The Brief | December 8, 2022

The Brief: Impact-linked compensation, second-party opinions for green bonds, small-business lending in Africa and Appalachia, disclosing extinction risk

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Greetings, Agents of Impact!

Featured: Impact Management

Tying fund managers’ compensation to impact performance is easier said than done. Fund managers typically get a share of financial gains from the investments they make in the form of carried interest, or simply “carry.” Should compensation for impact fund managers also be pegged to the impact performance of their portfolios? University of Oxford’s Aunnie Patton Power, in a guest post on ImpactAlpha last month, argued that such “impact carry” should be considered “table stakes” for limited partners committing capital to impact investing fund managers. In response, Agents of Impact raised a host of practical challenges that must be overcome before impact carry can be widely adopted. As could be expected, the most detailed dissection came from a pair of lawyers, Chintan Panchal and Aaron Bourke of RPCK Rastegar Panchal. Other impact practitioners weighed in as well with tweaks and alternative tools for aligning fund managers with impact performance. Among the suggestions: 

  • Reward enterprises, not investors. “Financial rewards should be directed to the primary value creator, which is typically the impact enterprise” and not the fund manager, argues Roots of Impact’s Bjoern StruewerSocial impact incentives, or SIINCs, use philanthropic capital to pay grassroots organizations and enterprises to deepen their impact. In cases where funds seek to adopt impact-linked compensation, “the impact carry should be shared between the investor and the enterprises,” Struewer says. “It is the enterprise that makes the difference.”
  • Establish guardrails. Before leaning into impact-linked compensation, managers should put more sophisticated risk management systems in place, says Delilah Rothenberg of the Predistribution Initiative. “We are still learning that we are not always measuring and managing the right things,” she observes. Without the right guardrails, managers could “game” metrics or ignore negative externalities and unintended consequences. “We might end up rewarding fund managers for worse outcomes, exacerbating inequality and imbalanced power dynamics.” 
  • Recognize track records. As large, traditional private equity players enter the impact investing market, impact carry could be a useful tool for holding them accountable, says Amie Patel of Elevar Equity. “Anyone that isn’t a pure impact general partner should have this impact-linked component in their strategy,” she says. Veteran, pure-play and often smaller impact managers like Elevar, which focuses on low-income customers in emerging markets, may not need such structures.
  • It’s complicated. There are reasons just 3% of impact fund managers have adopted incentive structures like impact carry. For starters, private equity funds are expensive to raise and operate, especially small funds, where a typical 2% fee structure doesn’t stretch very far. Layering impact carry onto traditional compensation arrangements would require “bespoke legal drafting” that drives up costs, Panchal and Bourke write. “Impact fund managers cannot be saddled with the full burden of implementation.”
  • The ‘how’ matters. More fundamental are questions about how and to what to peg remuneration. “How will the fund’s performance relative to those impact targets be measured?” the attorneys ask. “What if a fund manager exceeds certain impact targets but falls short of others?” Impact is often a long-term game and may exceed a typical seven or 10 year fund structure – a reality that Patton Power flagged in her original piece. “There is an evolution in people asking ‘Why should we have impact-linked compensation,’ to ‘How do we do it well?'” she says. “The next step is to establish best practices around what good impact-linked compensation looks like.”
  • Keep reading, “Tying fund managers’ compensation to impact performance is easier said than done,” by RPCK Rastegar Panchal’s Chintan Panchal and Aaron Bourke.

Sponsored by BlueMark

Raising the bar for impact reporting. Ten thousand new jobs created. One million metric tons of carbon emissions reduced. Two thousand new units of affordable housing built. Such metrics make for good headlines, but fail to offer a complete picture of impact results or how these results were pursued and achieved. Impact verification firm BlueMark, which surveyed more than 50 impact investing experts about completeness and reliability in impact reporting, is ready to share its framework.

  • 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, for “Raising the bar 2.0: Introducing BlueMark’s framework for evaluating impact reporting,” Tuesday, Dec. 13 at 11am ET. RSVP today.

Dealflow: Muni Impact

S&P Global acquires Shades of Green’s climate-risk assessments for bonds. Issuers of social, green and other sustainability bonds seek “second-party opinions,” or SPOs, from ratings agencies like S&P Global to reassure investors that the bond issuance aligns with stated goals.Shades of Green, a subsidiary of Norwegian climate research institute CICERO, provided the SPO for the World Bank’s original green bond framework in 2008. S&P Global acquired Shades of Green from CICERO “to expand and strengthen our ability to help our customers seeking access to the sustainable debt markets,” said S&P Global’s Martina Cheung.

  • Material risks. Environmental, social and governance-linked debt issued by sovereign, municipal, corporate and financial sector entities has reached $4.5 trillion, up from $1.5 trillion just two years ago. Investors have been pushing ESG bond issuers for better disclosure of climate and other risks. Shades of Green “provides transparency on climate risk while motivating early movers in the market and rewarding advanced actors,” said Shades of Green’s Christa Clapp.
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British International Investment provides $75 million guarantee for small business lending in Africa. The U.K. development finance institution and Nairobi-based African Guarantee Fundwill guarantee loans from partners lending to small and medium enterprises in Africa, especially women-led businesses addressing climate issues. The partners say the investment qualifies under the 2X Challenge, which incentivizes funds to emphasize women’s employment, entrepreneurship and leadership. By covering up to 75% of the risks, BII and African Guarantee Fund say the guarantees will help financial institutions deploy $150 million in loans to more than 17,000 small businesses. “We are certain of increased economic growth across the 40 African countries where our guarantee products are utilized,” said African Guarantee Fund’s Constant N’zi.

