Environmental, Social & Governance (ESG) investing is all the rage in the institutional investor community. Increasingly, pension funds, endowments and foundations (E&Fs) and asset managers are demanding that the companies in which they invest start implementing ESG guidelines and policies, from the board level to management and all the way down to supply chain operations. (See related article) But while related, impact investing, or investing with an intentional and measurable social or environmental impact, hasn’t gained the same momentum as ESG. The endowment and foundation community is now looking to change that.
“Endowments and foundations are, at their core, mission-driven institutions, who look for ways to use all of the assets at their disposal to create the world they want to see,” said Beth Bafford, vice president, syndications and strategy at Calvert Impact Capital, a firm that works to make impact investible for both institutional and retail investors. “For many of them, it is a moral and mission imperative to understand what the bulk of their assets are supporting and, where possible, create better alignment between their assets and the values of their organizations and the stakeholders they serve,” she said.
So is the mission to move toward more impactful investing finally taking hold? “There is not a foundation out there that has not at least discussed impact investing with their committees,” asserted Bafford.
So what exactly is impact investing?
Impact investing can be administered across all asset classes, but is mostly done through private investments, often in real estate, private equity, private debt and infrastructure deals. “It is always done with the purpose and intention to create measurable impact from investments as well as a competitive financial return,” Bafford said. What makes it different from ESG is that it relies more on outcome than process. “Impact investing enables people to add another variable to consider when looking at investments; they look at risk and return, and ESG, but then add impact as another variable to assess, when seeking investments,” Bafford noted.
Nice, but is it profitable?
Typical returns on impact investment deals, like any other investment, depends on the risk and the terms, but are generally in the 5%-7% percent range return for a three-to-seven year fixed-income or private loan transaction, Bafford said. “You are adding the additional variable of impact, but at the end of day, you are looking at the same risk return profile of any asset class, just like you would in a normal investment,” she said. Most of the foundations and endowments that invest with Calvert, which has $400M under management, make these investment through the private debt allocation portion of their portfolios, she noted.
Two Minneapolis Foundations already investing in impact
The McKnight Foundation, with $2.3 billion in assets under management, has long made impact investing part of its mandate. It currently has a commitment to invest at least $200 million in high-impact investments across any asset class that offers such investments, according to Elizabeth McGeveran, director of impact investing at the foundation. “As of Q2, we have [impact] investments in public equities, public fixed income, private debt funds, a private line of credit to a company, private equity fund, venture capital fund, real asset funds, a clean tech secondaries fund and three direct equity positions in small companies,” she said. “We are relatively agnostic about the asset class—we see opportunities for impact across all types of investment approaches,” she added.
McKnight’s impact investing goals are focused on the foundation’s overall priorities, which include promoting the transition to a low-carbon economy; affordable housing; thriving local economies and commercial agriculture, McGeveran said.
“In our $200 million high-impact commitment we have a general goal of $75 million into public stock and bond markets, $75 million deployed—with more committed—to private investments and then $50 million for ‘charitable investments’ or ‘program related investments,’ which are defined by the IRS as below market return,” she explained. “For the bulk of that $200 million we are looking for market-rate returns, but we are willing to take on some additional risk in private investments if an opportunity is closely aligned with the impact priorities of the foundation,” McGeveran noted.
In addition to that $200 million investment goal, McKnight has also made adjustments to existing investments to bring them more in line with its mission. “An additional $603 million [of investments] have ESG processes or are aligned with our mission in other ways. That means 33% of McKnight’s entire endowment is aligned with our mission,” McGeveran noted. For example, we moved $100 million from a Russell 3000 tracker fund into a carbon efficiency strategy that has similar fees, tracking error and risks, but it reduces the carbon intensity of that investment by 50%. We have almost four years of track record and it’s performing beautifully,” she noted. By that she means it is meeting its financial expectation in terms of returns, volatility, and tracking error, and its impact goals in terms of having less carbon exposure than the benchmark.
