The Brief | April 19, 2023

The Brief: Lafayette Square’s worker solutions, impact muni to expand home ownership in North Carolina, scaling climate tech, measuring investors’ contributions

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Greetings, Agents of Impact!

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Featured: Inclusive Economy

Lafayette Square is banking on low-income communities and worker solutions. The middle market is immense, as is the opportunity for uplift among the low-income people who make it work. That’s the investment thesis of New York-based Lafayette Square, the investment firm started by Damien Dwin in 2020 to provide private credit to middle market manufacturing, wholesale, franchising, transportation, construction, health care and other businesses primarily located in low to moderate income census tracts. The firm detailed its strategies in its annual 10-K report filed with the Securities and Exchange Commission. “Low-to-moderate income workers are essential to our economy and bear a disproportionate financial burden, particularly during times of inflation,” Dwin wrote in sharing the 138-page filing last month. “Monitoring where capital flows geographically and the types of benefits that workers receive is worthy of attention.”

  • Worker solutions. Lafayette Square reports publicly because it is structured as a private business development company. BDCs, as they are known, can tap a broader pool of investors with fewer regulatory hurdles. Lafayette Square presents its Worker Solutions unit as not only compliant with BDC requirements, but as a key driver of business growth. The unit works with portfolio companies to improve access to traditional benefits like health care and retirement plans and additional benefits for low-to-moderate income workers, such as matching savings programs. The bet: increasing employee retention, morale and productivity can reduce risk. Currently, Lafayette Square companies have higher turnover and lower participation in retirement and health benefits than the national average. “We believe that over time, our portfolio companies’ uptake of third-party solution providers, in combination with our capital, will contribute to an improvement in the metrics,” the company said.
  • Real wages. For a lender, Dwin has a contrarian view on the U.S. Federal Reserve’s meeting next month. Many investors hope the Fed will taper its rate hikes. Dwin wants the Fed to raise rates further. What his peers are missing, Dwin says “is the distress that inflation has caused for many lower income Americans still reeling from the pandemic and an inflation-adjusted drop in real wages of more than 6% since 2020.” The solution: investment in low-to-moderate-income places and people. “The impact could help reset a flailing economy,” he says, “and improve the lives of working people who are once again being disproportionately impacted by a Wall Street issue.” Read Dwin’s post, “How the Fed can help small business owners, raise real wages and rebuild communities.”
  • Keep reading, “Lafayette Square is banking on low-income communities and worker solutions,” by Amy Cortese and David Bank on ImpactAlpha.

Dealflow: Impact Munis

Impact Munis: Affordable home ownership and generational wealth in North Carolina. The North Carolina Housing Finance Agency is expecting to complete a $150 million “social bond” by Thursday, May 4. Proceeds will be used to purchase new mortgage loans for single-family residential housing from households with an income of less than 80% of the area median income. The bond is featured as part of ImpactAlpha’s collaboration with HIP Investor, which is identifying upcoming issuances with social and/or environmental significance. “Investors seeking impact can consider this higher-impact bond from the NC housing authority,” wrote Stella Yao of HIP, which gives the agency an overall HIP Rating of 61%, positioning it as “above average” compared to issues from other states and counties.

  • Social bonds. Investor demand for bonds targeting social issues have driven lower interest rates for New York, Atlanta and other  issuers (for context, see “Managing social risks and addressing racial inequities in the muni bond market). The North Carolina housing agency, a rollup of 100 county local housing agencies across the state, originated more than 4,000 mortgage loans over the last two years. Roughly nine in 10 went to borrowers earning less than the median income; 33% went to minority borrowers and 53% went to women. With additional programs including down payment assistance, the agency “is making a significant contribution to reducing wealth disparities in North Carolina,” said Yao.
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Climate tech investor Congruent raises $300 million to help portfolio companies scale. Congruent Ventures has cut pre-seed, seed and Series A checks for more than 60 companies since launching in 2017. The San Francisco-based venture capital firm’s new Continuity Fund will invest in existing portfolio companies to support commercialization and scale. The fund has made four investments. Meati Foods is making fungi-based meat alternatives. AMP Robotics makes, well, robots, to sort recyclable materials. Fervo Energy is a geothermal energy project developer. makes smart electric circuit breaker panels to support home electrification and energy consumption (for background, see “SPAN raises $90 million to upgrade the lowly circuit panel and electrify everything). Congruent looks to write $15 million to $20 million checks in Series B and C rounds of $30 million or more.

  • Seed investor. Pipeline and relationship-building still happens at the seed stage, Congruent’s Abe Yokell told ImpactAlpha. Congruent is still investing from its $175 million second fund, which closed in 2021. The availability of seed-stage capital for climate tech has improved in the two decades he has been investing in climate and clean tech, Yokell said. “There are very few climate tech firms that have been around for five years, much less 10,” he notes. The shortage now is at the early-growth stage, where valuations can be difficult to determine. “Venture capital is just one part of the climate capital stack,” Yokell acknowledged. “For climate businesses to scale and to address climate change at scale, we need a lot of other forms of capital: project finance, real-assets capital, debt.”
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Canada’s Flash Forest secures $11.4 million to speed forest replanting after wildfires. Climate change is increasing wildfire intensity and damages. Flash Forest in Ontario is using drones to jumpstart post-fire reforestation in areas that are too dangerous for human tree-planters. The company wants to help replant one billion trees by 2028 to mitigate climate impacts and biodiversity loss.

