2. The Kellogg School of
Management
is proud to support the
Impact Capitalism
Summit
and its mission to maximize
impact and return, which
aligns with our vision of
sustainable capital as an
instrument of positive change.
3. About the Organizer
OVERVIEW: Watershed Capital Group is a specialty consulting firm assisting sustainable companies and fund
managers seeking solutions including raising capital and executing M&A transactions and in evaluating
strategic financial options. Watershed’s clients include entrepreneurs, companies, and fund managers scaling
sustainable solutions that lead to competitive advantages and long-term value creation.
A new model of value creation is emerging deploying capital in strategies that leverage the inherent link
between natural, social and financial capital. strategies that leverage the inherent link between natural, social
and financial capital. The global move toward sustainability represents one of the most attractive investment
opportunities of our era. In the face of increasing resource scarcity and growing global demand for these
resources, sustainable strategies are enabling differentiated competitive advantages that lead to long-term
value creation. Watershed’s clients are entrepreneurs, companies, and fund managers scaling sustainable
solutions.
EXPERIENCE: With over 100 years of experience and over seventy-five engagements, Watershed partners are
committed to assisting its clients achieve success and scale a sustainable economy. Each partner has
domain knowledge in multiple industries, in both operational and financial capacities making Watershed one
of the most experienced teams in the sector. Specific industry sector experience includes: organic foods,
renewable energy, energy efficiency, media, water, sustainable ag and aquaculture, green consumer
products, manufacturing, industrial technologies, recycling, bio-plastics, advanced lighting, green building
products, transportation and environmental services. The Watershed team brings a diverse set of functional
backgrounds to clients including private equity, venture capital, investment banking, securities law, and
operational management.
NETWORK: With an exclusive focus in the sustainable/impact sector, Watershed Capital Group represents one
of the most comprehensive global networks of companies, funds and institutional investors focused in this
sector. Watershed Capital Group maintains a reputation as an innovator in the sustainable sector launching
and developing several initiatives. Some of these initiatives are the Five Fund Forum, Impact Capitalism
Circle, and the Global Cleantech Cluster Association. These activities have given Watershed Capital Group
one of the broadest networks in the industry. Watershed is also proud to be a founding B Corp member.
Michael Whelchel Shawn Lesser Aaron L. Enz Lydia Miller
Managing Partner Managing Partner Partner Managing Director
michael@watershedcapital.com shawn@watershedcapital.com aaron@watershedcapital.com lydia@watershedcapital.com
(828) 251 4645 (404) 257 3382 (415) 686 0068 (773) 415-2063
www.watershedcapital.com
Securities offered through Intellivest Securities, Inc., Member FINRA/SIPC
Impact Capitalism Summit 2014 Primer 3
4. About the Primer
As Impact Investing mainstreams, Big Path Capital recognizes the
importance of the dissemination of research and thought-leadership to
those new and experienced in the sector. This primer, development for the
Impact Capital Summit, includes articles and excerpts articulating the value
and opportunity available to institutional investors interested in Impact
Investing. These capital initiatives harness the power of investment for
positive social and environmental impact alongside maximum return.
Impact Capital is SmarterMoney+.
Big Path Capital is pleased to be publishing this primer in partnership with
the Kellogg of School of Management. For the past five years, under the
leadership of Jamie Jones, Kellogg has been a leader in the area of social
enterprise and of impact investing, forming leaders for the future. In
addition to providing assistance in the preparation of this primer, Kellogg
will offer a white paper summary or lessons and findings noted during the
Summit.
The SmarterMoney Review demonstrates the movement of Impact
Investing “from the margins to the mainstream” - a phrase from the World
Economic Forum article. The astute voice and collective experience
gathered in this primer challenge the traditional investment mindset and
encourage, through sound structure and rigor, an innovative capitalism that
generates returns and addresses world issues.
This compendium of excerpts advances the conversation around impact
investing and shifts the investment mentality around impact from why to
why not, from a defensive of posture of why invest in the sector to a
proactive why not invest. Savvy investors seek to maximize their returns.
These articles drive the point home that if investors are not looking at this
sector, they are forgoing an entire category and opportunity of return.
Regards,
Shawn Lesser Michael Whelchel
Co-Chairs, Impact Capitalism Summit
4 Impact Capitalism Summit 2014 Primer
5. Table of Contents
Article Contributed By
High-Impact Portfolios Can Outperform
Wall Street
HIP Investor 6
A Portfolio Approach to Impact
Investment: Framework for Balancing
Impact, Return, Risk
J.P. Morgan Social Finance 9
Impact Investing 2.0: 12 Outstanding
Funds Point the Way Forward
PCV, CASE, ImpactAssets 15
Impact investing as part of a responsible
investment portfolio
Principles for Responsible
Investment (PRI)
20
Building Impact Investing Portfolios: From
Strategy to Policy to Implementation
Sonen Capital 22
Agricultural Technology Impact
Assessment Framework
The CAPROCK Group 26
Total Portfolio Activation: A Framework
For Creating Social & Environmental
Impact Across Asset Classes
Trillium Asset Management &
Tellus Institute
30
A Historical Look at the SRI Industry and
Recent Industry Research
US SIF 33
Women, Wealth and Impact: Investing with
a Gender Lens
Veris Wealth Partners 36
From the Margins to the Mainstream World Economic Forum 39
From Ideas to Practice, Pilots to Strategy
Practical Solutions and Actionable Insights
on How to Do Impact Investing
World Economic Forum 43
Articles contained herein have been reprinted with permission
Impact Capitalism Summit 2014 Primer 5
9. A
Portfolio
Approach
to
Impact
Investment:
Framework
for
Balancing
Impact,
Return,
Risk
By
Yasemin
Saltuk,
Director
of
Research,
J.P.
Morgan
Social
Finance
This
is
an
extract
from
A
Portfolio
Approach
to
Impact
Investment
(Y.
Saltuk,
J.P.
Morgan
Social
Finance,
October
2012),
a
report
written
as
a
practical
guide
to
building,
analysing
and
managing
portfolios
of
impact
investments
for
professional
investors.
Since
completing
this
work,
we
have
been
using
the
framework
for
managing
our
own
portfolio
and
representing
the
profile
of
our
targets
and
investments.
For
the
full
report,
visit:
www.jpmorganchase.com/socialfinance.
In
traditional
financial
analysis,
investment
management
tools
allow
investors
to
evaluate
the
return
and
risk
of
individual
investments
and
portfolios.
This
research
presents
a
tool
to
analyse
impact
investments
across
the
three
dimensions
that
determine
the
performance
of
these
assets:
impact,
return
and
risk.
Throughout,
we
reference
the
experiences
of
impact
investors
with
case
studies
of
how
they
approach
each
step
of
the
portfolio
construction
and
management
process.
The
content
for
this
research
was
informed
by
our
own
investment
experience
as
well
as
that
of
23
institutional
investors
that
we
interviewed.
Figure 1
gives
an
overview
of
the
report
structure,
and
we
provide a summary
of
the
key
findings.
Figure
1:
A
Portfolio
Approach
to
Impact
Investment
Source:
J.P.
Morgan
Building
an
Impact
Investment
Portfolio
Find
a
home
for
the
portfolio
To
successfully
build
a
portfolio
of
impact
investments,
investors
need
to
assign
an
individual
or
a
team
to
source,
commit
to
and
manage
this
set
of
investments,
and
institutions
are
setting
up
their
organizations
in
different
ways
to
address
this
need.
Some
institutions
establish
a
separate
portfolio
with
its
own
management
team,
while
others
employ
a
“hub-‐spoke”
strategy
where
a
centralized
impact
team
partners
with
various
portfolio
managers
across
instrument
types
(such
as
fixed
income
and
equity)
to
manage
the
portfolio's
multiple
dimensions.
Still
others
bring
the
total
institution
in
line
with
the
impact
mission.
Define an impact thesisFind a home for the portfolio Define financial parameters
Building an Impact Investment Portfolio
Mapthe individual investmentsMapthe target profile
Mapthe aggregate portfolio
& compare to target
A Framework for Impact, Return and Risk
Manage risk through
structuralfeatures
Identify the risks
in the impact portfolio
Manage friction between
impact and return
Financial & Impact Risk Management
Throughout,
the
term
"social”
is used to
include
both
social
and
environmental
concerns.
