ImpactAlpha, Jan. 9 – The first mandate of an impact investment fund: Deliver actual impact through its investments. And the corollary: Effectively communicate that impact to stakeholders – particularly asset owners and institutional allocators.
Investors “want reports that cut through the noise, allow them to differentiate between credible and inflated claims, and offer insights into what’s working (or not working) in an investor’s impact approach,” says Christina Leijonhufvud of BlueMark, an impact verification firm that has assessed the impact reports for nearly 20 firms including KKR, LGT Capital Partners and the Rockefeller Foundation’s Zero Gap Fund.
Increased scrutiny from pension funds, universities and other investors, as well as from regulators and politicians, has impact fund managers scrambling to back up their impact claims. Annual impact reports from fund managers (and a few companies) have become a holiday-season ritual. Across the hundreds of reports, methodologies have improved, but quality and standards vary widely.
For investors and impact strategists, the reports provide impact measurement and performance data that at least invites further interrogation. Elevar Equity’s report, for example, highlights networked business models for serving low-income customers. Veris Wealth Partners calls out a shortage of investable solutions that tackle environmental and climate justice head on. Atlas Impact Partners makes the case for shorting what could be called the “addiction economy.”
And all of the reports represent at least an intention for accountability, as well as an impressive amount of work. Reading them is the least ImpactAlpha can do! Below, we present a sampling from the current pile, including reports from Runway and Calvert Impact. We’ll curate additional reports over the coming weeks, so send us yours (include a note with any items of particular significance).
BlueMark has spun its experience assessing impact management practices into a new framework used to rate impact reports, from low to advanced, on the completeness of the fund’s impact strategy and results, and reliability, or the clarity and quality of the data reported. Highlighting only the number of jobs an investment created, for example, fails to tell the full story, according to the methodology. A better report provides context into the quality of jobs created, such as, do workers have benefits and labor protections?
The market “needs both clearer guidelines about reporting best practices as well as a mechanism for the independent verification of impact reports,” says Leijonhufvud (disclosure: BlueMark is an ImpactAlpha sponsor.)
BlueMark piloted the framework with the help of Impact Frontiers with seven managers that collectively manage $3.1 billion across asset classes, including Anthos Fund & Asset Management, Schroder BSC Social Impact Trust, Impact Engine, Rally Assets, Japan Social Innovation and Investment Foundation and TELUS Pollinator Fund (one fund chose to remain anonymous).
Most of the pilot members scored well for “completeness,” by discussing the specific challenges each investment sought to address.” But only two included “a narrative on potential impact risks, either at the portfolio or investment level.” None of the firms “commented on potential negative impacts associated with individual investments.”
Elevar Equity: Reaching low-income customers
Seattle-based Elevar is doubling-down on its goal “to inspire the broader world of talent and capital to gravitate towards solving issues of inequity and lack of access to essential products and services.”
The investment firm’s mission: to deliver products and services to improve the lives of millions of people who were underserved by traditional companies because they were deemed too poor to pay or too hard to reach. Elevar’s reach today is more than 45 million people through 44 investments across five funds that together represent nearly $400 million in assets under management.
With sustainable and impact investing becoming more mainstream, Elevar’s team writes, “it is critically important that this intent be focused on authentically solving core challenges on the ground.”
Elevar’s customer-focused impact report singles out Brazil-based portfolio company Favo, which provides grocery delivery to low- and middle-income communities. Unlike other online grocers, Favo uses a “group buying” model, with designated individuals aggregating and delivering orders across their communities. The goal of the model is to “increase access and provide affordable groceries to low and middle income customers while empowering its community leaders with additional income sources.”
One of the women spotlighted has been able to earn an additional $1,500 in monthly income for her family by working with Favo. The company largely employs women for its community leadership positions.
Most of Favo’s customers earn less than $1,000 per month. Enabling communities to buy together helps families to save on the cost of food and other basic goods.
In India, SarvaGram, provides lending services to rural families otherwise excluded from the financial system. The company uses a network of physical agents and a backend credit-scoring system to underwrite loans in more than 8,000 villages.
