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April 29-30, 2014

Union League Club of Chicago

2014 Primer

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The Kellogg School of Managementis proud to support the

Impact Capitalism Summit

and its mission to maximize impact and return, which aligns with our vision of

sustainable capital as aninstrument of positive change.

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 [email protected] [email protected] [email protected] [email protected] (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

mailto:[email protected]




http://www.watershedcapital.com/

About the Primer As Impact Investing mainstreams, Watershed Capital Group 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+. Watershed Capital Group 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 Primer 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 the 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

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


NOTE: All investing risks loss of capital. Past performance does not indicate future results. This is not an offer of securities. ©2006-2014 HIP Investor Inc. and © 2014 HIP Investor Ratings LLC. All Rights Reserved.

The New Fundamentals of Investing

High-Impact Portfolios Can Outperform Wall Street

New Research Reveals a Diversified Portfolio, Rated for Future Risk, Can Deliver Stronger Returns with Lower Risk + Positive Impact

Executive Summary: + Investor portfolios today, even those guided or managed by expert advisors, could achieve

stronger returns with lower risk, and more positive impact on society – if they use all the meaningful information on future risk that is publicly available on their investments.

+ More than 20 quantifiable metrics of value-creation – which comprise up to 80% of the S&P500 stock market value – are knowable yet ignored by the majority of investors.

+ For investors who seek a stronger portfolio, a diversified blend of mutual funds and investments – optimized for future risk and potential return, as well as positive impact using HIP Investor’s ratings – can produce lower portfolio volatility, higher portfolio returns (relative to risk), and more positive net benefit to society.

More than $220 trillion is invested globally. Nearly all investors, advisers, and fund managers evaluate their results – and decisions to buy or sell – based on measures of past risk and return. As we all hear: “Past performance is not indicative of future results.” This is true. Looking forward, value-creation and volatility depend on evaluating future risk and return potential. According to interviews with institutional investors representing trillions of investor capital, the tools from Morningstar, Bloomberg, FactSet, and other firms “primarily analyze historical risk and return, not the full set of factors that drive future risk and return.”

Across the S&P500, 80% of the S&P 500 stock market valuation is driven by factors that are not accurately captured on the financial statements (Ocean Tomo) – and typically ignored by investors, analysts, advisers and fund managers. More than 20 quantifiable factors creating cash flow and profit, or lessening risk, are not used by Wall Street experts. Most financial analysis focuses on historical results, but not all the forward-looking sources and drivers of shareholder value creation. Also, no common standard is used by Wall Street investors for measuring net beneficial impact on society. HIP Ratings measure meaningful knowable-yet-ignored factors – and how they drive financial risk and return.

Investors can enhance return potential and lower risk by:

Valuing people as an asset: A portfolio model of publicly listed firms in Fortune’s Best Companies to Work For, calculated by Wharton finance professor Alex Edmans, typically outperforms the S&P500 (since 1998).

Natural Resource Efficiency: The S&P Carbon-Efficient Index of firms more efficiently using energy has outperformed the S&P500 since its inception in 2011.

Leadership Inclusive of All Talent: Boards of firms with 1 or more women on the Board have realized higher return on equity with lower volatility (2005-2011), according to Credit Suisse (see chart above).



A Diversified Portfolio Built to Benefit Society Can Beat Wall Street

“The markets are efficient.” “All available information is built into the stock price as soon as it is available.” “Index funds are the most reliable way to invest.” These investment mantras are embedded in Wall Street portfolios, integrated into the curricula of leading business schools, and rewarded with Nobel Prizes in economics. But new fundamentals of investing portfolios in the 21st century have arrived – that can lessen risk and enhance returns.

Investors benefit from diversified portfolios across all asset classes. Modern Portfolio Theory (MPT), distilled in 1952 by Nobel-prize-winning Dr. Harry Markowitz at the University of Chicago, is seen as the gold standard of portfolio construction. To apply MPT systematically, investors typically use index funds that follow the market. However, the underlying assumptions are that the market prices are efficient and accurate, incorporating all relevant information. Yet more than 20 factors of future risk, potential return, and net impact appear to be ignored by the market, and miss out on capturing the full set of drivers of value-creation. Thus, trusting the market-price based indexes can lead to a sub-optimal portfolio – with higher risk and lesser return.