Also,
the
term
“institutional
investor”
refers to
non-‐individual
investors,
including
foundations,
financial
institutions
and
funds.
Impact Capitalism Summit 2014 Primer 9
10.
Table
1
shows
some
examples
of
investors
including
foundations,
pension
funds,
financial
institutions
and
fund
managers,
and
their
organizational
structures.
Table 1:
Organizational
Structures
across
Institutional
Investors
Investor
Type
Example
Portfolio
Management
Foundation
The
Rockefeller
Foundation
Separate
team
The
F.B.
Heron
Foundation
Whole
institution
Pension
fund
TIAA-‐CREF
“Hub-‐spoke”
partnership
PGGM
“Hub-‐spoke”
partnership
Financial
institution
Storebrand
Separate
team
J.P.
Morgan
Social
Finance
Separate
team
Fund
manager
MicroVest
Whole
institution
Sarona
Asset
Management
Whole
institution
Source:
J.P.
Morgan
Define
an
impact
thesis
Once
the
organizational
structure
is
in
place,
the
portfolio
management
team
will
need
to
articulate
the
impact
mission
of
the
portfolio
to
set
the
scope
of
their
investable
universe.
For
many
impact
investors,
the
impact
thesis
is
usually
driven
by
the
value
set
of
an
individual
or
organization
and
can
reference
a
theory
of
change,
often
with
reference
to
specific
impact
objectives
such
as
access
to
clean
water
or
affordable
housing.
An
impact
thesis
can
reference
a
target
population,
business
model
or
set
of
outcomes
through
which
the
investor
intends
to
deliver
the
impact (see Table 2 for
examples).
Table
2:
Illustrative
Components
of
an
Impact
Thesis
Target
Population
Target
Business Model
Target
Impact
Income
level
Product/service
provider
to
target
population
Number
of
target
population
reached
Degree
of
inclusion
Utilizing
target
population
retail
distribution
Per
cent
of
business
reaching
target
population
Region
of
inhabitation
Utilizing
target
population
suppliers
Scale
of
outputs
Implementing
energy
and
natural
resource
efficiency
Quality
of
outputs
Source:
J.P.
Morgan
10 Impact Capitalism Summit 2014 Primer
11.
Define
financial
parameters
Alongside
the
impact
thesis,
the
investment
team
will
determine
the
investment
scope
with
respect
to
the
parameters
that
can
drive
financial
performance.
These
parameters
include
the
instruments
that
will
be
eligible
for
investments;
the
geographies
and
sectors
of
focus;
the
growth
stage
and
scalability
of
the
businesses
that
will
be
targeted;
and
the
risk
appetite
of
the
investor.
Abandon
the
trade-‐off
debate
for
economic
analysis
In
setting
the
investment
scope
and
return
expectations,
we
encourage
investors
to
abandon
broad
debates
about
whether
they
need
to
trade off
financial
return
in
exchange
for
impact.
We
rather
propose
that
investors
rely
on
economic
analysis
on
a
deal-‐by-‐deal
basis
of
the
revenue
potential
and
cost
profile
of
the
intervention
they
are
looking
to
fund,
and
set
risk-‐adjusted
return
expectations
accordingly.
A
Framework
for
Impact,
Return
&
Risk
Once
the
target
characteristics
of
the
portfolio
are
defined,
investors
can
map
the
following
across
the
three
dimensions
of
impact,
return
and
risk:
a
target
profile
for
the
portfolio,
the
expected
profile
of
the
individual
opportunities
and
the
profile
of
the
aggregate
portfolio,
which
can
then
be
assessed
against
the
target.
Map
the
target
profile
To
illustrate
how
different
investors
might
map
their
portfolio
targets,
we
present
the
graph
of
our
own
J.P.
Morgan
Social
Finance
target
portfolio
–
the
shaded
grey
area
in
Figure
2
–
alongside
the
profile
that
might
be
targeted
by
an
investor
with
a
higher
risk
appetite
and
a
lower
return
threshold
(Figure
3),
and
the
graph
that
might
represent
the
target
for
an
investor
pursuing
only
non-‐negative
impact
with
a
low
risk
appetite (Figure
4).
i
Figure 2: J.P. Morgan Social
Finance Target
Portfolio
Graph
Source: J.P. Morgan
Figure 3: High Risk Investor’s
Target Portfolio Graph
Source: J.P. Morgan
Figure 4: “Non-negative Impact”
Investor’s Target Portfolio Graph
Source: J.P. Morgan
Impact Capitalism Summit 2014 Primer 11
12.
Map
the
individual
investments
Next,
we
map
out
expectations
for
an
individual
investment
based
on
assessments
of
the
impact,
return
and
risk.
Once
that
investment
is
mapped,
we
can
then
compare
it
to
the
portfolio
target
as
shown
in
Figure
5.
Although
we
show
an
example
in
which
the
individual
investment
profile
does
fit
within
the
portfolio
targets,
in
general
investors
may
not
require
that
each
investment
necessarily
fits
within
the
target
range,
so
long
as
the
aggregate
does.
Map
the
aggregate
portfolio
and
compare
to
target
Once
the
portfolio
begins
to
grow,
we
can
consolidate
the
individual
investment
graphs
into
one
graph
representing
the
characterization
of
the
portfolio
as
a
whole,
aggregating
the
individual
graphs
by
either
overlaying
them
or
averaging
them
(simply,
or
on
a
notional-‐weighted
basis).
Then,
this
aggregate
can
be
compared
to
the
target
profile
for
the
portfolio
to
ensure
alignment.
Expand
the
dimensions
of
the
graph,
if
desired
Investors
should
consider
the
three-‐dimensional
graph
as
a
template.
For
some,
the
simplicity
of
this
approach
might
be
appropriate
for
aggregating
across
large
portfolios
at
a
high
level.
Others
might
prefer
to
use
a
more
nuanced
framework
that
better
reflects
the
different
contributing
factors
of
the
parameters
represented
on
each
axis
–
impact,
return
and
risk.ii
As
an
example,
we
could
consider
an
investment
graph
across
six
dimensions,
splitting
each
of
the
three
into
two
components,
as
shown
using
a
hypothetical
investment
in
Figure
6.
Alternatively,
an
investor
might
choose
to
show
four
dimensions,
where
risk
is
split
by
financial
risk
and
impact
risk.
Figure
6:
Illustrative
Graph
in
Six
Dimensions
The
bold
blue
hexagon
illustrates
the
profile
of
a
hypothetical
debt
investment.
Source:
J.P.
Morgan.
Figure
5:
One
Investment
in
the
Context
of
Portfolio
Targets
The
shaded grey
area
represents
our
portfolio
targets;
the
bold
blue
triangle
represents
an
individual
investment.
Source:
J.P.
Morgan
12 Impact Capitalism Summit 2014 Primer
13.
Once
the
targets
have
been
set
and
the
portfolio
begins
to
grow,
investors
are
then
faced
with
managing
the
investments
to
ensure
that
the
portfolio
delivers
both
impact
and
financial
returns
in
line
with
the
targets.
Financial
and
Impact
Risk
Management
Identify
the
risks
in
the
impact
portfolio
On
an
individual
investment
basis,
the
risks
that
arise
for
impact
investments
are
often
the
same
risks
that
would
arise
for
a
traditional
investment
in
the
same
sector,
region
or
instrument.
Just
as
we
abandon
the
trade-‐off
debate
on
return
across
the
asset
class
and
encourage
deal-‐by-‐deal
analysis,
we
encourage
investors
to
assess
the
risk
profile
that
results
from
their
particular
impact
thesis
and
motivation.
There
are
also
some
cross-‐market
risks
to
consider,
including
the
early
stage
of
the
market
and
its
supporting
ecosystem;
mission
drift;
the
responsible
combination
of
different
types
of
capital
(including
grants);
and
the
moral
hazard
of
recognizing
impact
failure
or
financial
loss.
