The Brief | December 12, 2022

The Brief: Adasina’s fiscal justice strategy, ESG bonds for cities, domestic work in Senegal, carbon credits in India, worker ownership and revenue-based lending

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Greetings, Agents of Impact!

Featured: Muni Impact

What Adasina learned about advancing ‘fiscal justice’ by investing $60 million in muni bonds. Adasina Social Capital launched its “Fiscal Justice Municipal Strategy” in 2020 to answer the question: Can investing in municipal bonds alleviate some of the inequities faced by communities of color? That year, the company raised $60 million to invest in mostly-Black municipal entities, including cities, water districts, school districts, and some historically Black colleges and universities. Adasina purchased bonds from Memphis Light, Gas and Water, school bonds from Danville, Va., and revenue bonds for a wastewater project in Baltimore. But in the end, Adasina opted to end the Fiscal Justice Municipal Strategy after the pilot program had concluded. The strategy tested two theses: 

  • Mispriced risk. Bond issues from fiscally sound but under-resourced Black communities are systematically mispriced because of racial bias, causing Black communities to pay more for debt across a range of criteria. Numerous studies (here, here and here for example) document the persistence of a “Black Tax.” “We will identify and invest in a subset of communities with a greater perceived risk, and which may offer higher yields to investors,” Adasina wrote in its investment case.
  • Upward spiral. Adasina’s second thesis looked for cities with material “fiscal justice deficiencies” that could be mitigated with deep engagement and local organizing and advocacy partners. Such cities might have an over-reliance on “fines and fees” that impose disproportionate burdens on people of color, or overuse tax abatements that undercut local revenues, or underinvest in public health. “When combined with an active citizenry and receptive leadership, these communities have the potential to be engaged around fiscal justice issues to unlock financial value at the municipal level,” the investment case explained.

Per the second thesis, cities with such an appetite for improvement proved harder to find than expected. The first thesis presented a more fundamental problem: the higher returns to investors effectively leveraged the same historical discrimination the strategy was intended to root out. “As an institutional investor, it’s my job to identify inefficiencies in the markets and exploit them,” Adasina’s Maya Philipson tells ImpactAlpha. “As an impact investor, it’s my job to consider funds flowing into communities and how they impact communities chosen for investment and those not chosen. Our impulse shouldn’t be to exploit the system.” Investor demand could eventually narrow those spreads, but leveling the playing field in the market requires far more money than Adasina’s pilot project deployed. “What is the best way for us to influence the system, the best way for us to use our voice?” Philipson asks. “Is it actually with the cities themselves or structurally with the overall system?”

Cities embrace ESG in muni bonds even as overall market dips. Municipal bond issues are down 17% this year compared to 2021 as interest rates have spiked, according to SIFMA. But state and local government issues under environmental, social and governance, or ESG, frameworks are trending up. A note from Barclays’ municipal research group forecasts $45 to 50 billion of local ESG bond issues in 2023, a roughly 20% increase on the $40 billion this year. New York City and Atlanta each recently issued their first social bonds. Both sales were oversubscribed, helping the cities drive down their costs of capital. The growth of municipal ESG debt is a trend that is “firmly entrenched for the foreseeable future,” Barclays’ Mikhail Foux wrote in the Dec. 1 note. 

  • ESG backlash. In municipal finance, as in other financial markets, there’s little agreement on what ESG means, let alone how it should be measured and tracked. In some Republican-led states, legislators are crusading against ESG labeling – and even divesting state funds

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  • Join Ford Foundation’s Margot Brandenburg, Philipp Essl of Big Society Capital, Ka-Hay Law of TELUS Pollinator Fund for Good, Impact Engine’s Roger Liew, and Impact Frontiers’ Mike McCreless in conversation with BlueMark’s Sarah Gelfand and Tristan Hackett. RSVP today.

Dealflow: Gender-Lens Investing

WIC Capital backs Calinounou’s home services in Senegal. Calinounou’s online recruitment and booking service for home cleaning, care and cooking services aims to professionalize a sector that is rife with unfair pay and working conditions. “The level of informality in the care economy in Senegal has hindered the growth of its [workers],” said Calinounou’s Fatou Diop. The business is working to improve the quality of domestic services jobs while keeping services affordable.

  • Early funding. WIC Capital, which invests in businesses founded by and serving women in West Africa, invested 134 million West African francs ($215,000) in equity and quasi-equity to help Calinounou boost formal jobs and reduce gender inequalities (for background, see, “Mapping the climate edge for gender investors – and vice versa“). Calinounou also is launching a training school. “We still have a tremendous amount of work to do to improve the working conditions of these professionals and the image of this sector,” said Diop.
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Varaha scores $4 million to help smallholder farmers create nature-based carbon credits. The Gurgaon-based climate tech startup launched this year with a goal of creating $150 million in income each year for India’s smallholder farmers through “fully traceable, high integrity carbon offsets from nature-based solutions,” said Varaha’s Madhur Jain. He said the company’s agroforestry and mangrove conservation projects would sequester at least one billion tons of CO2 from the atmosphere by 2030. By selling the offsets to buyers, Varaha can “augment the income of smallholder farmers and rural communities, and increase biodiversity,” said Jain.

  • Regional expansion. Carbon offset projects are vetted through Vahara’s platform, which uses remote sensing, blockchain, machine learning and other tech-based tools. Varaha’s seed round investors included Omnivore, RTP Global, Better Capital and Orios Venture Partners.
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Dealflow overflow. Other investment news crossing our desks:

  • Germany’s Customcells raised €60 million ($63.2 million) in Series A funding, led by World Fund and Porsche, to make lithium-ion batteries for electric planes.
  • Uolo raised $22.5 million, led by U.A.E.-based venture fund Winter Capital, to provide K-12 online learning programs for low- and middle-income families in India.
  • Juno Medical raised $12 million in Series A funding, led by NEXT VENTURES and Serena Ventures, to make primary health care affordable and accessible to families in underserved communities.
  • Acumen led Kenyan edtech startup Zeraki’s $1.8 million in a seed round to digitalize school administration.

Agents of Impact: Follow the Talent

David Lee, who joined AppHarvest as president last year, steps down but will remain on the company’s board… Boston Consulting Group seeks a project leader and principal of climate and sustainability… Ares Management Corp. is hiring an ESG associate and an ESG analyst in New York… Also in New York, the Guggenheim Museum is recruiting a sustainability associate director, and the Moinian Group has an opening for a sustainability director… Trust for Public Land is looking for a remote climate project manager… The U.N. Foundation is hiring a sustainability development program manager for Latin America and the Caribbean, based in Washington, D.C… EYElliance is seeking a remote senior manager for sustainable financing.  

Thank you for your impact.

– Dec. 12, 2022