Defined Benefit, Endowments/Foundations, ESG/SRI, Institutional Investors, Pension Funds, Private Equity, Public Funds

Inadequate Deal Structures Said to be Slowing Pensions’ Entrée to Impact Investing

Impact investing has piqued the interest of many forward-thinking pension funds, as a way to contribute to positive environmental and social change while also reaping significant returns.  But a lack of appropriately structured and sized investment vehicles may be holding many of them back from doing so.

Beth Bafford, vice president, syndications and strategy, Calvert Impact Capital

“One reason why impact investing has not drawn more interest is that many issuers of these products have found difficulty creating an investment vehicle that fits the size, shape and structure that works for institutional investors,” 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. “There are structural elements that are important to them [pension funds]” she said. Those elements seem to be hard to find in smaller impact investing funds or deals.

Impact investing—investing in products designed to deliver a measurable social and/or environmental impact while generating a competitive financial return—demands standards on both sides of the equation. To formulate an impact investment fund that will have traction “takes knowledge of the institutional investors—what they look for in terms of structure, rate, tenor, liquidity, and scale—all the things you need to reach an institutional investor, but you also need to find the shape and structure that meets the needs of these underserved communities we are trying to reach,” Bafford explained.

Rob Day, general partner, Spring Lane Capital

Rob Day, a general partner at Spring Lane Capital, a private equity firm that offers affordable financing for smaller-scale, sustainable infrastructure projects, agrees. “The challenge [for the impact providing community] is that they need to speak the same lingo, to structure things correctly to be replicable,” he said. “They also need to demonstrate attractive returns, or they the [investors] won’t care or replicate it, which is the goal, if you’re looking to unlock a big wave of mainstream capital into these types of investments,” he said. The problem lies in the fact that many of the creators of impact investing products “do not have deep Wall Street knowledge about how to structure it or define arcane terms so that they will sing to Wall Street,” he said.

Consultant Wilshire Associates sees  impact investing as a “growth market,” said Daniel E. Ingram, vice president of responsible investment research & consulting at the firm. In the findings of a survey by the US Forum for Sustainable and Responsible Investment (US SIF) there was a very clear delineation between the amount of interest investors’ had in socially responsible investing (SRI), which excludes certain investments and is still the most popular approach among institutional investors, followed by environmental, social governance (ESG) integration, and then a relatively small tranche devoted to impact investing. “There is a long way to go,” Ingram said. Many pension funds are still struggling to figure out their impact investing objectives and what to include in their investment policy statements, while at the same time ensuring they can actually implement their strategic impact investing objectives,” Ingram said.


Many foundations invest in early-stage start-up funds that can handle a few million dollars’ worth of investments, but there is a need for larger funds that can accommodate hundreds of millions.

Daniel E. Ingram, vice president of responsible investment research & consulting, Wilshire Associates

Metrics matter

So what can organizations do to make their impact investing strategies more appealing to institutional investors?

“We encourage organizations to provide a clear impact thesis and metrics by which they will measure their social return. They should also provide a historical track record of financial returns to investors,” said Christine Looney, deputy director of mission investments at the $13.7 billion Ford Foundation, which has committed to invest $1 billion over 10 years to impact investments.

Christine Looney, deputy director of mission investments, Ford Foundation,


 In April 2017, the foundation launched its mission-related investment (“MRI”) fund, through its Mission Investments program, marking the first time it has sought, intentionally, to generate positive social returns along with attractive financial returns,” said Looney.  The foundation is doing so by committing capital exclusively to private equity funds “because our board considers that strategy to be a highly effective approach to driving intentional impact intended to reduce inequality,” Looney said. The fund has a commitment of $40 million to-date to the fund. As for financial returns, time will tell. “Given that the portfolio is allocated primarily to private equity funds, which invest capital and gather returns over a ten- to twelve-year life cycle, it is too early to report meaningful returns,” Looney said.

While the impact investing team at the Ford Foundation is encouraged by the momentum being generated by the E&F community, they are hopeful that the rest of the institutional investor community will get on board.