Families approved through SarvaGram’s system can get small business loans to invest in their shops or to buy equipment for their farms, as well as personal loans for important expenses like weddings. a Mumbai-based financial services company that
Rekha Panicker is a three-time borrower from SarvaGram. She’s taken a loan to build a house in her village in the state of Maharashtra, to rebook her small kirana, or shop, after the pandemic lockdowns, and to pay for her daughter’s wedding.
Elevar was SarvaGram’s earliest equity investor, backing the company shortly after it launched in 2019. The firm recently re-upped its investment in SarvaGram’s Series C equity round, which also brought in Temasek, Elevation Capital and TVS Capital.
Veris Wealth Partners: Centering diversity and justice
Veris says in its latest impact report that climate justice is a key focus for 2023. Intentional investable solutions that tackle environmental and climate justice head on remain in short supply, the firm says.
The 15-year-old wealth manager with $2 billion in assets under management invests across four main themes – environmental and climate solutions, racial and gender equity, regenerative agriculture, and community wealth-building – and across multiple asset classes.
Private investments include Portland, Maine-based Rwanda Bean Company, small business crowdfunding site SMBX, and the Watsonville Land Project, a Dirt Capital initiative that supports sustainable farmland ownership by Latinx farmers. In public investments, Veris is an active owner and pursues shareholder engagement. Public investments include wind power developer Orsted, Chicago Housing Authority and John Deere (workers at the farm equipment company staged a five-week strike last fall before accepting the company’s pay package).
This year’s report again reflects Veris’s attention to equity, diversity, and inclusion, or EDI (see, “Veris presses its managers to report on impact and diversity”). Veris says a core tenet of its investment philosophy is that “race and gender diverse managers who use an Equity Diversity and Inclusion lens in their investment process can improve outcomes by providing more perspectives on the risks and opportunities of various investments.”
The firm screens potential investment managers via an EDI due diligence framework. Managers are categorized into five tiers ranging from best in class to a “watchlist” for those that need improvement.
Of its approved managers, 31% are owned by women and 21% by people of color. That’s up from 24% women-owned and 12% people of color-owned in its last report. Two-thirds of the new managers Veris performs due diligence on in 2023 will be “EDI managers,” the firm says.
Veris itself scores very well on gender diversity, but acknowledges it has work to do on racial diversity. Some 67% of Veris partners and 50% of the management team are women; 29% of partners and 17% of management are people of color.
“Candidly, Veris does not currently meet its own criteria for what constitutes an Equity Diversity and Inclusion (EDI) manager,” reads the impact report.
While many of its peers have been gobbled up by larger financial firms, Veris has remained independent – helped by a minority investment last year from Rosemont Investment Group.
Atlas Impact Partners: The long and short of ‘revenue materiality’
Do the products and services that drive a company’s revenue do good or ill? Atlas Impact Partners uses that metric of “revenue materiality” to find potential investments to go long on the good – and to short the bad.
The long-short absolute return hedge fund, for example, may be ‘short’ on companies in what could be called the “addiction economy,” including not only drugs and tobacco but also “cognitive addiction” like online gambling, social media and even binge TV watching.
“All these issues are promoted by products and services which are sold by companies with a perverse incentive – to raise revenue through excess consumption and addictive behaviors.”
Atlas’ 24-page impact report includes analysis about reduced health, increased costs and other negative effects, not only of cigarette consumption, but the relative nutritional impacts of meals at outlets like Domino’s Pizza, Shake Shack and Krispy Kreme.
On the positive side, are “circular” strategies for “using as little resources for as long as possible, while extracting as much value as possible in the process” (for a related take, see, “Three ways product resale is making the circular economy sexy”). Atlas has analyzed water companies Xylem and Evoqua Water Technologies and rolls up their own impact reporting. Xylem, for example, said it had prevented 1.93 billion cubic meters of polluted water from flooding communities or entering waterways and provided access to clean water and sanitation for 1.8 million people living in low-income or developing communities. Evoqua estimates that its products and services make 100 billion gallons of water a day usable through wastewater treatment, carbon removal and filtration.
For its long investments, Atlas sets a bar of 80% of revenues generated from products and services directed toward the Sustainable Development Goals. “We invest in companies with products and services that change the world, not the ones that change their operations,” Atlas Impact’s Robert Brown told ImpactAlpha (see, “Using ESG and impact to sort leaders from laggards in 2023”).