  • Innovative finance. Perceptions of risk have kept many small businesses from accessing financing from traditional lenders. Since 2011, the African Guarantee Fund has provided $1.8 billion in partial guarantees and risk-sharing facilities to lenders, catalyzing more than $3 billion in small business finance. African Guarantee Fund aims to unlock up to $5 billion for Africa’s women-led enterprises by 2026.
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Ford Foundation invests $10 million in Appalachian Community Capital to boost rural business lending. The infusion of capital from Ford is expected to support the financing of 400 small businesses and creation of 1,000 new jobs in the 13-state Appalachian region, while attracting additional private capital. It is the foundation’s second program-related investment in Appalachian Community Capital, a “central bank” for community development lenders. Since 2015, the nonprofit has deployed $26 million in debt and $5.5 million in grants to finance 110 small businesses and support 2,000 jobs. Unequal access to financial resources “is a plague in our country, whether it affects rural Appalachia or urban areas,” said Ford’s Roy Swan. ACC “is upending this trajectory in rural America.” Share this post.

Dealflow overflow. Other investment news crossing our desks:

  • Sweden’s Einride, which integrates electric and autonomous vehicles into supply chains, raked in $500 million in equity and debt funding from Temasek, Norrsken VC, EQT Ventures and others.
  • Germany’s World Fund secured €50 million ($53 million) from the European Investment Fund to back emerging climate tech ventures in Europe.  
  • A $10 million fund launched by Tulane University’s Innovation Institute will invest in women and minority-owned businesses in Louisiana.

Signals: Extinction Watch

Move over climate. Here come biodiversity disclosures. Environmental ministers from 191 countries are in Montreal this week to hammer out a global biodiversity framework that could serve as a kind of Paris Agreement for nature. On tap: corporate disclosure of impacts on nature. The issue is under negotiation at COP15, the biodiversity “conference of parties” that was delayed two years due to the Covid pandemic. The summit comes as human development is pushing the planet towards a sixth mass extinction. “We do hope that Montreal 2022 will be to nature what Paris 2015 was to climate,” says Planet Tracker’s Robin Millington

  • 30 by 30. The broad goals of the convention to reverse biodiversity loss and close funding gaps are broken down into 23 targeted actions. Target 3 urges the conservation and protection of 30% of global land and oceans by 2030. Other targets include cutting subsidies harmful to biodiversity (Target 18) and ensuring equitable participation by Indigenous communities (Target 21). Canadian Prime Minister Justin Trudeau said his government would spend $800 million over seven years on four Indigenous-led conservation projects covering 386,000 square miles of land.
  • Nature-based reporting. Like climate change, the collapse of Earth’s biodiversity presents both systemic and company-level risks. Some $44 trillion, or about half of global GDP, depends on nature. Target 15 calls for companies to report on efforts to reduce biodiversity-related risks. Mandatory reporting requirements would take years to implement across countries, but investor groups are looking to fast-track action. The Taskforce for Nature-Related Financial Disclosure is rushing to finalize a framework modeled on the similar task force for climate disclosure. Nature Action 100, modeled on Climate Action 100+, aims to mobilize investors to press corporations on nature-related risks and action. The idea, CDP’s Bridget Schrempf tells ImpactAlpha, is to “expand our definition of the ‘E’ in ESG to cover planetary boundaries, including ocean and land use, biodiversity, food production, and waste.”
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Agents of Impact: Follow the Talent

Maryland’s governor-elect Wes Moore closed out this week’s Mission Investors Exchange conference in Baltimore, six years after he addressed the same conference as an anti-poverty advocate, author and founder of BridgeEdU, a social enterprise to help at-risk students overcome structural barriers to entering and staying in college (and which was acquired by Edquity in 2019). Baltimore and Maryland can become testbeds for innovation and impact, Moore told foundation leaders. “I need you to invest here.” See “Overheard at MIE” for more takeaways from the conference. 

Autodesk Foundation promotesTrenton Arthur, Haresh Khoobchandani and Dara Treseder to its board of directors… Hedge + Impact headhunting firm is recruiting an impact investing analyst in Michigan and an impact private equity principal for Latin American and the Caribbean in Mexico City… The World Bank is looking for a director of development impact measurement in Washington, D.C… LISC seeks a legal operations manager in New York.

The Nature Conservancy is recruiting a senior policy advisor for agriculture… Winrock International is hiring a remote program officer for net-zero climate services… WEPOWER is recruiting a director of political strategy in Saint Louis, Mo… CIBC is looking for an ESG investing summer intern in Washington, D.C… Google is launching its Google for Startups Accelerator on climate change in Europe.

Thank you for your impact.

–Dec. 8, 2022