The Brief | May 11, 2021

The Brief: China as an ESG risk, Midwest tech founders, D.C. food fund, innovative finance for local business, development finance at J.P. Morgan

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Greetings, Agents of Impact! 

Featured: ImpactAlpha Original

Transparency is elusive as investors assess governance risks in China (podcast). There are by now dozens of ways to measure corporate exposure to climate risks, but few good methods for assessing the risks of exposure to China, and specifically to the ruling Communist Party. Just ask Jack Ma. Or Elon Musk. “There are growing worries that in some ways mirror what’s going on with climate change with exposure to China,” Strategy Risks’ Isaac Stone Fish tells ImpactAlpha’s David Bank on the latest Agents of Impact podcast. Stone Fish, a former journalist and fluent Mandarin speaker, helps corporations and other organizations identify dependencies and entanglements in the world’s largest manufacturer, exporter and retail market. Human rights violations in Xinjiang, a supplier of cotton, pharmaceuticals and solar panels, are an immediate and urgent concern. Coming up: heightened scrutiny of corporate involvement with the Chinese military as tensions heat up over Taiwan. When it comes to assessing ESG risks in global business, Stone Fish says, “I would argue that the most important metric that people are missing is this China politics card.”

The Bank of China and the Industrial and Commercial Bank of China, for example, “have radically different relationships with Beijing,” Stone Fish says. For investors that want a banking partner with a smaller exposure to Xinjiang, “There are ways of gathering that information.” Ma, the billionaire founder of Alibaba, ran afoul of Chinese regulators last fall and suffered a stunning fall from grace. The pressure on Musk, comes not because of Tesla’s success in China’s huge electric-car market, but from Musk’s concurrent role as CEO of the rocket company SpaceX, Stone Fish says on the podcast. “The thinking was, ‘We’ll bring Musk and Tesla in, and then we’ll have to worry less about SpaceX going against the People’s Liberation Army.” Stone Fish doesn’t rely on leaked documents or human intelligence. “The idea is to get standards out there based on open-source information,” he says. Chinese ministry and provincial websites that report out meetings between U.S. executives and Chinese officials provide “a really good proxy for U.S.-China corporate relationships.”

Listen in to David Bank’s conversation with Strategy Risks’ Isaac Stone Fish on ImpactAlpha’s Agents of Impact podcast, “Transparency is elusive as investors assess governance risks in China.” Catch up on all of ImpactAlpha’s podcasts, including our weekly Impact Briefing.

  • Saudi influence. “For investors who assess countries for environmental, social and governance, or ESG, factors, Saudi Arabia has long gotten a red flag for ‘G’,” writes Imogen Rose-Smith in her latest Institutional Impact column, Saudi Arabia presents a governance risk impact investors can’t ignore.”
  • Country ESG scorecards. Nearly 70% of all countries saw their scores decline in The Economist’s 2020 Democracy Index. The Social Progress Imperative’s index looks at how well countries provide for basic human needs, wellbeing and opportunity. Scandanavian countries top Robeco’s Country Sustainability Ranking, which takes into account 40 ESG indicators. Institutional Shareholder Services and MSCI also assess countries’ ESG performance. In last year’s ranking of civil and political liberties by Freedom House, the U.S. dropped 10 points to 83, just behind Argentina and Mongolia. It’s too easy to blame the sharp drop on policies of then-President Trump. The underlying causes – racial injustice, money in politics, and polarization and extremism – transcend administrations. Share this post.

Sponsored by BlueMark: Making the Mark

The benchmark for impact investing practice. BlueMark has completed more than 30 impact verifications across asset classes and investor types, including for CDC Group, KKR, Closed Loop Partners, Bain Capital Double Impact, BlueOrchard Finance, Calvert Impact Capital and LeapFrog Investments. The impact verification specialist rounds up the findings in Making the Mark: The benchmark for impact investing practice.” The BlueMark Practice Benchmark of prevailing and best practices in impact management distinguishes practice leaders and learners, says BlueMark’s Christina Leijonhufvud. Only by aligning on such a benchmark, she says, “can we make progress on institutionalizing our shared efforts to address the many crises and systemic risks that stand in the way of a sustainable future.”

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Dealflow: Follow the Money

Sixty8 Capital raises $20 million to back underrepresented tech founders. The Indianapolis-based venture fund is looking to invest in more than two dozen pre-seed and seed-stage technology startups led by Black, Latinx, women, LGBTQ+ and disabled founders, particularly in the Midwest. Backers include the Indian Next Level Fund, 50 South Capital, Eli Lilly and Co. First Internet Bank, Central Indiana Community Foundation and Bank of America (see, “Bank of America places $150 million with minority-led fund managers”). “There is a $4 trillion missed opportunity when we don’t put a focus on diverse founders,” said Sixty8’s Kelli Jones. The Black woman-led vehicle made its first investment in Black-led Qualifi, an Indiana startup that helps employers make hiring simpler and more efficient.