The
development
of
the
market
over
time
should
erode
some
of
the
risks
associated
with
its
early
stage
and
ecosystem.
While
some
of
these
risks
will
remain
in
place,
investors
will
likely
develop
better
processes
for
recognizing
and
dealing
with
them.
Manage
risk
through
structural
features
Once
the
risk
profile
of
the
investment
is
determined,
investors
manage
it
using
structural
features
such
as
seniority
in
the
capital
structure,
fund
intermediaries
and
compensation-‐related
or
covenant-‐based
incentives.
With
respect
to
the
currency
risk
that
arises
for
investors
allocating
capital
internationally,
some
investors
referenced
diversification
across
countries
as
the
preferred
means
of
management.
Manage
friction
between
impact
and
return
Many
investors
cite
that
they
pursue
opportunities
where
the
impact
mission
is
synergetic
with
the
financial
return
pursuit.
Several
organizations
also
acknowledged
that,
at
times,
friction
can
arise
between
these
two
pursuits.
Some
of
the
challenges
referenced
include
the
investee’s
growth
coinciding
with
a
reduction
in
jobs;
the
investee
maintaining
mission;
or
ensuring
impact
measurement.
Some
investors
manage
these
challenges
by
building
covenants
referencing
the
mission
into
the
deal.
Portfolio
diversification
Investors
often
find
a
softer
approach
to
diversification
to
be
more
suitable
to
the
private
nature
of
this
market.
Rather
than
setting
exposure
limits
as
can
more
easily
be
done
for
public
equity
portfolios,
impact
investors
tend
to
start
with
a
more
opportunistic
approach.
They
assess
the
merits
of
investments
mostly
on
a
stand-‐alone
basis,
while
monitoring
the
broader
concentrations
in
any
sector,
geography,
instrument
or
impact
pursuit.
Once
the
portfolio
reaches
a
critical
mass,
many
of
them
become
more
strategic
about
diversification,
considering
an
investment’s
individual
merits
alongside
those
in
the
context
of
the
broader
portfolio.
Impact Capitalism Summit 2014 Primer 13
14.
Looking
Forward
Challenges
should
ease
over
time
To
be
successful
today,
investors
need
to
be
realistic
about
the
stage
of
the
market,
employing
patient
capital,
bringing
a
dynamic
approach
and
taking
an
active
management
role
to
the
investment.
Whether
investing
directly
or
indirectly,
they
need
to
navigate
a
broad
ecosystem
to
ensure
success.
Investors
today
share
a
collaborative
spirit
in
meeting
these
challenges
with
the
broader
goal
of
catalysing
capital
towards
impact
investments.
This
research
has
been
a
first
step
towards
sharing
the
experiences
of
these
field
builders
to
help
investors
establish
a
strategic
approach
to
portfolio
management
for
impact
investments.
About
J.P.
Morgan
Social
Finance
J.P.
Morgan
Social
Finance
was
launched
in
2007
to
catalyse
the
growing
market
for
impact
investments
and
accelerate
the
delivery
of
market-‐based
solutions
to
social,
economic
and
environmental
challenges.
Our
business
is
dedicated
to
growing
this
market
through
client
advisory
services,
principal
investments
and
research.
Disclosures
________________________________________
J.P.
Morgan
is
the
global
brand
name
for
J.P.
Morgan
Securities
LLC
and
its
affiliates
worldwide.
This
research
is
written
by
Social
Finance
Research
and
is
not
the
product
of
J.P.
Morgan’s
research
departments. For further disclosures, please see the full publication at
www.jpmorganchase.com/socialfinance.
________________________________________
Copyright
2012
JPMorgan
Chase
& Co.
i
The term “non-negative” is used to indicate, for example, a socially responsible investor that might employ some
negative screening to exclude negative impact from a portfolio, but does not actively pursue positive impact.
Readers should note that no particular correlation or relationship between impact, return and risk is implied.
ii
To ensure the investment profile is not oversimplified, the use of this framework is advocated – whether in three
dimensions or more – in conjunction with a more detailed understanding of the investments, and never on a
stand-alone basis.
14 Impact Capitalism Summit 2014 Primer
15. Impact Investing 2.0: 12 Outstanding Funds Point the Way Forward
By Cathy Clark, Jed Emerson and Ben Thornley1
From its origins in socially responsible investing, community finance, microfinance, and
international development, impact investing has emerged as a distinct practice. This has
warranted the creation of new field-level infrastructure, like the Global Impact Investing
Network and Impact Investing Policy Collaborative, and motivated volumes of excellent
research adding tremendous depth to the conversation among practitioners.
All this has played out in the first, “1.0 era” of the market’s emergence – where
“observation” has necessarily trumped “evidence.” However while observation has so
far been sufficient to align key stakeholders, and drive product development and
demand from capital providers like high net worth individuals, private foundations, and
even commercial institutions, it is no longer enough. The market has not been growing
as fast as many practitioners had hoped, in part because the larger wealth advisors and
institutional investors on which growth depends are demanding a level of product and
performance specificity that only time and experience can provide. And to the extent
that impact investing can be more difficult to perfect than traditional investing –
operating as many impact investors do in newly forming markets, with financial tools
and infrastructure that necessitate extreme creativity and collaboration – the need for
evidence is even more acute.
The three of us, together with colleagues at Pacific Community Ventures and CASE at
Duke, have spent the last three years shifting the discussion from the “why” of impact
investing to the “how,” by examining the practices and performance of 12 outstanding
funds in detail, culled from an initial list of 350. Detailed case studies, information on
our research methods, and full findings are available at our project microsite:
www.pacificcommunityventures.org/impinv2. A recently released e-book, Collaborative
Capitalism and the Rise of Impact Investing (John Wiley & Sons), also connects the
experiences of the 12 funds to the bigger picture of a more outcomes-oriented,
transparent, and responsive form of business and finance writ large.
What the 12 funds demonstrate is that, while inherently diverse in its application,
impact investing is in fact a cohesive discipline. With decades of practice to draw upon,
there is no need to speculate on what impact investing might be or debate whether it is
1 The Impact Investor project – a research collaboration between Insight at Pacific Community Ventures,
CASE at Duke University and ImpactAssets – was made possible with the generous support of Omidyar
Network, Annie E Casey Foundation, RS Group, Heron Foundation, W.K. Kellogg Foundation, and Deutsche
Bank. This article is an edited excerpt from the final project report published in November 2013, Impact
Investing 2.0: The Way Forward – Insight from 12 Outstanding Funds. The 12 firms/funds studied include
Aaavishkaar, Accion Texas, Bridges Ventures, Business Partners Limited, Calvert Foundation, Deutsche
Bank, Elevar, Huntington Capital, The W.K. Kellogg Foundation, MicroVest, RSF Social Finance, and SEAF.
Impact Capitalism Summit 2014 Primer 15
16. possible for investors to receive financial returns along with social and/or environmental
impacts. This level of doubt was warranted in the 1.0 era, but the 12 funds we studied
prove the opposite.
The bottom line is this: a first generation of private impact investing funds has delivered
on the promise of concurrently delivering financial returns and explicit social outcomes.
Developed and emerging market equity and hybrid funds, all with some participation of
commercial investors aiming for market-rate performance, have generated financial
returns of 3-22 percent. Social debt funds – with primarily individual, philanthropic or
policy-driven bank investors – have returned 0-3 percent, matching their targets and
never losing a dime.
We can now enter a “2.0 generation” of impact investing with confidence, knowing
what practices undergird success and building on these lessons to bring the field to
scale.
Four Practices Common to 12 Outstanding Impact Investing Funds
Outstanding impact investing funds undertake many practices common to all asset
managers; they carefully nurture their brand, leverage all of the relationships at their
disposal, are often headed or backed by singularly reputable or experienced individuals
and institutions, demonstrate exceptional financial discipline, are models of operational
excellence, and work relentlessly to support the growth of their investees. However
there are four qualities that are distinct to impact investing:
1. Policy Symbiosis
2. Catalytic Capital
3. Multilingual Leadership
4. Mission First and Last
Policy Symbiosis
While many people believe that the most successful capital market is one in which
government is least involved, our 12 funds prove that impact investing is grounded in
deep cross-sector partnership that benefits from the government’s engagement. In fact
the public sector is ubiquitous in impact investing at all levels of government, consistent
with its strong interest in maximizing social and environmental benefits to society, and
the promise that impact investing can deliver these benefits at scale.