“Our $1 billion MRI fund is around 7.5% of our total endowment. Now, if we assume all foundations, like Ford, allocated roughly 7.5% of their roughly $900 billion in aggregate assets to MRI, that $68 billion is a paltry sum compared with the trillions of dollars needed to solve the liabilities—shortage of affordable housing, under-employment, societal cost stemming from structural and systemic racism and gender bias, and environmental degradation, to name a few,” said Roy Swan, director of mission investments. “So, the real action is not just the foundations, but other asset owners who take a special interest in the public welfare and civil society: pension funds, sovereign wealth funds, university and endowments.”

Roy Swan, director of mission investments, Ford Foundation

By contrast, European pension funds have long been comfortable pursuing social and financial returns within fiduciary standards, as they serve their beneficiaries, said Swan. According to Global Impact Investing Network‘s (GIIN) 2018 Annual Impact Investor Survey, pension funds, worldwide, invested in aggregate $5.4 billion in impact investments in 2017 and have so far planned $4.27 billion of investment in 2018.

Gil Crawford, chief executive officer (CEO) of the $385 million in AUM, MicroVest, a global impact investing asset management firm that seeks to invest capital in under-banked markets and provide access to financial services for rising middle-class communities around the world, agrees that larger institutions need to get involved. “Many foundations invest in early-stage start-up funds that can handle a few million dollars’ worth of investments, but there is a need for larger funds that can accommodate hundreds of millions,” he said. “In order to move the needle, we need to talk about that kind of money.”

Gil Crawford, chief executive officer, MicroVest

Where are impact investments being made?

Today “the impact markets are more mature in the private markets, so that is where the bulk of attractive investable options have been to-date,” Ingram said. But the scale of public markets could be attractive, going forward, he noted. “Investors are now looking at what kinds of impact they can have in public markets, as there are differing risk return considerations in both markets. The question being asked now is: ‘Do certain asset classes deliver better impact bang for your buck?’” he added.

Size Matters

In the meantime, the small size of deals on offer continues to be a roadblock to impact-market participants. “The large public plans still face a challenge of scale—finding attractive opportunities at the right ticket size, which warrant the due diligence they would have to do, and the time it takes, so that the impact investment moves the dial toward meeting their return seeking objectives,” Ingram said.

Day concurs: “If you are big pension fund, you can see a trend toward sustainability, and you want to place 30-year bets. But when many of the solutions that are emerging are actually very small projects, you have to find out how you will take the $130 billion that you have to invest and apply it in $5 million increments,” said Day. “It doesn’t scale.” To help solve that problem, Spring Lane’s approach is to put dozens of smaller projects together into “project pools” ranging in size from $10-40 million. This aggregation allows Spring Lane to invest at a size that works for spreading out the costs and risks of an individual project, while still providing smaller project developers with the financing they otherwise couldn’t find at their small scale.

It also means that these investments into smaller projects can, together, become large enough to be attractive to institutional investors, to solve what Day called “the missing middle” between individual impact investments and large institutional capital. “Large investors like pension plans need to write a check that is big enough to make sense for them, but at the same time there’s this need for capital for smaller-scale projects, just like the same kind of capital that is already being provided for big wind turbine or solar farm developers,” he explained. “Big investors, like pension funds, are often interested in investments into operational infrastructure projects, because of their relatively lower-risk profile. But at the smaller scale of these individual projects–pension funds with their minimum check sizes, sometimes as high as $100 million depending upon the size of the pension fund—wouldn’t be a fit without aggregation of some kind,” Day said. Spring Lane Capital itself is backed by institutional investors, and SEC filings indicate the fund is $400 million in size.

Local investing is a way into the impact market

One way that pension funds are entering the impact investing space is through local bond offerings.  The proceeds of these offerings are often used on the local city and state level to provide a positive impact on the local communities, through projects such as repairing infrastructure or building hospitals or schools. Crawford has also become aware of institutional investors starting to ask if they can do impact investing directly. “Pension funds in Canada are doing less investing in funds and more direct investing. They will invest directly in infrastructure projects, for example. I’ve seen this trend start in institutional investors’ impact portfolios, as well,” he noted.

Going forward, Calvert will continue to play a role in introducing pension funds into the impact space.  “We see our role as to act as a translator between institutional investors interested in impact investing and the communities seeking capital,” Bafford said.

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