Faith Institutions and Impact Investing An Introduction

Transcription

1 3iG International Interfaith Investment Group Faith Institutions and Impact Investing An Introduction

2 Content Foreword 3 1. What Is Impact Investing? 4 2. Impact Investment Sectors 5 3. Impact Investment Types And Vehicles 6 4. The Impact Investment Market 7 5. How To Get Started? 8 6. Best Practices Of Faith Institutions 9 7. Impact Investment Resources and Oportunities 17 2

3 Foreword Faith consistent investing (FCI) relates to religious institutions integrating their religious beliefs into the investment process. FCI includes avoiding investments in companies or industries because of their activities or products (negative screening), but many faith institutions also practice positive screening; investing in companies that show positive corporate social and environmental responsibility. In addition, faith institutions engage as active shareholders by engaging the management of companies on a variety of issues that pertain to the policies and practices of corporations. However, with impact investing religious institutions select companies because of the potential positive contribution that they make to society rather than choosing the best companies within the limitations of capitalism. This report introduces the topic of Faith Institutions and Impact Investing. Impact investments are investments that explicitly aim to respond to social or environmental challenges, while generating financial returns. Impact investing is not something new. Religious institutions have been practicing impact investing for many years, more in the form however of community development than from the financial investment approach. In this report, one will find information on the various sectors, types and vehicles of impact investing and some suggestions on how to get involved. Some examples of the best practises of religious institutions are also offered. Lastly, some resources and investment opportunities are mentioned. At 3iG we hope to publish a series of impact investing and faith institution reports. The first is related to microfinance, and subsequently we will provide more in-depth reports on clean technology, sustainable agriculture and other types of impact investments. By doing so, 3iG hopes to capitalise more religious capital into the impact investment market. I wish you enjoyment in reading this report and hope that it will further clarify impact investing and how religious institutions have invested via this route. Katinka C. Van Cranenburgh Secretary General 3iG Disclaimer: 3iG is not responsible for any investment decisions made by religious investors. All best practises mentioned in this report are based on a qualitative selection. 3iG does not necessarily promote one above others but just showcases them as examples of faith institutions investing with impact. copyright International Interfaith Investment Group 3iG,

4 1. What is Impact Investing? Impact Investing is part of Sustainable and Responsible Investment (SRI), a method of investing that considers social and/or environmental impact together with financial return in the investment decision process. Impact investors, however, go beyond SRI which focuses primarily on avoiding investments in harmful companies or encouraging improvements in the way companies deal with stakeholders. Instead, impact investors are actively seeking to place their capital in businesses, projects and funds that are focused on providing solutions to social or environmental problems while providing at least a nominal return. Impact investing means therefore seeking to create social and environmental impacts in addition to investment returns and combines two investment criteria: Financial criteria: non-negative return on investment Impact criteria: company or project immediately addressing social or environmental problems 4

5 2. Impact Investment Sectors Impact investment opportunities can address a wide variety of social and environmental problems. Usually, organizations or projects eligible for impact investment demonstrate a mission closely related to the following sectors: Microfinance: Lending in small amounts, usually to small business owners. Because of its well publicized successes and relative harmony between social impact and financial return, microfinance is one of the largest and most accessible sectors of impact investing. Bottom of the pyramid: Some business opportunities directed at the lowest-income segment of the population demonstrate potential for both attractive returns and positive social impact. The provision of critical goods and services to poor communities is therefore a potential sector for impact investors. Examples of such services are new technologies allowing affordable communication in remote rural areas, as well as access to clean water. Clean technology: Products and services that improve productivity or efficiency while reducing energy consumption, waste or pollution are attracting numerous investors for their high growth potential. Innovative technologies in the generation and distribution of renewable energies are examples of such investment opportunities. Environmental management: Projects in the fields of forestry, the rehabilitation of natural habitat or waste management, combined with revenue generating activities can offer opportunities for impact investors to have a positive effect on the environment. Health care: Investors can support enterprises that are lowering costs and increasing access to medical products and services for low-income communities. Housing and basic infrastructure: From businesses that focus on both supply and financing for housing, to infrastructure such as roads or transport in isolated areas or utility companies seeking to increase access to water and water quality, the infrastructure sector offers many opportunities for investors motivated by more than financial returns. Community development: a sector targeted early on by impact investors, it includes community investing where loan capital is provided for the development of underserved communities. Opportunities in the area of education also are part of this segment. Sustainable agriculture: As one of the main sources of revenues for low-income communities, agriculture can be supported by investments into enterprises that improve farmers access to better agricultural inputs and equipment. 5