Many of our funds actively maintain relationships with government, either seeking
direct investment from public entities or leveraging other policy incentives. And the
16 Impact Capitalism Summit 2014 Primer
17. relationship is not one-sided. The funds also use their experience in the field to
influence the creation of more enabling and supportive public policy environments.
The UK Government played a foundational role helping to form Bridges Ventures and
provided a 1:1 investment match for every pound raised in the £40 million Sustainable
Growth Fund I. Business Partners Limited was created as a partnership between the
South African government and some of that country’s largest corporations. And
Huntington Capital’s second fund received investment from institutions motivated by
both the U.S. Community Reinvestment Act and California state-level regulations.
Funds should be aware of policies that apply to them, cultivate relationships with public
officials, be part of the field-level conversation, and invite policymakers to the table as a
real partners in impact investing.
Catalytic Capital
The concept of Catalytic Capital is relatively intuitive: one set of investments triggers
additional capital that may not have otherwise been available to a fund, enterprise,
sector or geography, thereby generating exponential social or environmental value. We
know that investors providing capital for strategic in addition to financial reasons have
been critical to the development of impact investing; however, we did not expect
Catalytic Capital to have been so prevalent. As it happens, every one of the 12 funds
benefitted from, or deploys, Catalytic Capital.
Catalytic Capital in the form of grants, guarantees, or concessionary or cornerstone
investments may have the potential to negatively distort markets, particularly at the
investee level. However at the fund level, our 12 case studies show Catalytic Capital has
been nothing short of transformative, unlocking billions of dollars of non-catalytic
investments.
Accion Texas receives half of its $14 million operating budget for making high-impact
microloans from grants—a proportion that is falling but will likely never reach zero.
Deutsche Bank’s Global Commercial Microfinance Consortium was made possible by a
grant from the Department for International Development in the UK, which provided
operating income during fund creation, and additional security to other investors. And
RSF Social Finance is becoming adept at using an “integrated” approach in its lending,
tapping philanthropic capital, at the margins, to make more borrowers eligible for
financing.
Funds should re-conceptualize the motivations of investors (with an awareness of the
wide range of factors for individuals and institutions that drive their engagement in
impact investing), target and partner with investors who are both mission- and strategy-
aligned, and create peer groups of structural innovators given the importance of layered
funds in making newer or more idiosyncratic markets investable.
Impact Capitalism Summit 2014 Primer 17
18. Multilingual Leadership
Those responsible for making investments must execute with unshakable financial
discipline, but successful fund leadership is about more than simply effective money
management. The founders and leaders of the 12 funds in this study often had cross-
sector experience in multiple essential areas: finance/business, policy, and
impact/philanthropy.
Multilingual Leadership takes this notion a step further and indicates the
institutionalization of a fund’s ability to move seamlessly among diverse stakeholders
and audiences. Taken as a whole, each fund team exhibited fluency in the vocabularies,
networks, and unwritten norms of the private, public and nonprofit sectors.
Kellogg Foundation’s Mission-Driven Investment program was created and led by two
“intrapreneurs” with deep programmatic experience and institutional credibility,
championed by a CEO who had been a pioneer in venture philanthropy, and
implemented in partnership with a third-party investment consultant. MicroVest has a
governing board mostly composed of social sector representatives, even while
management operates autonomously with an explicit goal of achieving market rates of
financial return.
Funds should recognize the need for different kinds of expertise, leverage strong
individual or institutional foundations into strong teams, be open to growth and
transformation (constantly evaluating and adding expertise), and actively work to train
the next generation of leaders to be multilingual.
Mission First and Last
While a defining piece of conventional wisdom in the 1.0 era has been that investors
approach impact investing through either a financial-first or impact-first lens, this is
rarely the case. In reality, funds put financial and social objectives on an equal footing by
establishing a clearly embedded strategy and structure for achieving mission prior to
investment, enabling a predominantly financial focus throughout the life of the
investment.
Knowing early and explicitly that impact is in a fund’s DNA, all parties (investors,
investees and the fund itself) are able to move forward with the investment disciplines
akin to any other financial transaction, confident that mission drift is unlikely. Towards
the end of the investment, the focus of funds returns to the impact achieved according
to a stated mission. Mission First and Last demonstrates that, in practice, every fund
combines explicit impact intention with operational accountability to impact, and
suggests that it is time to retire our dichotomous financial-first or impact-first thinking.
18 Impact Capitalism Summit 2014 Primer
19. There are a number of ways to essentially “lock in” mission. Calvert Foundation
manages a community investment note registered in all 50 U.S. states accessible to non-
accredited investors. The impact thesis and constraints of the fund are built into the
registered security. The Bridges Ventures Sustainable Growth Funds I and II focus on a
cluster of thematic areas where established social or environmental need creates a
commercial growth opportunity for market-rate or market-beating returns, and then
report rigorously on the impacts that its investees are delivering. RSF offers mortgage
loans, construction loans, and working capital lines of credit exclusively to nonprofit and
for-profit social enterprises that meet stringent impact criteria.
Funds should lock in their mission (establishing a clear “investment thesis of change”
highlighting the intentional social or environmental impacts they seek to create, and the
manner in which they will be delivered through investment), align accountabilities with
mission, track targeted metrics and strengthen feedback loops, and maintain absolute
financial discipline.
Looking Ahead
When taken together, the four themes help explain why building scale is a gradual and
deliberate endeavor:
Funds take the time to build teams with multi-sector experiences, approaches
and skill sets;
They become familiar with policy and spend energy cultivating mutually
beneficial relationships with philanthropists as well as governmental actors;
They are less masters of the universe than they are both masters of
collaboration (soft skills) and financial structuring (hard skills); and
They recognize and act on their accountability to multiple stakeholders.
We need to be careful about our generalizations and not claim them as universal too
soon. Yet we are pleased to celebrate the arrival of the 2.0 era in impact investing: a
core set of successful practices taken from illuminating, real-world examples of
investors, funds, entrepreneurs and beneficiaries doing well and doing good together.
Impact Capitalism Summit 2014 Primer 19
20. Impact
investing
as
part
of
a
responsible
investment
portfolio
By
Karin
Malmberg
Impact
investing
is
an
approach
to
responsible
investment
which
signatories
to
the
United
Nations-‐
supported
Principles
for
Responsible
Investment
(PRI)
are
becoming
increasingly
interested
in.
We
work
with
those
signatories
to
explore
investment
opportunities
that
deliver
positive
environmental
and
social
benefits,
while
producing
attractive
financial
returns.
PRI
signatories
have
fiduciary
responsibilities
which
means
all
their
investments
must
meet
certain
risk
and
return
requirements.
We
might
therefore
talk
about
'finance
first'
impact
investing,
or
environmental
and
social
(E&S)
themed
investing.
Figure
1
below
illustrates
how
such
an
approach
fits
with
other
investment
approaches.
Figure
1:
The
spectrum
of
investment
approaches
Source:
Adapted
from
Bridges
Ventures
Institutional
investor
case
studies
These
seven
case
studies
demonstrate
how
E&S
themed
investing
can
form
a
valuable
part
of
an
institutional
investors’
approach
to
responsible
investment,
focusing
on
a
particular
aspect
of
the
investment
process.
All
major
asset
classes
and
several
themes,
such
as
affordable
housing,
health,
agriculture,
microfinance
and
sustainable
infrastructure,
are
covered
in
the
investments
profiled.
• Environment
Agency
Pension
Fund
This
case
study
describes
how
clear
and
stringent
ESG
requirements
were
embedded
into
the
tendering
and
appointment
processes
for
a
recent
mandate
in
environmentally
themed
funds
in
property,
sustainable
infrastructure,
forestry/timberland
and
agriculture/farmland.
