The Brief | August 16, 2019

ImpactAlpha’s Big 9: Overcoming bias, cleantech revival, Kiva 2.0, platform shakeout, alt-term sheets, Agent of Impact Daryn Dodson

Dennis Price
ImpactAlpha Editor

Dennis Price

TGIF, Agents of Impact!

Featured: ImpactAlpha’s Big 9

1. Asset owners undervalue high-performing fund managers of color. Superior performance, the theory goes, should dispel lingering stereotypes about investment fund managers of color. A peer-reviewed study from Illumen Capital and Stanford SPARQ this week found those biases, implicit or otherwise, actually increase the better fund managers of color perform (see No. 5, below). The results suggest that institutional investors’ biases drive homogeneity in asset management by disadvantaging fund managers of color in the allocation of capital. “We put to sleep forever in this paper the idea that it’s only a pipeline problem,” says Illumen Capital’s Daryn Dodson, a co-author of the study. Unchecked biases limit the available universe of funds and managers, says Stanford’s Ashby Monk, who helped design the study. Asset owners at the top of the financial food chain who undervalue racially diverse high performers, or overvalue White ones, expose their portfolios to uncompensated risk and leave returns on the table. Go deeper.

2. Three signs of a cleantech venture capital revival. The contrarian story in cleantech venture capital: renewed investment activity is being driven by smarter, more patient investors. Newcomers including Congruent Venturesand Radicle Impact in San Francisco, ClearSky in Florida, Energy Impact Partners and Breakthrough Energy Ventures have helped strengthen the continuum capital entrepreneurs need to launch and scale cleantech and climate ventures, though high-risk, high-impact, early-stage innovators face a persistent capital gap. Returns from investments (many of them still unrealized) in cleantech companies between 2014 and 2017 have rebounded to the highest level since 2000-2004. One surprising source of capital: oil and gas corporate VC, for whom cleantech investments account for a majority of deals so far this year. Venture funding for cleantech companies remains well off its 2008 peak and the total amount is still no match for the urgency of the climate crisis. But, says Prime Impact Fund’s Matthew Nordan, “You now have investors who are approaching this space on its own terms.” Climate smarter.

  • Softbank signal: Swiss developer Energy Vault raised $110 million from SoftBank Vision Fund for utility-scale renewable energy storage solutions. The deal suggests the fund’s “deep pockets are turning toward storage tech and other capital-intensive forms of clean energy,” saysAxios’ Dan Primack, “a welcome change for a sector that was largely abandoned by VCs after a string of high-profile failures.”

3. Kiva’s next act. Kiva has long been the poster child of tech-based crowd power to change lives. CEO Neville Crawley is pushing the microfinance capital provider to change financial systems as well. “There are 1.7 billion people outside the financial system. Basic math tells us that some trillions of dollars needs to move,” he says in ImpactAlpha’s Q&A. Step One is building Kiva’s portfolio of institutionally backed impact funds to complement its crowdfunding capital, starting with its $30 million fund for refugee finance. “I think there’s opportunity for us over time to become a multi-billion dollar fund manager,” Crawley says. Step Two is a protocol to provide low-income people formal financial identities as way to unlock mainstream financial services. “We’re not trying to make an alternative system, we’re trying to improve The System,” Crawley says. Sierra Leone is the first country to adopt Kiva Protocol. Kiva 2.0.

4. A shakeout in impact investing platform raises questions about, well, impact. The wave of impact investing platforms promised to open impact investing to everyone. But after the startups’ struggles to attract customers produced a casualty (Swell shut down operations last month), industry analysts are parsing their propositions, and their impact. In a guest post on ImpactAlpha, Align Impact’s Hummayun Javed suggests the platforms have to acknowledge the limited impact of public-equities investment. “The problem might lie in linking personalization of your portfolio to measurable impact in the world,” he writes. The competition for retail impact investors has just begun, as has the quest for deeper impact. Take note.

  • The numbersEthic, a technology platform for financial advisors and other intermediaries (rather than individual retail investors) says its assets under management more than doubled to $170 million, as of June 30, from less than $80 million in March (see, “Ethic raises $13 million to help investors build custom sustainable investing portfolios).
  • Full disclosure. Javed says that as an advisor, Align has no stakes in the companies named in his post, nor in the competing models, and gets no compensation from either public or private fund managers. “The better these platforms do, the better it is for us,” he told ImpactAlpha.