6 3. Impact Investment Types and Vehicles Impact investment opportunities span most asset classes. Investors therefore have a variety of options to choose from to integrate impact in their portfolio in a way that fits their risk profile and other portfolio management requirements. Equity investments can be done both in publicly listed or privately held organizations. Some investors prefer fixed income opportunities and provide loan capital or even guarantees directly to organizations and projects. Cash and cash equivalents can be deposited in community development or microfinance banks to help capitalize these organizations. Finally an increasing number of professionally managed funds focused on impact investments are made available to investors. 6

7 4. The Impact Investment Market It is difficult today to estimate the current size of the impact investing market. While there is data estimating the size of sectors that include impact investing such as clean tech and microfinance, there is no way to accurately estimate the portion of invested in these sectors that is driven by the intention to generate a positive impact. In its publication entitled Investing for social and environmental impact, The Monitor Institute forecasts that in the next 5 to 10 years, given the current size of today s SRI market, impact investing could represent about 1 percent of professionally managed global assets. This would represent a market of about $500 billion, a significant supplement to current levels of philanthropy. Among various types of impact investors, faith-based institutions are leaders in the field. The preliminary results of a FCI survey conducted by 3iG, in cooperation with the academic institutions ESADE and Vlerick, survey of 100 faith-based institutional investors revealed that 3 out of 4 of them do practice impact investing and that the sectors they focus the most on are Community Development, Microfinance and Affordable Housing. 7

8 5. How to get Started? In a recent publication entitled Solution for Impact Investors: From Strategy to Implementation the Rockefeller Philanthropy Advisors provides a framework to streamline the impact investment process from identification of the investor s mission and values to the assessment of impact. The publication identifies 7 steps outlined below and stresses the importance of firmly aligning one s investment strategy with one s core values and mission. The Impact Investing Cycle IMPLEMENT AND MAINTAIN STRATEGY Evaluete Impact Analyze Deals Generate Deal Flow Develop Impact Investing Policy Define Impact Create Impact Themes Articulate Mission and Values ESTABLISH STRATEGY For more information: 8

9 6. Best Practices of Faith Institutions The following five examples of impact investing are selected based on several criteria. As 3iG is interfaith a variety of faith initiators was aimed at. Also a variety of types of impact investing should be involved. 6.1 Positive Social Purpose (PSP) Lending Program The United Methodist Church has used part of its multi-million-dollar pension fund to become the largest lender of mortgages for low-income housing in the United States. It also lends to schools, community facilities, and households beyond the United States in need of small, collateral-free loans. Faith: Christian (Methodist) Location: United States Year begun: 1990 Value: $1 billion Return: Market rate, or above (risk adjusted) Sector: Housing, education, health, microfinance For one of the world s largest faith-based investors, diversifying out of traditional ethical investments such as a carefully selected stock portfolio meant a strong desire to specialize in a particular impact investment field. A division of the United Methodist Church in the United States pension fund, the Program aims for a double bottom line of providing positive social impact and financial return through investing in mortgages to low-income communities. The fund, worth a combined $1 billion as of the end of 2008, manages retirement, health and welfare benefit plans, programs and funds for more than 74,000 of the Church s active and retired clergy, as well as lay employees. As such, it has a large pool of capital and a long investment horizon. During 2008, the fund invested more than $177 million in loans for housing, schools, and community development. In the area of housing alone, the Program has funded 30,000 units of affordable housing in all of the US 50 states since its inception in The loans are secured through the value of the underlying real estate. It does not lend directly, but operates through community development financial institutions that assess creditworthiness and provide some secondary loan participation. The nonprofits that sit in between the Program and the low-income family is often a mission-driven organization dedicated to serving those whom the financial system typically excludes from property ownership or 9