The Minneapolis Foundation, which has $850 million in assets under management invested in donor advised funds and other charitable funds, began offering donors the opportunity to invest in its impact investing fund, called InvestMPLS, in 2016. Currently, the InvestMPLS loan fund has $5.5 million in invested assets and the foundation projects the funds size to grow to $10 million.
InvestMPLS assets are invested with qualified intermediary organizations, including Community Development Financial Institutions (CDFIs), mostly located in the Twin Cities. The fund comprises loans that are offered at below-market rates to partner organizations, which then use the money to make smaller loans to assist in economic development or educational initiatives.
“The Invest MPLS revolving loan fund has specific, well-articulated goals, measurements and metrics in place that tell us and our donors what has been achieved by the investment,” said Karen Florez, manager of investments at the Minneapolis Foundation. “The money is not a gift or grant, it’s a loan,” she emphasized. “The theory behind it is that the principal is repaid with a modest amount of interest and can be loaned out again, so the money keeps rotating and gets used many times instead of just once,” said Florez. From a social impact perspective, “the fund is designed to help our donors expand their impact beyond grant making to pursue a shared vision of racial, social and economic equity in our community,” Florez said.
Two areas on which the investments in InvestMPLS are focused are creating living-wage jobs in the Minneapolis area and helping high-performing schools that serve low-income students of color to expand. For example, assets in the fund support an organization called Propel Nonprofits, which offers finance, strategy and governance services to many Minneapolis-based nonprofit organizations. Propel is using InvestMPLS funds to support construction of a new high school, which will open in the city this fall.
Propel Nonprofits provided term-financing to the school, which the school will repay to Propel. and then Propel will repay that money to the InvestMPLS loan fund. “The rate of return in not going to be like an investment portfolio, but there is a modest return to the donors and then the principal will be returned to the fund and be available for grantmaking or reinvestments,” Florez said. Donors receive a 1.75% return on their investments and the loans made to Propel are at a rate of 2%.
The Minneapolis Foundation is also now developing a plan to direct an impact-investing lens on other investment pools it manages. For instance, with its money market accounts, the foundation is considering how to invest in a money market fund, short-term deposit or CD of a bank that makes loans to low-income neighborhoods, Florez explained.
Calvert’s current focus: getting capital to small businesses
Currently, Calvert is raising money for a $25 million small-business, capital-lending fund that provides affordable flexible capital for businesses located in low-income communities. “The fund targets small-business owners, who often lack access to affordable capital, such as women or entrepreneurs and businesses of color,” Bafford said. The organization funds private, flexible loans that allow the recipients to grow and build their businesses. The fund also tracks job creation, wages, benefits and the training taking place at the businesses to be sure that the loans are making a positive social impact for both the people working at the businesses as well as for the broader community they are serving,” Bafford explained. The fund is expected to close at the end of September. (Calvert declined to name the expected rate of return for the fund.)
Calvert, typically, syndicates private loans to investors that range in size from $10 to $40 million per deal and brings multiple institutions into a single investment fund at a $1 million minimum investment. In aggregate, Calvert has syndicated $165 million of transactions in the last year. It also puts its money where its mouth is. “Calvert lends into every transaction that we syndicate,” noted Bafford. We hold a piece of the risk for every deal we offer to institutional investors. We serve a unique function in the markets, because we not only structure deals as bankers, but also put money into the deals with our peers in the transaction,” she said.
Interest by E&Fs continues to grow
While impact investing is not a new asset class, there has been a clear peak in interest in the sector, over the last few years, Bafford noted. The Mission Investor Exchange, an impact investing network for foundations dedicated to deploying capital for social and environmental change, with in excess of 200 members, has seen attendance at its conferences grow exponentially over the past few years, “not only in interest and attendance growth, but sophistication of the conversation has grown,”Bafford said. “And the question being asked at the conference has moved from ‘why would you do this’ to ‘how do you do it successfully?’” she said.