5. Agent of Impact: Daryn Dodson of Illumen Capital. Dodson launched Illumen Capital, an impact investing fund of funds, on the thesis that managers could better focus on value by overcoming racial and gender bias. The former Calvert Funds consultant and Ben and Jerry’s board member teamed up with Stanford researchers to train fund managers in which Illumen invests in bias-reducing interventions, an ‘impact alpha’ investment strategy. Dodson became convinced the absence of minority-led funds is not a function of the “pipeline” of talented managers. Instead, he argued, allocators are overlooking and undervaluing qualified women and fund managers of color. This week the thesis was vindicated by new research, co-authored by Dodson, that confirms asset allocators at pension funds, university and foundation endowments and other institutions hold clear biases, implicit or otherwise, against funds led by high-performing Black males (see No. 1, above). Shrinking their set of investable opportunities, Dodson told ImpactAlpha, “is a good way to diminish the possibility of returns.”

The implications of the study, Race influences professional investors’ financial judgment,” could further open the door already cracked by a growing number of Black and Brown-led venture firms. “This is intense. And vindicating,” tweeted Backstage Capital’s Arlan Hamilton, who has built a portfolio of 130 companies led by women, people of color, and/or LGBTQ founders. Other Black and Brown-led venture capital firms unlocking undervalued assets include Impact America Fund, New Voices FundHumble VenturesUnshackled VenturesHarlem Capital and Cross Culture Ventures. Institutional investors, take note, and don’t say Dodson didn’t tell you so. – Dennis Price

  • Share Daryn Dodson’s Agent of Impact story on Instagram.
  • Follow the talent with ImpactAlpha’s weekly report on career moves, job openings, events and opportunities.

6. BlackRock’s stranded assets. BlackRock this spring warned investors of climate risks lurking in their portfolio (see, “Risk, adjusted: BlackRock and Mercer signal the repricing of climate risk), but may not have heeded its own message. BlackRock’s fossil fuels exposure has cost investors $90 billion in value, according to the Institute for Energy Economics and Financial Analysis. As the world’s largest asset manager, with a $6.5 trillion portfolio, BlackRock has been disappointingly slow to lead on climate-risk mitigation, says IEEFA’s Tim Buckley. The firm says it has little influence over the majority of its portfolio, which is passively managed, and less than 1% of BlackRock’s total assets are allocated according to environmental, social and governance, or ESG, factors. Peers like AmundiNorges Bank and AP4 are deploying low-carbon investing strategies that provide comparable-risk adjusted returns. Buckley says BlackRock has a fiduciary duty to step up its efforts to mitigate the systemic risks of climate change. Take charge.

7. Deals of the week. Stay on top of the dealflow all week long on Deals that stood out:

  • Fund raises. KKR tops $1 billion for its Global Impact fund… Adobe Capital closes its $30 million fund for Mexico’s impact entrepreneurs.
  • Future of work. Joust raises $2.6 million to boost financial services for gig workers… SafetyWing raises $3.5 million to build “safety nets” for digital nomads… Ultranauts raises $3.5 million to demonstrate neurodiverse employment opportunities.
  • Food and farm tech. Rabobank and Caspian launch $2 million debt fund for India’s agtech startups… Lumachain raises $3.5 million to fight slavery in food supply chains… Hazel Technologies and Cambridge Crops raise capital to combat food waste… Bioenergy Development clinches $106 million to manage organic waste in cities.
  • Innovative finance. Global Health Investment Fund clears a profit with a voucher sale to Novo Nordisk… Aceli Africa wins a Convergence grant to blend finance for smallholder farmers.

8. Startup capital for the other 98%. Less than 2% of entrepreneurs ever raise venture capital. That leaves plenty of opportunities for investors willing to think outside of the financing box. Village Capital and Zebras Unite have teamed to create a taxonomy of alternative capital structures and term sheets. “We need many more funds to think this way if we’re going to enable the creation of more independent, diverse, mission-driven and sustainable companies,” says Candide Group’s Aner Ben AmiCommon language.

9. Don’t call it ‘mainstream.’ It’s ‘legacy’ financeImpactAlpha’s Agents of Impact Call No. 10 earlier this month took subscribers inside our editorial decision-making and road-tested a few of our hunches. One of our favorite hobby horses: subtly undermining conventional approaches to finance in the same way tech innovators casually dismiss ‘legacy’ computer systems that are outdated but still in use. Adam Connaker laid out Rockefeller Foundation’s expanded commitment to scaling new investment products and capital structures and opined, “Finance can do more than we’ve been asking of it.” Kellogg Foundation’s Cynthia Muller argued for inclusivity, particularly for historically marginalized people. “If we are not looking at racial equity in the impact investing space, what are we here for?” she asked. Goldman Sachs’ John Goldstein suggested that secular, persistent, accelerating themes are reshaping risk and opportunity. Legacy institutions that don’t shift their strategies will miss the future. Tune in.

– Aug. 16, 2019