10 bank loans. The Program also makes available collateral-free loans in small amounts to struggling families, many of them households headed by women. In its microfinance initiative, it reaches beyond the US borders to communities in South Africa, South America, Eastern Europe and Southeast Asia. In terms of investment discipline, the Program has its priorities clear: it evaluates projects for potential funding by benchmarking them against investments of a similar maturity, risk, and structure. It does not accept a return below market rate, but it also measures its impact through the number of disadvantaged people served, school seats created, and housing units built, keeping its financial and social missions balanced against one another. Projects the PSP Lending Program will invest in: 1. Multifamily Housing (Homeless shelters and affordable, senior and special needs housing) 2. Community Facilities (Health care, day care and other facilities that support low- and moderate-income communities) 3. Charter Schools 4. International Microfinance 10

11 6.2 Global Solidarity Forest Fund A 10-year commitment from the Lutheran Church Of Sweden and the Norwegian Lutheran Church Endowment to reforest 40,000 hectares of forest for carbon sequestration, biodiversity retention, and conservation has drawn in large-scale investors from the secular world as well. Faith: Christian (Lutheran) Location: Mozambique and Angola Year begun: 2006 Value: $100 billion Return: Minimum 10% return* Sector: Environment * (internal rate of return) Climate change, shrinking wild space, the disappearance of species from the planet - faith-based institutions are as concerned as many governments and civil society organizations regarding how they can be part of the solution to some of the most difficult problems facing the planet. Nordic churches pooled $100 million in investments from faith-based and secular institutions to fund the reforestation, restoration, and maintenance of 40,000 hectares of forest in Mozambique and Angola. These pine, eucalyptus, and teak forests all of which have at least 10% local ownership are certified by the Forestry Stewardship Council as environmentally, socially, and economically viable. The existence of these forests helps address the effects of climate change and prevent biodiversity loss. A sustainable harvest the project also includes timber mills to provide jobs and value-added to local economies will financially enrich communities in Mozambique and Angola. Having set a minimum internal rate of return (IRR) of 10%, financial objectives are clear. The project has also publicized when in the project life cycle these returns will be seen. After Year 5, when the pine forests mature, returns will average 5%. After Year 18, returns will rise to 20% as the more valuable teak and eucalyptus wood matures and global demand for sustainably sourced hardwoods continues to grow. The Global Solidarity Forest Fund s Investment Criteria: General criteria Highly favourable natural conditions for forestry Availability of land, either through ownership or long-term concessions from government and preference for concessions that are available directly Preference for establishing new forest enterprises All investments must be welcomed and endorsed by the host government 11

12 Co-operation with a national partner; e.g., a local church with capacity and interest in the project A minimum of 10% local ownership Economic Criteria Potential of a minimum of 10% real Internal Rate of Return (IRR) Social and Environmental Criteria No involuntary resettlement, acquirement of land-use rights only through negotiated settlements No conversion or degradation of natural forest habitat or of critical habitat For every hectare of new forest plantation established one hectare of protected or responsibly managed native ecosystem is set-aside Each investment is subjected to certification according to the Forest Stewardship Council (FSC) Adherence to relevant UN and ILO conventions on biodiversity, conservation, human rights, individual freedom, indigenous peoples, ethnic minorities and health, safety and working environment Adherence to the 10 Universal Principles of United Nations Global Compact The project also works through local churches in order to provide the jobs and local expertise that they feel are critical to complementing their financial and environmental return on investment. A balance of environmental, social, and economical criteria are key to their sustainability strategy. This project went beyond faith-based approaches, leveraging its own involvement to attract $60 million in investment from the Stichting Pensioenfonds ABP, the Dutch government and education system pension fund. It also bridged for- and not-for-profit approaches, involving the Ford Foundation, the US-based grant funder; SIDA, the Swedish government s development agency; and USAID, SIDA s counterpart in the United States. 12