Capital Impact Partners to manage Nourish DC to fund local food businesses. Washington, D.C. Mayor Muriel Browser tapped the Arlington, Va.-based community development finance institution to receive $1 million for the fund, which will provide loans, grants and technical support for food businesses owned by local entrepreneurs, especially Black, Indigenous and other founders of color.

  • Catalytic capital. The CDFI plans to leverage the funds to attract another $2 million “to foster an inclusive food system that provides economic opportunities and access to healthy, affordable, and culturally-appropriate food, particularly in communities impacted by historic disinvestment and structural racism.” (See, “Capital Impact Partners and CDC Small Business Finance creates community investing powerhouse.”) The new vehicle is part of the $5.2 million DC Local Equity, Access and Preservation Funds, or DC LEAF, which aims to improve food access, create jobs and promote economic growth in the district.
  • Onward

Dealflow overflow. Other investment news crossing our desks:

  • Houston-based digital bank Fair raises $20 million from a group of majority immigrant (and many first time) investors – its target customer demographic.
  • Blueprint Local and Nowak Metro Finance Lab will support organizations in Seattle, Salt Lake City, San Antonio, Baltimore, Cincinnati and Birmingham, Ala. to develop innovative financing models for local businesses.
  • Greater Milwaukee Foundation will deploy $1 million in low-interest loans to the city’s Black and Brown-owned businesses.

Signals: Ahead of the Curve

J.P. Morgan’s ‘development financial institution’ amps up transparency in emerging markets dealmaking. Development finance institutions are typically quasi-governmental agencies that invest in economic development (and soft power) in emerging and growth markets. The largest U.S. private bank borrowed the DFI approach to beef up its impact investing in emerging markets. The bank’s goal is to identify “the development gaps and then see if we could increase investment over time,” J.P. Morgan’s Faheen Allibhoy told ImpactAlpha (see, “Agent of Impact, Faheen Allibhoy“). In its first year, J.P. Morgan closed nearly 440 deals worth $146 billion, according to its annual report.

  • Anticipated impact. There was some head scratching when the DFI was announced last year (see, “Three questions for J.P. Morgan’s new development finance institution“). “The objective of our team is to mainstream impact throughout what J.P. Morgan is doing,” said Allibhoy. The team screens emerging markets deals across the bank for impact using a methodology built on the International Finance Corp.’s Anticipated Impact Measurement and Monitoring framework. Deals covered 16 of the 17 U.N. Sustainable Development Goals (the exception: SDG No. 14 – Life below water).
  • Impact continuum. The majority of J.P. Morgan’s capital – $91 billion – went to projects deemed “low” impact; just $11 billion classified as “high” or “very high” impact deals. “We’re pleased with the distribution because it shows that our methodology is working,” Allibhoy said. “High-impact” deals include a $750 million loan to the Uzbek government to build schools and hospitals, and a $189 million loan to a Turkish telecom provider to purchase new equipment. The bank is also involved in a bond offering for South Africa-based Liquid Telecom, which provides fiber communication and broadband equipment for 10 countries in Africa, including the Democratic Republic of the Congo and South Sudan.
  • Investor demand. J.P. Morgan works on the “sell side,” creating, promoting and selling investment products on behalf of public and private entities in search of capital. “Investors are asking even more questions now” about emerging market deals, down to transaction-level concerns about the use of proceeds, Allibhoy explained. Having a clear methodology “to articulate and measure that impact is a lever that will (hopefully) make development finance or impact finance a more mainstream way to invest.”
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Agents of Impact: Follow the Talent

Australian fund manager Impact Investment Group spins off its impact venture capital arm, Giant Leap. Danny Almagor takes on the executive chair role at IIG, following Daniel Madhavan’s departure last month… Louisa Macdonell of Development Trusts Association Scotland joins the board of Social Investment Scotland… JFFLabs is hiring a director for its Employment Technology Fund… 17 Asset Management is looking for a sustainable investing fellow in New York… Acumen East Africa seeks a senior portfolio associate in Nairobi.

Senegal-based Brightmore Capital will support the Centre Urbain de Business et d’Entreprenariat (CUBE)’s K-pital Race program… The U.N. Food Systems Summit is accepting applications for its “Best Small Business: Good Food for All” competition…. Slow Food Northern California is holding its Food Funded JEDI (Justice, Equity, Diversity, Inclusion) conference, Wednesday, May 12… Also on the 12th, the Predistribution Initiative is hosting “Understanding Systematic Risk and What Modern Portfolio Theory Misses When it Comes to ESG,” featuring authors Jon Lukomnik and Jim Hawley.

Thank you for your impact.

– May 11, 2021