The Brief | April 17, 2023

The Brief: Impact investing in China, farm management in South Africa, Two Sigma’s bet on human capital, MassMutual’s catalyst fund, managing human rights risks

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Greetings, Agents of Impact! 

Featured: Impact in China

Can China’s impact investing ecosystem expand beyond green energy and ESG? China manufactures more batteries than the rest of the world combined, by far. The country’s spending of $546 billion last year on solar, wind, electric vehicles and other low-carbon technologies represents nearly half of the world’s total. It led the world in green bond issuances in 2022, at more than $76 billion, and could float another $100 billion in 2023. Yet for all its ambitions in green energy and its embrace of environmental, social and governance investing, China has frustrated the expectations of those working to develop a bigger market for private impact investments. “Impact investors are few and far between, short on successful case studies, and work needs to be done on educating investors,” Tao Zhang of Dao Ventures said in a recent landscape report on China’s impact investing sector. China’s impact investing sector is “filled with confusion and lack of clarity over basic principles and practices, which will deter the healthy development of the industry if standards are not established,” the foundation noted.  

Shanghai-based Ehong Capital first adopted an impact investing strategy in 2012. The firm focuses on sustainable agriculture, clean energy, waste, health and elderly-care, and quality education. Raising capital has become increasingly challenging, says Ehong’s Chao Zhang. The pandemic is one factor. So is China’s human rights record and crackdown on tech moguls. China’s frayed relationship with the US, says Zhang, has “sapped interest from foreign investors and created a generally tough environment for private equity in China.” Even the word “impact” is complicated in China, where it can connote influence, as in political or financial power. “If you talk about impact investing, people will think of it as a donation, or that you have to sacrifice financial returns to create impact,” says Lilian Lin of the China Impact Investing Network. On the other hand, she says, “ESG investing is actually very trendy in China, so if you interpret impact investing as one of the strategies of ESG investing, it can attract attention from the mainstream investors.”

Dealflow: Inclusive Economy

Two Sigma Impact raises $677 million to back ‘human capital-centric’ businesses. The impact investing arm of the $58 billion hedge fund Two Sigma will invest to create quality jobs in healthcare, education and training and other businesses. Two Sigma Impact has invested roughly $370 million in six companies. Its portfolio includes opioid treatment provider Community Medical Services, e-commerce platform Wholesale Supplies Plus, and Penn Foster, which offers low-cost degrees and certificates. Warren Valdmanis joined Two Sigma from Bain Capital in 2019 to launch Two Sigma Impact from the hedge fund’s balance sheet. The goal: finding out and proving the correlation between good jobs and business value. The fund received commitments from pension funds, endowments, foundations and family offices, as well as its own executives and employees.

  • Benchmarking good jobs. The firm’s Good Jobs Score Assessment tool includes a dozen questions for portfolio companies to assess job quality from workers’ points of view. Valdmanis told ImpactAlpha the tool is built on research that shows workers define a job as “good” across four pillars: fair treatment, career growth opportunities, good leadership and purpose. “The Good Job Score has the potential to be the core voice-of-worker metric for measuring and benchmarking job quality,” Valdmanis said. For initial benchmark data, the firm administered the assessment tool with more than 5,800 workers at 60 companies.
  • Check it out.

Secha Capital’s investment in South Africa’s FarmTrace will support employee ownership. Private equity firm Secha Capital made its name as an early investor in South Africa’s bread and butter businesses. Its latest investment, FarmTrace, is a farm management software company based in Limpopo, a region known for high-value crops like citrus, macadamia nuts and avocados. The investment will help the company expand in the Western Cape, known as South Africa’s wine region. As part of the deal, FarmTrace will launch an employee stock ownership plan, or ESOP, for 20% of the company. “It’s a standard option pool that will be based on tenure at the company and also help FarmTrace attract the talent it needs,” Secha’s Brendan Mullen told ImpactAlpha. Venture capital firm Hassium Capital invested alongside Secha. 