13 6.3 Catholic Health Initiatives Catholic Health Initiative Provides low-interest loans to organizations that give disadvantaged populations access to jobs, housing, education and health care. The objective of the Direct Community Investment Program is to maximize social good while ensuring secure lending. Faith: Christian (Catholic) Location: United States Year begun: 1999 Value: $25 billion Return: Below market rate (varies according to the loan recipient) Sector: Community development (health, minority, culture, housing) The Catholic Health Initiative, the second-largest Catholic-run health care system in the United States and one of the largest nonprofit health care systems in the world, has found a variety of ways to invest consistently with the Catholic faith, and while doing so, make a positive social impact. While its core investments are in health care and long-term care facilities which generate revenues of $8.6 billion annually it recently decided to expand its focus on serving communities in need by setting up its Direct Community Investment Program. The initiative s Direct Community Investment Program blends general, social, and economic criteria to extend funding to companies, programs, or intermediaries either through direct lending, collateral support (often the key for a nonprofit to get bank lending), loan guarantees (agreeing to repay a bank loan if the borrower defaults), or certificates of deposit (support for community-based development finance institution). Target beneficiaries are organizations that provide jobs, housing, education, and health care to those who need it most, and the Initiative has committed to put 2% of all of its investment assets in the Direct Community Investment Program. The fund is also clear about what it does NOT do: it does not take equity stakes or give grants. Loan applicants must be nonprofit, their enterprises consistent with Catholic values, and specifically targeting low-income communities. In terms of financial objectives, the Program is willing to accept a return below the market rate, and accepts that it may also face liquidity challenges as a result. Its investment horizon is a maximum of five years. 13

14 6.4 Sarona Risk Capital Funds Providing first in risk capital for growth industries in developing countries, the Sarona Risk Capital Fund has financed ventures in Nicaragua, Romania, and Paraguay. One of its latest ventures is funding an ethanol plant to provide alternative incomes to farmers in Paraguay. Faith: Christian (Mennonite) Location: Paraguay Year begun: 2008 Value: $13 billion Sector: Cleantech & microfinance In 1953 Meda was established as a venture capital fund to invest in businesses operated by and for the benefit of the poor. The capital provided by Meda members was to be repaid to Meda for use in other similar projects. Meda s first investment was in the Sarona dairy in Paraguay. That investment was repaid in full in Today, Meda is an organization that works actively in international development investment, which includes microfinance, but also various other small and medium-sized enterprise investment sectors that benefit poor communities. Meda successfully launched the 2 Sarona Risk Capital Funds which have combined assets under management of $13 million and pursue a triple bottom line objective: People, Planet, and Profit. Sarona Risk Capital Funds are set up to provide high risk capital to businesses who need to attract other capital and begin to move towards profitability. Sarona has already contributed to the success of many business, funds, and microfinance institutions (MFIs) by providing equity capital and loans. One recent investment example is ERPAR. ERPAR is a Paraguayan company that plans to produce ethanol from a mix of sugar cane and manioc. When built, the plant will have an annual capacity of 10 million liters per year. Several local Paraguayan entrepreneurs, Meda Paraguay and Meda North America have joined forces to provide the start-up capital needed to get the project going. The plant is expected to support 400 farming families in Paraguay and create 82 direct jobs at the plant. ERPAR is working in a high-growth sector, ethanol fuel production, which will continue to be important in the development of South American economies. Due to the financial crisis in 2008, construction financing has hampered the planned start-up of the plant resulting in agricultural management of the land instead, until additional financing can be secured. Meda s Sarona Risk Capital Fund was instrumental in the beginning of MicroVest, now a 20 million USD fund to provide capital to microfinance institutions globally. Sarona was also instrumental in investing in CAPA and MiCredito (MFIs in Romania and Nicaragua), as well as Codip, a starch plant in Paraguay. Because of these first in risky investments, these institutions are impacting over 500,000 clients and farmers. ERPAR%20Quarterly%20Report%20Sept%2030% pdf 14

