What to Watch This Week: Second Vatican Impact Investing Conference — Sources of Impact Capital
Highlighting presentations from Day 2 of the Second Vatican Impact Investing Conference
Fast Company’s recent article Inside the Vatican-Blessed Tech Accelerator Tackling Climate Change reminded us this week that the Vatican has not only showed commitment to moving additional resources towards impact investing, it is influencing the growth of impact capital. So this week we continue with our deep-dive into the Second Vatican Conference on Impact Investing (held in June 2016) by revisiting two sessions that focused on the various sources of impact capital, their expectations, and their fit with different types and stages of enterprises.
When Pope Francis met Donald Trump last month, he raised eyebrows by handing the U.S. president his 2015 papal letter…www.fastcompany.com
The second day of the 2016 conference kicked off with a lecture-style presentation from John Kohler, Executive Fellow and Director for the Impact Capital Program at the Miller Center for Social Entrepreneurship, Santa Clara University.
Sources of Capital and the Enterprises in Which They Invest
Kohler opened by reiterating the natural alignment between the works and teachings of the Catholic Church and impact investing. He explained the importance for organizations to understand the “why” of what they do — the purpose, cause, belief or reason your organization exists. Most organizations start with the “how” and the “what” of their work, but impact investors look for the “why”. The Church also starts with the “why”: its values.
Kohler presented a chart of investor return expectations.
Moving from right to left, he discussed the spectrum of “Finance First” investments to charitable donations, which have a 100% loss of capital. The line across the bottom loosely relates to expected returns for these investment types. Impact Investors start with their values, and then enunciate this “why” with their investment choices. In some cases, they might be willing to earn a lower rate of return with their money than with other investments.
In discussing impact investor motivations, Kohler made the distinction between investors of their own money (who are motivated by personal values) and fund managers. Fund managers will have restrictions based on what they promised when raising funds; they will have to stick to their stated investment thesis when making investment decisions.
Turning to the social enterprise, Kohler addressed the various “Colors of Money” or the spectrum of available capital. The appropriate capital type (from grants and concessionary loans to equity ownership) depends on the stage of enterprise. Sources of capital are rarely coordinated but they should be, which is the basis for “Blended Finance”.
Blended finance is defined as the complementary use of grants and non-grant financing from private and/or public sources to provide financing on terms that would make projects financially viable or sustainable.
Kohler advises entrepreneurs that they need to be able to tell investors the four pieces of information highlighted in this graphic:
Entrepreneurs must be able to match the promises they make to investors with what their business models can achieve. He used the example of Eco-Fuel Africa — a Ugandan social enterprise that converts agricultural waste into affordable, clean cooking fuel for low-income households — to illustrate how this process can work effectively for social, environment and financial gains.
Kohler’s presentation laid the groundwork for the following panel of capital providers.
Examples of Capital Providers
Moderated by Roger Huang, Dean of the Mendoza College of Business, this session included representatives from the Ford Foundation, Calvert Foundation and Bank IM Bistum Essen or BIB (a German cooperative bank that provides financial services to the Church and Caritas).
Each panelist was given ten minutes to introduce their organization’s approach to impact investing. Graham MacMillan, Senior Program officer for Impact Investing at the Ford Foundation, kicked off the discussion.
MacMillan set the context of Ford Foundation’s approach by referencing its 80 year history that began with proceeds from the Ford Motor Company’s IPO which — through careful management — has resulted in a $12 billion endowment. He spoke about Ford Foundation President Darren Walker’s Toward A New Gospel of Wealth, in which Walker laid the groundwork for how the Foundation would use its capital to build a more inclusive economy.
In this honest assessment of Ford’s work to date written in October 2015, Walker admitted that the power balance had failed. He framed how the Foundation would put its values into action by reorganizing its programming around the global crisis of inequality, an ongoing renewal the Foundation calls FordForward.