Atlas doesn’t claim credit, even partial, for the impact of its publicly listed portfolio companies. Rather it uses its analysis of revenue materiality to spot companies in which to potentially go long (and short) to generate financial returns for its clients. And in doing so, believes they will help lower the cost of capital for companies it owns and raise the cost of capital for companies it shorts, enabling investors to generate impact in the public markets.
“We are increasingly certain that investing in public companies is the most important means of directing capital to innovative solutions for many of the world’s pressing issues,” the report says. “The scale required to advance the adoption of alternative energy, implement circular economies, and resolve healthcare challenges requires large amounts of capital.”
As for the short positions, the firm says, “We believe that reducing human dependence on unhealthy habits means elevating the cost of capital for companies producing the products and services which create and depend on those habits.”
Atlas expects sustainable investments to benefit from policy tailwinds, including new ESG disclosure rules in Europe and similar regulations under consideration by the SEC.
“All these trends support the thesis underpinning one of the central themes in our portfolio; that companies providing solutions which drive toward a more sustainable world have the highest impact and will continue to thrive and profit. “
Runway: Patient, affordable, non-extractive capital
Jessica Norwood launched RUNWAY (as The Runway Project) in 2016 to bridge the “friends & family” funding gap for Black entrepreneurs and build wealth for Black communities (see, “Believe in you’ money for black entrepreneurs”).
In Oakland, Calif., and then Boston, Norwood and her team have modeled a financial system attuned to underserved communities overcoming the historic legacy of social and economic discrimination (see, “Local funds model the racial reckoning and renewal central to the COVID recovery”). Last year, the Black and Brown women-led firm expanded to Chicago through a joint venture partnership with Uptima, an Oakland-based “entrepreneur cooperative” and incubator that runs four-week and eight-month bootcamps.
RUNWAY co-designed and co-launched the REAL People’s Fund, a community-led fund aiming to raise $10 million to deploy “non-extractive capital” and provide business support to minority, immigrant, undocumented and and formerly-incarcerated entrepreneurs in historically disinvested communities in California’s East Bay area.
“There’s a high degree of distrust and extraction that has happened at the hands of our financial and banking system,” said RUNWAY’s Nina Robinson. “We need to disrupt those industries and create new policies and a new rule book so that capital can flow freely.”
Runway also launched Rooted, in partnership with Souls Grown Deep Foundation, to support Black creatives in the U.S. South. Souls Grown Deep holds one of the largest collections of art by African American artists in the U.S. And RUNWAY secured $500,000 in philanthropic funding from the Ebay Foundation to support expansion efforts and give a spark to RUNWAY Labs, its research and development arm aiming to build solutions for Black entrepreneurs in the U.S.
Calvert Impact: Creating financial structures for communities
Calvert Impact moved fast in 2020 when COVID shutdowns threatened to decimate small-businesses, particularly in low-income communities primarily served by community finance development institutions, or CDFIs.
From a small start, Calvert over two years has helped mobilize nearly $500 million for five “community recovery funds” that effectively purchase small-business loans in 19 states, allowing 34 CDFI lenders to make additional loans (see, “How ‘Community Recovery Vehicles’ scaled community lending to ease pandemic pain”).
Calvert Impact (first as Calvert Foundation, then Calvert Impact Capital and now simply Calvert Impact), has been developing such innovative financing mechanisms for a quarter-century. The firm’s Community Investment Note, a low-interest fixed-income vehicle launched in 1995, has deployed a total of $1.6 billion across nine sectors (the new impact report didn’t break out totals by year). Calvert’s loan syndication business, launched in 2017, has deployed a total of $782 million to 85 lenders.
Calvert said it deployed $268 million to its borrowers in 2021, helping them disburse a total of $6.9 billion to their end-user clients.
“As climate change and inequality worsen, we are in desperate need of solutions that we can scale urgently,” Calvert’s Jennifer Pryce writes in the new report. Calvert’s strategic plan and new structure will let the company diversity its lending, structuring and new product development, she said, “allowing us to create more opportunities for investors to channel capital to communities that need it.”