20 Impact Capitalism Summit 2014 Primer
21. • Wespath
Investment
Management
This
case
study
outlines
how
this
US
investor
developed
its
highly
successful
Positive
Social
Purpose
Lending
Program
and
overcame
the
challenges
it
faced.
• Local
Government
Super
This
case
study
looks
at
the
Australian
pension
fund’s
environmental
and
social
themed
investments
within
four
asset
classes:
international
listed
equities,
private
equity,
sovereign
bonds
and
absolute
return
strategies.
It
describes
how
these
investments
help
LG
Super
hedge
against
climate
change
risk,
their
performance
to
date
and
how
LGS
identifies
and
executes
them.
• PGGM
This
case
study
outlines
how
the
Dutch
pension
administrator
goes
about
understanding
the
direct
and
wider
impacts
of
its
E&S
themed
investments,
illustrated
using
examples
of
how
it
applies
its
approach
to
microfinance
investments.
• Storebrand
This
case
study
looks
at
the
Norwegian
insurance
company’s
investments
in
health
and
agriculture
sectors
focusing
particularly
on
the
strict
criteria
Storebrand
uses
to
identify
and
evaluate
these
investments.
• Merseyside
Pension
Fund
This
case
study
outlines
the
rationale
for,
and
the
structure
of,
investments
made
to
support
local
regeneration.
• Christian
Super
This
case
study
focuses
on
the
Australian
pension
fund’s
investments
in
community
infrastructure
and
community
finance.
It
illustrates
the
clear
social
impacts
the
selected
funds
aim
to
deliver.
It
also
outlines
the
investment
structures
and
risk
mitigation
strategies
these
funds
employ
to
facilitate
institutional
investment.
Measuring
impact
The
paper
Understanding
the
environmental
and
social
impact
of
your
investments
explains
the
value
of
measuring
impact,
provides
guidance
on
what
investors
should
be
tracking
and
summarises
practical
tools
and
techniques
available.
The
paper
is
supported
by
two
case
studies
looking
at
indirect
investor
approaches
to
measuring
impact:
Obviam
Sarona
Asset
Management
PRI
in
Person
2014
PRI
in
Person
is
the
leading
global
responsible
investment
conference.
At
this
year’s
event,
taking
place
in
Montréal
22-‐26
September,
topics
discussed
will
include
green
bonds,
impact
measurement
and
institutional
investor
case
studies.
Please
go
to
unpri.org/montreal
to
find
out
more.
Find
out
more
These
case
studies
and
other
resources
can
be
accessed
on
PRI’s
website:
http://www.unpri.org/areas-‐of-‐work/implementation-‐support/environmental-‐and-‐social-‐themed/
Please
contact
Karin.malmberg@unpri.org
if
you
are
interested
in
finding
out
more.
Karin
Malmberg
is
Manager,
Environmental
and
Social
Themed
Investing
at
The
United
Nations-‐
supported
Principles
for
Responsible
Investment
(PRI)
Initiative.
PRI
is
an
international
network
of
over
1200
investors
and
intermediaries,
together
managing
over
US$
34
trillion
in
assets.
These
signatories
work
together
to
put
the
six
Principles
for
Responsible
Investment
into
practice.
Our
goal
is
to
understand
the
implications
of
sustainability
for
investors
and
support
signatories
to
incorporate
these
issues
into
their
investment
decision
making
and
ownership
practices.
Impact Capitalism Summit 2014 Primer 21
22.
Building
Impact
Investing
Portfolios:
From
Strategy
to
Policy
to
Implementation
Sonen
Capital
LLC
Authors:
Justina
Lai,
Associate
Director;
Will
Morgan,
Director
of
Impact;
Joshua
Newman,
Investment
Analyst;
and
Raúl
Pomares,
Senior
Managing
Director.
Key
Insights
• An
impact
investing
policy
is
the
critical
link
to
translating
an
impact
investing
strategy
into
tangible
implementation
steps.
• Impact
investors
can
benefit
from
an
additional
layer
of
due
diligence
by
using
specific
impact
lenses
to
identify
investments
that
fit
clients’
financial
and
impact
requirements.
• In
addition
to
diversifying
across
asset
classes,
impact
investors
can
increasingly
diversify
across
impact
sectors
as
markets
deepen.
Introduction:
The
following
was
adapted
from
Evolution
of
an
Impact
Portfolio:
From
Implementation
to
Results,
a
landmark
report
released
in
October
2013
by
Sonen
Capital
in
collaboration
with
the
KL
Felicitas
Foundation
(KLF,
or
the
Foundation).
The
report
demonstrates
to
investors
that
impact
investments
can
compete
with,
and
at
times
outperform,
traditional
asset
class
strategies
while
pursuing
meaningful
and
measurable
social
and
environmental
results.i
In
2004,
to
meaningfully
address
the
world’s
most
pressing
social
and
environmental
issues,
KLF
began
a
process
that
would
eventually
allocate
100%
of
the
Foundation’s
capital
to
impact
investments.
Over
the
seven-‐year
period
of
2006-‐2012,
the
Foundation
moved
from
2%
of
assets
allocated
to
impact
to
over
85%,
while
generating
index-‐competitive,
risk-‐adjusted
returns.
This
article
highlights
Sonen
Capital’s
strategy
for
building
impact
investment
portfolios,
utilizing
our
experience
in
investing
KLF’s
assets
as
a
case
study
to
concretely
illustrate
this
approach.ii
The
full
report
is
available
for
download
via
Sonen’s
website
at:
http://www.sonencapital.com/evolution-‐of-‐
impact.php
Creating
an
Impact
Investment
Policy:
Constructing
KLF’s
impact
investment
portfolio
required
following
a
framework
through
which
investors
could
move
towards
action
–
from
establishing
to
executing
and
maintaining
an
impact
investing
strategy.
This
cycle,
depicted
below
and
described
in
detail
in
Solutions
for
Impact
Investors:
From
Strategy
to
Implementationiii
,
provides
a
roadmap
for
building
impact
investment
portfolios.
Central
to
this
process
is
developing
a
comprehensive
Impact
Investing
Policy,
the
critical
link
to
translating
a
strategy
into
a
tangible
implementation
plan.
Impact
Investing
Cycle
Source:
Solutions
for
Impact
Investors:
From
Strategy
to
Implementation.
Rockefeller
Philanthropy
Advisors,
2009.
22 Impact Capitalism Summit 2014 Primer
23.
KLF’s
Impact
Investing
Policy
was
designed
to
incorporate
impact
criteria
into
the
portfolio
construction
process
and,
to
the
extent
possible,
select
impact
investments
that
satisfied
the
Foundation's
Investment
Policy
Guidelines.iv
The
selected
policy
targets
reframed
KLF's
Investment
Policy
with
respect
to
asset
allocation
to
achieve
both
financial
and
impact
objectives.
Anchored
by
rigorous
financial
analysis
and
ongoing
assessments
of
factors
affecting
macroeconomic
conditions,
the
asset
allocation
targets
are
still
designed
to
diversify
KLF's
investments
across
and
within
asset
classes,
while
achieving
lower
volatility
and
risk
over
time
to
protect
portfolio
capital
and
achieve
competitive
returns
across
market
cycles.
Figure
9:
KLF
Impact
Investments
by
Impact
Strategy
and
Asset
Class
Source:
Sonen
Capital
Portfolio
Construction:
As
KLF’s
assets
were
moved
into
impact,
a
balance
was
sought
between
financial
and
impact
considerations.
As
the
impact
investment
universe
expanded,
so
did
the
opportunity-‐set
through
which
KLF
could
express
preferences
for
impact
themes
and
investment
views
according
to
asset
class
targets.
KLF’s
Return-‐Based
Impact
investments
performed
in
line
with
their
asset-‐class
exposures
while
providing
for
diversification
benefits.
The
impact
industry
has
since
matured
enough
to
offer
a
more
complete
set
of
investment
options,
making
it
increasingly
possible
to
find
financially
compelling
investments
across
asset
classes
that
achieve
required
impact
criteria.