Ford Foundation is an asset owner, but money is not its only asset. So it examines the possibility of inequality in everything it does, and asks the question “Are we perpetuating the very economy we are seeking to overcome?” A strong believer in capitalism and diversity, the Foundation looks for ways to use its financial capital to build an inclusive economy through:
- Grant investments, which build the impact investing field;
- Program Related Investments which demonstrate the business case for impact investments, take financial risks that that others cannot and “crowd-in” additional investors; and
- Mission-Related Investments that effectively put the other 95% of Ford Foundation’s endowment assets on the table.
In fact, many of MacMillan’s comments about mission-related investments foreshadowed the Ford Foundation’s 2017 announcement that it will allocate up to $1 billion of its endowment over the next 10 years to impact investing.
Next, Jenn Pryce, President & CEO of the Calvert Foundation, shared her organization’s impact investing approach. Unlike Ford, Calvert is not an endowed foundation. However, in 20 years it has raised and invested nearly $1.5 billion on behalf of more than 15,000 investors.
According to Pryce, “We all want to change how capital works so it can work for the benefit of all.” The Calvert Foundation raises capital from a diverse group of US investors in amounts as low as $20. It then lends this capital to a diverse group of innovative, cross-sector, private organizations in the US and abroad. Its goal is to use capital to de-risk innovation.
Pryce gave examples of Calvert’s indirect and direct investments in the areas of environment and women’s empowerment. In Mongolia, the Foundation provided patient capital in the form of a low-interest, non-collateral loan to a micro-finance institution. This enabled the institution to distributed energy-efficient stoves and gas insulation blankets, reducing carbon dioxide emissions and helping families reduce their heating costs.
Pryce’s Women’s Empowerment example demonstrates how the Calvert Foundation uses blended finance and direct investments to support organizations that are developing and distributing clean energy products, which have been shown to have an out-sized impact on the health and well-being of women in the developing world. Blending, or “Braiding”, capital from multi-disciplinary sources like government, nonprofit, and private financial institutions is challenging and confusing. This expertise is an area where Pryce sees intermediaries adding real value to the process.
Pryce emphasized the importance of collaboration, as the problems are urgent and too big for any one group to tackle alone. Because the Calvert Foundation wants to stay on the cutting edge of innovation, it considers an investment successful when other capital follows Calvert, and when partner organizations build on the learning curve for improved efficiency.
Michael Sommer, Director of BIB focused his remarks on the bank’s work in micro-finance. BIB’s Micro-finance Business is implemented as a long-term part of the bank’s strategy. Its investment process and fund management are integrated into the bank’s standard processes. BIB is not a development bank. Its core business is the financing of the religious health sector in Germany and the management of pension funds of the Bishop conferences all over the world.
BIB translates the core principles of personality, subsidiarity, solidarity and preservation of creation into its ethical and sustainable corporate policy. Many people are bankable but simply don’t have access. BIB’s micro-finance work not only gives people access to micro-credit (loans), but also to basic financial services like savings, money transfers and insurance. To ensure the social focus of BIB’s work, Sommer often conducts site visits with beneficiaries. He stressed that all players in the micro-finance value chain have to take responsibility and play their part. The investor may need to accept adequate (not maximum) profits for the supply chain to work. To note, BIB is a nonprofit.
The possible results are worth it. Financial benefits include diversification to other forms of investment, expected return exceeding money market level, and low volatility. Social benefits include providing schools and professional training; improving nutrition, healthcare and living environments for families; and creating jobs. In this way, money is a service instrument.
With only about five minutes left after the panelists gave their presentations, the moderator posed one question for each to answer: how should we incentivize other investors to join the impact investing movement?
Sommer recommended self-inspection as the first step. Anyone who wants to get involved must first understand his/her own philosophy.
Pryce advised to meet people where they are; to start with conversations around their values. Then discuss how capital fits into the larger puzzle.
MacMillan took the opposite approach. He opined that the term “impact” isn’t helpful because the exact definition is up for debate, and it means different things to different people. Rather than using confusing language, he suggested leading with risk and opportunity because that’s what investors understand. Finance follows opportunity.
All of the panelist’s presentations are available for download.
Read our previous article for more additional reviews of conference sessions.