  • Seedlings. Israel-based OurCrowd and Canadian telecom company Telus co-led the investment round. Telus invested via its $100 million Pollinator Fund for Good social impact fund. The investment will support Flash Forest’s U.S. expansion. The company will also provide drones to Telus’ business customers to support their environmental sustainability initiatives.
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Dealflow overflow. Other investment news crossing our desks:

  • The Global Energy Alliance for People and Planet, or GEAPP, committed $35 million in catalytic capital to a fund with the Asian Development Bank for investments in clean energy projects in South Asia. (GEAPP)
  • Bogota-based Acumen Latam Impact Ventures (or ALIVE Ventures) secured $20 million for its second fund, which has a $80 million target, from investors including Acumen, the Dutch Good Growth Fund and Latam Impact Fund. (Forbes)
  • nZero, a Reno, Nev.-based carbon management and accounting platform, scored $16 million in a Series A investment round led by Fifth Wall. (nZero)
  • Bamboo Capital Partners will manage a $17 million fund, backed by the World Bank, to create access to clean cooking stoves for households and small businesses in Burundi. (Bamboo Capital)

Six Short Signals: What We’re Reading

🚀 Pathways to commercial liftoff. The Department of Energy’s $8 billion investment in regional clean hydrogen is meant to catalyze demand pools for hydrogen energy and support cost-sharing across distribution and storage. The hubs are one way the U.S. government aims to “buy down risk” of hydrogen, nuclear and long-term energy storage to attract private investment. (FootPrint Coalition / Department of Energy)

🌎 Investing in climate justice. To invest in community resiliency, front-line communities are creating their own financial entities, including loan funds, land trusts and worker cooperatives. Examples include Catalyst Miami’s North Miami Community Investment Cooperative, Kheprw Integrated Fund, Seed Commons and Reinvest in Our Power. (Gloria Walton / The Solutions Project)

🌱 Corporate climate spend. More than 700 business executives ranked achieving “sustainability goals” their top corporate initiative over the next six months, ahead of digital transformation, market growth, and financial performance, according to Honeywell’s Q2 Sentiment Index. One in five corporations plan to increase investment in sustainability by more than 50%. (Honeywell)

⚡ Inside the microgrid market. Renewable energy microgrid companies are busy serving commercial and industrial facilities, data centers and utilities, according to executives who will participate in Microgrid Knowledge’s mid-May Microgrid 2023: Lights On! Conference in Anaheim, Calif. (Microgrid Knowledge

😃 ‘Happy worker’ alpha. Harbor Capital Advisors is expanding its suite of thematic exchange-traded funds with a new product seeking to capture the link between happy employees and positive stock performance of smaller companies. (Bloomberg)

💨 A just cannabis economy. Growing cannabis indoors hurts workers and communities. One clear solution: Farm cannabis outside, where sustainable energy is abundant and lower startup and operating costs can reduce the steep inequities that nonwhite owners of businesses face in obtaining financing. (Slate)

Impact Voices: Metrics Madness

Investor contribution: The elephant in the room no longer? Last month’s Metrics Madness Agents of Impact Call suggested that a universal metric to guide investments in racial justice and equitable wealth-building remains elusive. Impact Frontiers and the Predistribution Initiative have undertaken an exercise to identify a similarly elusive standardized method to measure an investor’s contribution to intended positive impacts. In a guest post on ImpactAlpha, Jackson Gates and Mike McCreless describe how, after analyzing hundreds of bespoke metrics, they “were reminded of the fable of the blind men each touching a different part of an elephant: each metric seemed to capture a different, incomplete view of the investor’s contribution to impact.”

  • Counterfactuals. A standard metric for measuring changes in outcomes for end-stakeholders and the environment that would not have happened without the investors’ presence might have represented a gold standard for impact investors. But causality is hard to measure, Gates and McCreless write. Instead, they propose that investors craft a plausible narrative for investor contribution that considers context and counterfactuals. Such a narrative would help “investors assess whether there is a sufficiently compelling case that their actions have caused or are expected to cause a change in outcomes that wouldn’t have likely occurred in their absence.”
  • Shared resources. The Investor Contribution 2.0 collaboration between Impact Frontiers and the Predistribution Initiative, supported by Omidyar Network, aims to develop tools that investors can use to measure and manage their own positive and negative impacts, as distinct from those of portfolio companies. The materials are now open for public-consultation via the project website.
  • Keep reading, “Investor contribution: The elephant in the room no longer?,” by Jackson Gates and Mike McCreless on ImpactAlpha.

Agents of Impact: Follow the Talent

ImpactAlpha is at Climate Week in San Francisco to talk catalytic capital and share the next version of the Climate Finance TrackerDavid Bank is on panels presented by Second Muse and New Energy Nexus on Thursday, April 20.

Hala Hanna, who has spent the last six years building MIT Solve’s global community, becomes its new executive director… Rebekah Saul Butler, former chief investment officer and co-executive director of The Grove Foundation, joins Gratitude Railroad as managing partner and co-CEO. 

Agilon Healthis on the hunt for a remote ESG and corporate citizenship senior director… Blue Dot Capitalis recruiting an ESG research and integration senior associate… Investing for Goodseeks an innovative finance co-lead… The University of Pennsylvaniais looking for a research specialist for an ESG initiative.

Boston Consulting Groupis hiring an ESG knowledge expert and team manager… Ford Foundationhas an opening for a technology and society program officer in New York… Applications are open for scholarships for the Oxford Social Finance Programme, a five-day program that offers leadership skills training to impact investors.

Thank you for your impact.

– April 19, 2023