Adding
“Impact”
to
Investment
Due
Diligence:
In
addition
to
the
fundamental
financial
analysis
and
discipline
that
goes
into
investment
decision-‐making,
KLF
used
a
specific
impact
lens
based
on
the
Foundation's
charitable
mission
and
its
founders'
values
to
further
refine
the
investment
selection
process.
This
included
an
assessment
of
a
potential
investee's
impact
strategy,
impact
reporting
capabilities
and
fit
with
the
Foundation's
mission.
Meetings
were
set
up
with
portfolio
managers
and
analysts,
and
each
team's
investment
process
was
studied
to
understand
how
investment
decisions
were
made,
all
in
an
effort
to
understand
how
ESG
or
impact
factors
are
integrated
to
add
value.
Impact Capitalism Summit 2014 Primer 23
24.
Due
Diligence
(Public
Strategies):
We
classify
investment
opportunities
principally
according
to
three
categories,
listed
from
lowest
to
highest
impact:
After
categorizing
strategies,
quantitative
screens
for
financial
track
records
are
applied.
Impact
investors
should
analyse
not
only
the
returns
of
a
strategy,
but
also
attempt
to
understand
the
underlying
drivers
of
returns
and
risk,
including
the
factors
to
which
each
strategy
is
exposed.
After
promising
candidates
have
been
isolated
within
each
asset
class,
investors
must
thoroughly
analyse
managers’
impact
strategies.
As
investors
become
more
comfortable
with
the
options
in
the
impact
marketplace,
they
can
begin
to
think
about
“impact
allocations”
–
allocating
their
investments
optimally
across
various
impact
approaches
and
target
themes
–
in
addition
to
asset
and
risk
allocations.
Due
Diligence
(Private
Strategies):
For
investors
able
to
access
private
market
investments,
alternative
strategies
are
critical
components
of
an
investor’s
diversified
asset
allocation
strategies.
Private
investments
offer
both
compelling
economic
exposures
and
the
potential
to
capture
unique
impact
opportunities
through
highly
thematic
exposures.
For
example,
private
strategies
can
provide
exposure
to
direct
impact
in
themes
important
to
investors,
such
as
clean
energy
and
technology,
community
development,
sustainable
forestry,
sustainable
ranchland
and
financial
services
for
base-‐of-‐the-‐pyramid
(BoP)
communities.v
Just
as
in
the
public
markets,
private
investments
require
extensive
financial,
impact
and
operational
due
diligence.
Investors
should
be
aware
that
the
due
diligence
process
is
iterative
and
non-‐linear;
new
quantitative
and
qualitative
data
points,
enhancing
the
quality
of
due
diligence
and
ongoing
monitoring,
can
surface
by
integrating
impact
criteria
into
the
investment
process.
Asset
Allocation:
For
KLF,
once
appropriate
investments
were
identified,
each
investment
was
matched
to
the
Foundation’s
overall
asset
allocation
targets.
KLF’s
impact
investments
were
allocated
across
all
asset
classes,
making
it
possible
to
identify
specific
social
or
environmental
impacts
for
each.
As
a
greater
number
and
wider
spectrum
of
impact
investment
opportunities
continue
to
become
available
to
investors,
all
asset
classes
are
expected
to
be
capable
of
delivering
risk-‐adjusted,
financially
competitive
and
mission-‐aligned
impact
returns
to
investors.
Next
Steps
for
Investors:
For
investors
seeking
to
integrate
impact
across
their
investment
portfolios,
the
impact
investing
cycle
roadmap
can
serve
as
a
useful
guide
for
moving
from
strategy
to
implementation
to
results.
1. Ask
for
impact:
Asset
owners
should
no
longer
accept
the
premise
that
sacrificing
financial
performance
is
necessary
to
achieve
measurable
and
meaningful
impact.
Evolution
of
an
Impact
Portfolio:
From
Implementation
to
Results
can
serve
as
a
reference.
Responsible:
Negative
Screening
Sustainable:
Positive
Screening
Thematic:
Social/Environmental
Themes
When
high-impact
opportunities
are
unavailable
as
a
result
of
portfolio
construction
necessities,
investors
may
opt
to
screen
out
issue
areas
such
as
tobacco,
firearms
or
alcohol.
Investors
should
note
that
the
use
of
sometimes arbitrary
negative
screens
can
reduce
the
efficiency
of
portfolios
and
may
entail
certain
risk/return
trade-‐offs.
Investors
can
add
value
to
the
investment
process
by
incorporating
ESG
criteria
or
sustainability
considerations
into
manager
or
security
selection.
Positive
screening
allows
managers
to
express
themes
and
investment
ideas
through
best-‐in-‐class
approaches
or
through
careful
selection
of
companies
that
manage
their
ESG
risks
and
opportunities
in
a
proactive
manner.
Thematic
strategies
look
to
focus
on
a
particular
social
or
environmental
trend
by
expressing
investment
ideas
that
are
best
positioned
to
benefit
from
exposure
to
the
theme.
Typically,
managers
identify
and
invest
in
the
most
progressive
companies
(or
other
issuers)
with
strong
ESG
performance
within
a
theme.
24 Impact Capitalism Summit 2014 Primer
25. 2. Reclaim
ownership
of
assets:
If
the
service
provider
is
not
willing
and/or
not
able
to
deploy
assets
to
impact,
another
service
provider
should
be
found
who
is.
3. Become
more
educated:
Growing
industry
networks
and
an
abundant
set
of
topical
resources
are
available
to
those
interested
in
learning
more.
4. Widen
options:
The
industry
continues
to
evolve,
and
investors
today
have
an
increasing
number
of
choices
to
implement
their
impact
strategies.
More
high-‐quality,
turnkey
solutions
are
available
in
the
marketplace
than
ever
before.
i
For
a
complete
understanding
of
the
strategies,
principles
and
performance
results,
please
see
Evolution
of
an
Impact
Portfolio:
From
Implementation
to
Results,
October
2013.
San
Francisco,
CA:
Sonen
Capital,
http://www.sonencapital.com/evolution-‐of-‐impact.php.
ii
Sonen
Capital
was
founded
in
September
2011,
and
therefore
much
of
the
performance
commentary
relates
to
investments
made
under
the
supervision
of
Raúl
Pomares
(with
significant
input
from
KLF)
before
the
existence
of
Sonen
Capital,
and
by
an
investment
team
that
is
different
from
that
of
Sonen
Capital.
There
can
be
no
assurances
that
Sonen
Capital
would
have
achieved
similar
performance,
or
that
investments
made
by
Sonen
Capital
in
the
future
will
achieve
their
stated
objectives
or
avoid
losses.
iii
Godeke,
S,
Pomares,
R.
Solutions
for
Impact
Investors:
From
Strategy
to
Implementation.
Rockefeller
Philanthropy
Advisors,
2009.
iv
The
complete
investment
policy
is
available
at
http://www.klfelicitasfoundation.org/
and
depicted
in
Evolution
of
an
Impact
Portfolio:
From
Implementation
to
Results.
v
Base
of
the
pyramid
refers
to
the
4
billion
people
with
annual
income
under
US$
3,000
in
local
purchasing
power.
Hammond,
A,
Kramer,
W,
Tran,
J,
Katz,
R
and
Walker,
C.
“The
Next
Four
Billion:
Market
Size
and
Business
Strategy
at
the
Base
of
the
Pyramid”.
World
Resources
Institute,
2007.
Impact Capitalism Summit 2014 Primer 25
26. Agricultural Technology Impact Assessment Framework
The Agricultural Technology (AgTech) sector is emerging as the key weapon in the battle for global food
security. The triple threat of population growth, rising incomes among the emerging middle class, and
limited arable land and water resources are projected to cause widespread food shortages, high levels
of food price instability, and increased strain on existing environmental and governmental resources.
AgTech seeks to address the food security threat using technological solutions to raise agricultural
yields, improve supply chain efficiencies to lower food spoilage, improve water resource management,
and combat food safety issues. AgTech innovations could raise global crop yields by up to 67% and
lower food prices by up to 49% by 2050.1
From a financial perspective, the high demand for food
security solutions could result in attractive exit valuations and potentially compelling cash yields.