15 6.5 Isaiah Fund Interfaith fund for recovery from natural disasters, after Hurricane Katrina and beyond. Investors are the American Baptist Home Mission Society, Christus Health, Highland Good Steward Management, Jesuits of the New Orleans Province, Jewish Funds for Justice, and Mennonite Mutual Aid Community Development Investments Faith: Interfaith (Baptist, Mennonite, Catholic, Jewish) Location: United States Year begun: 2005 Value: $10 billion Return: Below market rate (varies according to the loan recipient) Sector: Community development and affordable housing After Hurricane Katrina hit the US southern Gulf Coast in 2005, New Orleans faced a host of challenges, including a disproportionately heavy effect of the disaster on the city s poor. Using an innovative, interfaith approach, the Isaiah Funds Redevelopment Loan Facility came in to fill the gap, lending to nongovernment and community-based organizations to rebuild New Orleans communities. Protestant, Catholic, and Jewish institutions banded together in this effort, believing that more capital meant greater impact. The partnership was born out of discussions at the Interfaith Center on Corporate Responsibility s Katrina Investment Response Team, and took its name and its inspiration from the scripture that unites the Jewish and Christian faiths: You will restore the age-old foundations, and be called repairer of the breach, restorer of the streets in which to dwell. The fund s first loan, announced in May 2008, was $500,000 to an 87-unit housing development, connecting a lower-income community with New Orleans downtown core. A nonprofit property developer called the Gulf Coast Housing Partnership provided the construction expertise after having already built 500 units of housing post-katrina in The fund does not aim to stop there: it plans to have lent $10 million by the end of 2009, with matching grants during the same time period expected to total $1 million. The Isaiah Fund has found strength through using the unique strengths of its members, while also reaching out to external partners who have the skills they most need. Jewish Social Funds for Justice, a member of the Isaiah Fund that specializes in funding low- to middle-income communities in the United States, administers the fund, and has separately lent or granted $19 million to similar projects before Hurricane Katrina. Externally, the fund has partnered with the Calvert Foundation, the nonprofit arm of one of the United States oldest specialized firms in the ethical or values-based investment space. The Calvert Foundation s Community Investment Partners Program helps companies, families, and nonprofit institutions find investment opportunities that best match their values. 15

16 The fund also hopes to move beyond its uniting cause. Beyond Hurricane Katrina, the Isaiah Fund aims to fund similar disaster recovery efforts, believing that its knowledge and patient capital approach will benefit disadvantaged communities for years to come. For more information: jewishjustice.org/download/section42/roundtable_on_religion pdf 16

17 7. Impact Investments Resources and Opportunities In this section we provide a list of resources and institutions than can be used as reference or support for further research by prospective impact investors. We do not endorse these institutions but have decided to include them in this report because their mission is closely related to impact investing and they give a good idea of the opportunities than already exist in this growing field. Bridges Ventures (UK) Venture capital in UK s most deprived areas or in businesses that can demonstrate strong social/environmental benefits, particularly in the sectors of healthcare, education and the environment. Global Impact Investing Network GIIN Newly founded non-profit organization dedicated to increasing the effectiveness of impact investing. Likely to become the reference in the sector and provides great resources and research database. Imprint Capital (US) Develops and executes mission-driven investment strategies for foundations, family offices and individuals. Investing For Good (UK) Offers independent advisory services for portfolios whose primary purpose is to delivery positive environmental and social impact. Advises banks, family offices, foundations and asset managers on impact investing. Prudential (US) Debt, equity, tax credit for affordable housing, access to education, economic development in the US. ResponsAbility (Switzerland) Loans and private equity in the sectors of microfinance, SME financing, fair trade and media in developing countries. 17

18 Root capital (US) Social investment fund that provides capital, financial education, and market connections to small grassroots businesses in rural areas of developing countries. Triodos (UK) Full-service bank focused on sustainable finance and businesses. Offers services in asset management, investment banking, impact investing in sectors such as microfinance, environment and social entrepreneurship. This report was written in cooperation with Erin Prelypchan and Christophe Bochatay as part of their MBA programme at ESADE Business School, Spain. For further information please visit: 18