  • Farmer familiar. FarmTrace’s software helps mid-size and commercial farms consolidate production information and manage their operations. Unlike systems built for commodity crops like wheat, corn and soy, FarmTrace is designed for cash crops. The eight-year-old company is profitable and bootstrapped its growth. “We have a long back-log of interested farms, so we decided to raise capital to accelerate our growth and meet the needs of more farmers,” said FarmTrace’s Jacques du Plessis.
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MassMutual invests $100 million in second Catalyst Fund for diverse founders. The insurance company launched its first Catalyst Fund in 2021 with $50 million to invest in diverse-led and rurally-based startups in Massachusetts. It has invested in companies like Black woman-led MeetCaregivers, an online marketplace that matches seniors with home caregivers, and CareAcademy, which provides online training for home caregivers. Nth Cycle is salvaging valuable minerals from EV batteries and other electronics. RLP has developed 3D printing technology to make affordable prosthetic devices. With the first fund almost fully deployed, MassMutual is reupping its commitment with a second, $100 million Catalyst Fund. A portion of the fund will co-invest with first-time Black, Indigenous and Latino-led funds, which MassMutual supports through its $100 million First Fund Initiative. MassMutual manages about $316 billion in assets. The new Catalyst Fund will bring its total impact investments to $300 million. Check it out.

Impact Voices: ESG in VC

Managing human rights risk rises up the agenda of venture capital. Artificial intelligence ethics. Labor rights for gig workers. Client protection in fintech. Venture capitalists are finding it harder to ignore human rights risks in their portfolios. Over the last nine months, investor network VentureESG spoke to two dozen VC firms and investors, as well as civil society groups, to develop tools to help VCs integrate human rights in their due diligence. Even VCs with an interest in human rights were unsure about how to apply them to investing. Some called for a specialized set of due diligence questions (see, “A human rights approach in impact investing”). Leaders to watch: impact funds like Lightrock and emerging market investors like British International Investment. “We can learn from them,” VentureESG’s Joanne Azem and Johannes Lenhard write in their latest dispatch.

  • Embedding rights. Some impact funds add whistle-blower protections and grievance mechanisms (see, “Will impact investors welcome the arrival of mechanisms to redress community grievances?”). Lightrock embeds safeguards “into our investment process and carefully assesses our portfolio companies in relation to human rights policies,” says Lightrock’s Marc Moser. BII’s Rob Borthwick says the agency expects its VC fund managers “to carefully consider and formalize their approach to human rights issues.” VCs ought to ask themselves and prospective portfolio companies about human rights commitment policies, due diligence processes, and remedies for human rights violations, says VentureESG.
  • Supply chain solutions. Working Capital, a spinout of Omidyar Network’s Humanity United, sees an investment opportunity in technologies to help businesses protect vulnerable workers and source responsibly. The fund will convene a one-day (private) Supplier Responsibility Summit this week with representatives from Apple, Amazon, Disney, DBL Partners, Salesforce Ventures and others. Investor and regulatory pressures, such as Germany’s Supply Chain Act, which went into effect in January, “are changing the risk-reward calculus,” for corporations to act, Working Capital’s Ed Marcum told ImpactAlpha.
  • Keep reading, “Managing human rights risk rises up the agenda of venture capital,” by VentureESG’s Joanne Azem and Johannes Lenhard.

Agents of Impact: Follow the Talent

Iain Watson, former head of power and utilities at National Bank Finance, is named country manager of Marathon Capital’s Canada operations… Oikocredit is on the hunt for a regional capacity building specialist in Abidjan, Cote d’Ivoire… Employee-owned Boston Trust Walden Company seeks a compliance associate.

ECMC Foundation’s venture investing arm has an opening for a senior associate in Los Angeles… LISC is looking for a remote impact measurement and communications intern… ResponsAbility is recruiting a climate-smart agriculture technical specialist in Lima… Acre seeks an ESG and impact investment senior analyst in Singapore. 

Capital Good Fund issued an RFP for a consultant to help develop, design and implement a solar leasing program for low- and moderate-income homeowners… Impact Investing Ghana’s Ghana Impact and West Africa Deal Summit will convene in Accra, May 16-17… “Financing the fight on lead in drinking water,” hosted by the Accelerator for America Action will take place in Washington, D.C., Tuesday, May 16. 

Thank you for your impact.

– April 17, 2023