This said, several debates have emerged that question the ultimate beneficial impact of AgTech
investments beyond increased crop yields. Is there impact intentionality in AgTech, given that exits are
likely to involve strategic sales to large multi-nationals operating in the food and agri industries? Does
AgTech facilitate the industrialization of food production, with potentially negative environmental
consequences? Does it threaten organic/natural, local farming practices? Are production yields rising at
the potential expense of public health, due to the unknown consequences of genetically modified crops
and increased reliance on hormones and antibiotics in animal proteins? Is any AgTech benefit trickling
down to small scale farmers, notably those in developing economies?
The purpose of this paper is to provide investors with a framework for making informed decisions about
whether or not to pursue investments in the AgTech sector, considering all sides of the debate, most
notably the ultimate social benefits of an adequate food supply vs. the question of intrinsic impact. This
should be done within the context of the investor’s investment philosophy and financial objectives.
Decision points to frame an Investor’s AgTech strategy:
To what extent does the investor want exposure to the AgTech sector? Why?
What is the investor’s position on the lack of impact intentionality in most AgTech investments
vs. the end goal of increased food security? Does the meaningful benefit to society outweigh the
impact mission drift risk?
Can an investor occupy a position of innovation leadership in impact investing, yet still invest in
the AgTech space? Does AgTech investing optimize the investor’s capacity to add value?
Would direct investing in AgTech be a better strategy to pursue, as it would allow investors to
seek out specific AgTech investments that could offer intrinsic impact?
If we define success as “the intention of an investment being materialized and fulfilled,” then
what does that look like in the AgTech context?
There are three reasons investors may want to participate in AgTech investing:
1. To generate positive financial return from a sector with projected high product
demand.
2. To enhance long-term food security through new technologies.
3. To ameliorate food inflation.
There are three primary strategies to pursue exposure to the AgTech sector:
1. Direct private investment into AgTech companies.
2. Investment in AgTech companies through the public securities’ markets.
3. Investment in private funds focused on AgTech, mainly using PE or VC vehicles.
26 Impact Capitalism Summit 2014 Primer
27. Backup Research/Thoughts on AgTech
Trends driving the AgTech debate:
Population growth. While the rate of growth is slowing, world population continues to expand:
it is expected to reach 9.1 bn by 2050, a 70% increase.2
This will drive increased demand for
food, as well as higher prices.
Rising food prices are driving more people into poverty. 110 million people were driven into
poverty, and 44 million more became undernourished, in 2008. 925 million people go hungry
because they cannot afford to pay for daily nutrition. In many developing countries, people
spend 50-80% of their income on food.3
Growth in EMG middle class. Emerging markets are also seeing unprecedented growth in the
middle class, as income levels rise. GDP worldwide is projected to increase by 3.3% annually
over the next decade, but by 5.6% annually in emerging markets. This will increase demand for
animal protein and certain produce, both of which previously were too expensive for this group.
Meat consumption during this period is projected to rise 2.4% annually in emerging markets, vs.
0.9% in developed countries.4
Demand for livestock feed, and the land on which to grow it, will
rise as a result, putting additional pressure on traditional food resources.
Food inflation. Despite declining per capita consumption of wheat and rice, the rising
population, particularly in developing countries, is expected to increase global demand for
staple food grains. According to the USDA, 82% of the increase in world wheat consumption
over the 2013-22 period will be driven by emerging markets.5
This could result in food inflation
spikes similar to that seen during the 2008 food crisis, as global supply curves destabilize.
Increased transportation costs. Inexpensive transportation fuels have made the global food
supply chain profitable and efficient. Increased transportation costs threaten this supply chain,
as the countries who may experience sharp increases in food import needs are the same
countries least able to afford it.
Limited land supply. There is a limited supply of arable land, water resources are becoming
more scarce, and desertification continues to claim previously arable land across the globe.
Farmland prices in the US are rising at unprecedented rates, up more than 400% over the last
ten years, and more than 90% over the past five. 6
This ultimately increases the end cost of food
to the consumer.
Land grab in EMG. Increased demand for arable land is resulting in land grabs in emerging
markets, which is destroying rainforests and reducing carbon offsets, disrupting indigenous
populations, increasing the strain on the water supply, increasing the burden on the global food
supply chain and creating mono-cultures in previously diverse food ecosystems.
Strain on water resources. Rising demand for food, and notably the growth in animal protein
consumption, will increase agriculturally-based water demand. 1 kg of rice production uses
3,500 liters of water, whereas 1 kg of beef requires 15,000 liters. Current water management
techniques in agriculture are changing ecosystems significantly, and rendering the provision of
ecosystem services ineffective. The external cost in the US is US$9–20 billion per year.7
Food loss/waste. 30% of food production is lost or wasted each year, meaning the productive
inputs (water and land) are also wasted.8
Greenhouse Gases. Agriculture contributes to greenhouse gas emmissions.9
Biodiesel demand. Rising demand for biodiesel is increasing demand for vegetable oils in
emerging markets.
AgTech investments can ameliorate some of these issues:
Benefits:
Impact Capitalism Summit 2014 Primer 27
28. Poised to raise crop yields by up to 67% and lower food prices by up to 49% by 2050.10
Increase productivity and crop yields on existing farmland through technological advancements
in seed technology, fertilizers, agri equipment, and precision agriculture (notably irrigation).
Improve animal protein yields through programs and investments promoting animal health and
innovations in livestock feed.
Reduce food spoilage and loss through supply chain innovations, with cold storage being a
notable near-term opportunity. Similarly, vertical integration or direct
grower/distributor/consumer interaction can reduce food cost.
Increase effective water management through improved irrigation techniques that reduce water
waste during the growing process; develop water recovery/repurposing systems to increase
water recapture.
Reduce food safety issues through innovations in diagnostics, processing, and packaging.
Solid investment exit opportunities exist through strategic sales. High demand for food security
solutions could result in attractive exit valuations and interest from multiple buyers.
However, there are concerns arising from the AgTech strategy:
Risks:
Mission drift upon exit: Strategic sales would likely be to large companies in the food and agri
business, resulting in an increased industrialization of the food supply. Many of these
corporations are utterly devoid of impact intentionality (example: ConAgra).
Higher crop and protein yields are often achieved through genetic modification to seeds and
crops, and hormones and antibiotics used in animal protein production. Debate continues over
the long-term public health impact of these techniques.
AgTech innovations may not be environmentally friendly (ex: pesticides and fertilizers).
Increased automation in the farming process could reduce jobs for LMI populations.
The potential for higher profits via rising crop yields, plus a lack of environmental regulation
around land usage, could encourage additional transformation of rainforest/jungle to farmland,
resulting in the negative externalities mentioned above, but potentially impacting region-scale
ecosystems.
Productivity improvements in emerging markets meant to support domestic consumption needs
may instead enhance the export market, depending on relative pricing.
Investor Interest:
Increased awareness of the food security dilemma and the potential for solid returns is
attracting more investors to the sector. However, the development of AgTech-focused
investment vehicles is still nascent, resulting in fewer fund investment options for interested
AgTech investors.
To our knowledge, there are no purely AgTech-focused funds that require impact intentionality
on behalf of their portfolio companies (funds that eschew the environmental and social
negatives mentioned above while also investing solely in AgTech).
Investing in AgTech may result in deviation from parts of the investor’s stated investment policy.
Impact:
AgTech investments bring an undeniable enhancement to global food security by raising the
productive capacity of existing farmland and the efficiency of the agricultural supply chain.
Productivity increases could help control food inflation.
More productive farmland could reduce the demand for land conversions in emerging markets (I
know this conflicts with a similar point listed under Risks; it could go either way).
Water consumption and waste could be reduced.
28 Impact Capitalism Summit 2014 Primer
29. A greater share of the value chain could be pulled to the producer, as technology-enabled
farmers can connect directly to end markets.
Complications:
A debate has evolved within the impact investment community concerning the need for food
security (an adequate, affordable food supply, notably to emerging market populations) vs. the
environmental need for sustainable and natural farming, local agriculture and LMI livelihood
promotion, and concern over the public health unknowns related to productivity enhancements.
