ImpactUs are also appearing and expanding their impact investment offerings. That platform, for example, has added four new issuers to connect institutions and individuals with impact investing opportunities. The new issuers include Coastal Enterprises, a Maine-based organization that focuses on rural business development in the U.S.; Enterprise Community Investment, part of the supportive housing group Enterprise Community Partners; Iroquois Valley Farms REIT, a listing from the equity investor in organic farmland; and MicroVest Capital Management, an investor in global microfinance and small-banking institutions.

One thing underpinning the movement is an alignment with the UN sustainable development goals, and knowledge that realizing the sustainable development goals means undertaking a massive effort to deploy capital. Barriers need to be overcome if we are to unlock this valuable source of capital. While impact investing is at an exciting inflection point with many people looking to become involved, some institutional investors are considering the next steps of tactical action, and are frustrated by the mismatch between SDG investment products on offer and their criteria for deploying capital.

We Have The Data

The impact data flywheel starts to spin. As investors demand impact financing and performance data, the marketplace is responding. Our friends at ImpactAlpha conclude their Operation Impact series, produced in partnership with the Case Foundation, Acumen and Bridges Fund Management, with a report that impact data “network effects” are kicking in. Along with many other data efforts, ImpactAlpha and the open database, ImpactSpace, are pulling together more data, which drive better products, which attract more users – and more data.

Enterprise-level impact data can get impact investment to the big leagues. “Early-movers in impact investing used to try to coax people into the pool by saying, ‘Come on in, the water’s fine,” writes Clara Miller, president of the F.B. Heron Foundation, in a new essay. “Now, immense players are doing cannonballs off the high dive, and there’s no lifeguard.” No wonder early-movers are nervous! But in Miller’s view, current doctrine and battles around impact measurement and metrics may be undermining the vision of capital market transformation that unites the field. Rather than focusing on the “additionality”, “attribution” and “intentionality” of the impact investor, says Miller, better to measure the overall effect that enterprises have.

Conscious Capitalism Is The Way Forward — But It’s An Uphill Fight

Under Chief Executive Officer Paul Polman, Unilever — a $170 billion corporation — is seeking to espouse a trendy sentiment—that it’s possible to make more money by acting virtuously—on a global stage. That means selling environmentally friendly detergent, installing thousands of water pumps in African villages, even removing gender stereotypes from advertising. The initiatives are tied together by two arguments. First, that ethically discerning shoppers in the developed world—or, less charitably, Gwyneth Paltrow among the urban bourgeoisie—are willing to pay a premium for products that do less harm to the planet. And second, that encouraging health and happiness in emerging markets will turn millions of the global poor into consumers for the first time. In theory, they’ll be loyal to the brands that sought them out.

Shareholder capitalism, alas, has other plans. Earlier this year, Unilever received an unsolicited, $143 billion takeover bid from the Kraft Heinz Co., the maker of the eponymous cheese slices and ketchup. Kraft Heinz is run by 3G Capital, a voracious private equity company whose billionaire Brazilian owners have torn through markets with a simple, investor-delighting strategy for the businesses they acquire—fire, sell, or eliminate anyone or anything that isn’t nailed down. The implicit message to Unilever was clear: Handwashing dances are nice and all, but your CEO is spending too much time keynoting climate change conferences when he should be finding ways to make his richest shareholders even richer.

Unilever isn’t the only big company trying to do better. A survey of 94 U.S. corporations finds that interest in renewables among American businesses is robust and growing, even after President Trump’s announcement on the Paris Climate Accord. More than 70% of the companies surveyed by Smart Energy Decisions have completed at least one renewable-energy purchase. A solid 60% report their interest in renewables has grown since last year.

Investment and Small and Local Businesses

At PCV, we talk a lot about how small businesses are the engines of job creation. Since 2000, almost all net new jobs were created by new and small businesses. But rather than living in the golden age of entrepreneurship, we are in the midst of a 40-year decline in the rate of new business starts. Not coincidentally, the vast majority of VC funding goes to usual hotspots like the Bay Area, Boston and New York, and only tiny percentages fund entrepreneurs who are women or people of color.

In his new book, The Innovation Blind Spot: Why We Back the Wrong Ideas―and What to Do About It, Ross Baird, founder of Village Capital, shows how investors who look for companies and entrepreneurs in overlooked geographies and demographics can pay less and achieve equal or greater returns.

There are also new financial models that can boost capital flows to small businesses. Transform Finance released Innovations in Financing Structures for Impact Enterprises: Spotlight on Latin America. The report features 16 case studies of new financing models, including revenue-based loans, redeemable equity and holding companies. The report was backed by the Inter-American Development Bank and the Rockefeller Foundation.

Community Roundup

Buffalo, New York Mayor Byron Brown’s push to spur private investment with public funds is paying off. The Western New York Impact Investment Fund has raised $8 million from community and national foundations and private investors to back projects in the Buffalo area, from social startups to environmental-cleanup bonds. Investors are already active in the depressed region; more than $19 billion in economic-development projects are slated for Western New York. Backed by the Community Foundation for Greater Buffalo, the fund was based on a study with the Heron Foundation to survey demand for impact investing in the region. Investors include the the Health Foundation for Western & Central New York, the John R. Oishei Foundation, the Seymour H. Knox Foundation, private investors Thomas Hunt and Andrew Rudnick, and RP Oak Hill Building, a construction-management company.

Great news for Chicago! J.P. Morgan was one of the first major financial institutions to bet on Detroit’s recovery after the city’s bankruptcy in 2014. After an initial $100 million commitment, the bank pledged another $50 million to Motor City. Its work in Detroit helped the bank earn the top spot on Fortune’s third annual Change the World 50 list. Now J.P. Morgan is putting $40 million, over three years, into a similar initiative in Chicago’s struggling neighborhoods, its second-largest city investment. Chicago had a violent 2016 and this year seems likely to be worse. J.P. Morgan is distributing the capital as grants to nonprofits and small businesses focused on providing job training and mentorships in particular.

In 2014, The James Irvine Foundation and Nonprofit Finance Fund (NFF) launched the California Pay for Success Initiative, a $5.6-million effort to support the exploration of new approaches to funding social services. Pay for Success ties payment for service delivery to the achievement of measurable results, and is at the vanguard of a shift in the US to reorient our social systems around outcomes. A new report and Pay for Success scorecard shares learnings from the California Initiative, which resulted in the launch of several projects and development of many others, and recommendations for how to accelerate social-sector transformation.