Impact investors recognize that all aspects of the argument present pressing concerns, but
disagree on which is most important. Does the investor need to formulate a view concerning
this debate?
Does the investor’s commitment to impact intentionality outweigh the fact that most AgTech
funds do not invest with the goal of creating social impact, despite their ultimate goal of
increased food security?
Can the investor occupy a position of innovation leadership in impact investing, yet ignore the
concerns above?
Notes:
1. http://www.ifpri.org/pressrelease/agricultural-technologies-could-increase-global-crop-yields-
much-67-percent-and-cut-foo
2. UN http://www.un.org/waterforlifedecade/food_security.shtml
3. Ibid.
4. http://www.ers.usda.gov/amber-waves/2013-august/developing-countries-dominate-world-
demand-for-agricultural-products.aspx#.Uzdgs1ydrwI
5. Ibid.
6. http://www.ncreif.org/farmland-returns.aspx
7. http://www.un.org/waterforlifedecade/food_security.shtml
8. Ibid.
9. Ibid.
10. http://www.ifpri.org/pressrelease/agricultural-technologies-could-increase-global-crop-yields-
much-67-percent-and-cut-foo
Disclosure: The CAPROCK Group, Inc. (‘CAPROCK”) is an SEC Registered Investment Adviser. CAPROCK provides individual
client services only in states in which it is filed or where an exemption or exclusion from such filing exists. Provided for informational
purposes only. Independent advice should be sought in all cases. Investment in securities or financial instruments involves the risk
of loss. Impact investing does not guarantee any level of performance. Past performance is not a guarantee of future performance.
Alternative and private investments, including private placements, involve additional risk, including lack of liquidity, restrictions on
withdrawal/redemption/transferability and the risk of loss of a full investment. Because these types of investments involve certain
additional degrees of risk, they should only be utilized when consistent with the client’s investment objectives, tolerance for risk,
liquidity and suitability.
Impact Capitalism Summit 2014 Primer 29
30. TOTAL
PORTFOLIO
ACTIVATION
A
FRAMEWORK
FOR
CREATING
SOCIAL
AND
ENVIRONMENTAL
IMPACT
ACROSS
ASSET
CLASSES
A
paper
published
by
Tides,
Trillium
Asset
Management,
and
Tellus
Institute
has
developed
a
novel
framework
for
pursuing
social
and
environmental
impact
opportunities
across
asset
classes.
The
study
“Total
Portfolio
Activation,”
by
Joshua
Humphreys,
Ann
Solomon
and
Christi
Electris,
provides
concrete
steps
to
help
institutional
investors
begin
working
toward
a
fuller
activation
of
their
portfolio
to
advance
their
mission.
The
basic
insight
that
drives
Total
Portfolio
Activation
is
that
every
investment
across
every
asset
class
has
social
and
environmental
impacts—positive
and
negative.
The
paper
provides
both
a
framework
and
a
set
of
analytical
tools
to
help
mission-‐driven
investors
understand
the
specific
impact
opportunity
set
that
can
be
pursued.
In
addition
to
wide-‐ranging
research
on
the
burgeoning
field
of
sustainable,
responsible,
and
impact
investing,
the
authors
relied
on
the
advice
and
examples
of
numerous
investors,
investment
officers,
and
fund
managers
who
agreed
to
speak
about
their
efforts
to
pursue
investment
impact,
whether
across
their
portfolios
or
within
asset
classes.
With
case
studies
of
The
Oneida
Trust,
Equity
Foundation
and
Dominican
Sisters
of
Hope
among
others,
the
report
provides
specific
examples
of
investors
who
have
begun
to
activate
increasing
allocations
of
their
portfolios
for
deeper
social
and
environmental
impact.
Total
Portfolio
Activation
outlines
four
related
areas
of
activity
where
opportunities
for
impact
can
be
readily
seized
within
each
asset
class
and
ten
key
steps
that
investors
can
take
in
order
to
implement
the
Total
Portfolio
Activation
framework.
Download
the
full
report,
Total
Portfolio
Activation:
A
Framework
for
Creating
Social
and
Environmental
Impact
across
Asset
Classes
http://croataninstitute.org/publications/publicat
ion/total-‐portfolio-‐activation-‐2012
The
following
is
an
excerpt
from
the
paper:
nterest
in
investment
that
pursues
social
and
environmental
impact
has
exploded
in
recent
years.
Although
opportunities
for
impact
investing
have
emerged
across
asset
classes,
most
impact-‐
investment
activity
has
remained
largely
confined
to
a
I
30 Impact Capitalism Summit 2014 Primer
31. limited
array
of
private
investments,
touching
only
a
small
percentage
of
investor
portfolios.1
For
organizations
and
individuals
seeking
greater
impact
and
better
alignment
between
their
investment
activities
and
their
mission
or
values,
there
remains
a
pressing
need
for
tools
to
help
investors
identify
and
seize
opportunities
to
activate
more
of
their
assets
for
social
and
environmental
benefit.
To
help
fill
this
gap,
this
paper
introduces
a
simple
conceptual
framework:
Total
Portfolio
Activation.
“Total
Portfolio
Activation”
is
a
framework
for
conceptualizing
social
and
environmental
impact
investment
not
as
an
asset
class,
but
rather
as
an
approach
to
be
pursued
across
all
asset
classes
in
a
diversified
portfolio.
At
a
time
when
most
"impact
investment"
has
seemingly
been
confined
to
private
equity
and
private
debt
investments,
the
basic
insight
that
drives
Total
Portfolio
Activation
(TPA)
is
that
every
investment
across
every
asset
class
has
potential
social
and
environmental
impacts
–
both
positive
and
negative.
However,
we
lack
a
coherent
framework
for
evaluating
the
opportunity
for
impact
across
all
holdings
in
a
diversified
portfolio.
Specifically,
the
paper
identifies
four
related
areas
of
activity
where
opportunities
for
impact
can
be
readily
seized
within
each
asset
class
in
order
to
increase
an
investor’s
potential
for
social
or
environmental
impact:
1.
Investment
selection
–
incorporating
environmental,
social
or
governance
(ESG)
issues
and
impact
into
investment
review,
decision-‐making
and
performance
analysis.
Investors
will
have
specific
criteria
related
to
environmental
or
social
issue
areas
or
targeted
geographies
around
which
they
structure
their
investment
selection
process
and
then
monitor
their
impact.
2.
Active
ownership
–
exercising
the
stewardship
rights
and
responsibilities,
voice
and
votes,
that
often
accompany
owning
an
asset.
Investing
in
assets
can
often
open
opportunities
to
engage
in
activities
as
an
owner,
whether
directly
or
indirectly.
1
Yasemin
Saltuk,
Amit
Bouri,
and
Giselle
Leung,
“Insight
into
the
Impact
Investment
Market,”
J.
P.
Morgan
and
the
GIIN,
December
2011.
3.
Networks
–
joining
wider
groups
and
coalitions
of
stakeholders
around
common
environmental
and
social
issues
of
concern,
in
order
to
leverage
collective
power
to
generate
greater
impact
than
any
single
investor
could
on
its
own.
4.
Policy
–
engaging
in
public-‐policy
activities
as
an
investor
in
order
to
tap
government
resources
and
incentives
or
encourage
regulatory
oversight
and
intervention
in
support
of
impact
objectives.
Policy
activity
acknowledges
the
potential
role
government
support,
regulation
and
intervention
can
play
in
the
investment
process
to
encourage
positive
social
and
environmental
outcomes.
Each
activity
area
can
be
applied
within
each
asset
class,
and
increasing
portfolio
activation
can
have
significant
leveraging
effects
on
an
investors’
potential
impact.
At
the
same
time,
the
relative
importance
of
each
activity
for
increasing
potential
impact
will
vary
within
each
asset
class
and
depend
on
the
investor’s
specific
social
or
environmental
concerns
or
goals.
The
process
of
selecting
an
investment
because
of
its
impact
attributes
is
key
for
every
asset
class,
but
we
Impact Capitalism Summit 2014 Primer 31