Sustainable Portfolios Can Beat Wall Street and Modern Portfolio Theory

A more optimal portfolio that lowers risk and ONE-YEAR (2013) PERFORMANCE enhances returns – and can beat Wall Street – is possible. In 2006, HIP Investor developed a unique methodology to rate investments and funds globally. Today, HIP’s 6000 ratings include 4500 corporations (equity and debt) and 1500+ issues of bonds (including governments and nonprofit muni-bonds) on their future risk, return, and impact.

Using HIP’s approach to manage future risk, at least two diversified portfolio models of mutual funds and investments (one with 24 funds; another with 10 funds) can lower financial volatility (as calculated by the standard deviation of monthly returns) and earn higher annualized returns, for the 1-year and 3-year periods ending December 31, 2013 (see charts). Over all time periods analyzed – 1, 3, 5, and 10 year THREE-YEAR (2011-2013) PERFORMANCE periods – sustainable, high-impact portfolios (HIP 24 HIP 10 models) incurred lower risk (and lower portfolio Beta) and stronger returns relative to risk (higher Sharpe ratios). Across all time periods analyzed, the HIP 10 portfolio approach shows less risk and exceeds the annualized returns of the Modern Portfolio Theory approach. New fundamentals can transform traditional investing.

Sustainable portfolios can outperform the market, as they integrate meaningful, quantifiable information (captured by HIP Ratings) that is knowable yet ignored by most investors, analysts, endowments, pensions, and foundations. Investors integrating this info can strengthen their portfolios.

Vanguard 2025 Fund

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PORTFOLIO: color of bubbles: Dark Green = HIP 24Light Green = HIP 10Red = Vanguard 2025 FundGray = MPT

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PORTFOLIO: color of bubbles: Dark Green = HIP 24Light Green = HIP 10Red = Vanguard 2025 FundGray = MPT

*For annualized time period over the past 3 years ending 12/31/2013

*For annualized time period over the past 1 year ending 12/31/2013



Smart Portfolios Include Funds & Investments that Can Realize Both Positive Impact + Profit

Smart investor portfolios diversify to mitigate the potential downside of future risks and seek the upside associated with all the possible opportunities. More than $220 trillion of global financial assets – including your portfolio – could be stronger and more resilient by measuring its future risk exposure and allocating to funds and investments that can lower that risk, seek enhanced returns, and spur net positive impact for society. US-SIF identifies $3.7 trillion in the USA and $4 trillion in Europe that is pursuing positive impact in portfolios.

Every investment – stock, bond, mutual fund, ETF – can be rated for its future risk, financial return potential, and net impact on society. Investors can track their portfolio performance on all these dimensions. Color-coded HIP Ratings can visualize future risk and upside potential in portfolios (red connotes riskier; green implies more resilient, striving for higher impact and possible stronger returns with lesser risk). In the 3 years ending 12/31/2013, a HIP-designed portfolio’s funds exceeded the MPT portfolio funds; more HIP-selected funds performed above the financial “efficient frontier” and were color-coded “green” for lower future risk and more positive impact. Using investment ratings of this type to measure and decide can strengthen your portfolio.

3-Year Fund Performance of HIP-24 portfolio** 3-Year Results: Modern Portfolio Theory funds***

* For annualized time period over the past 3 years ending December 31, 2013 (one fund with less than 3 years history blends in its benchmark-index performance) ** HIP 24 funds cover mutual funds, ETFs, and stocks that are fund-like (e.g., KKR private equity, partnered with EDF.org) *** MPT funds and allocations follow the model approach followed by software-based advisor WealthFront, as published on its website in Q4-2013

Every investment and fund has a future risk-return-impact profile; HIP rates more than 6000 investments and funds. Muni bonds can rate higher impact by funding nonprofits in healthcare and education, as well as government services for water and cities. Private-equity funds can manage risks and pursue impacts more systematically than publicly listed companies. Hedge funds can be low transparency about the portfolio’s future risks.

Do you know the future risks embedded in your portfolio? Is it built for 21st century opportunities? Portfolios designed thoughtfully that incorporate knowable-yet-ignored factors of value-creation and future-risk reduction – which HIP Ratings methodically calculate – can result in stronger, more resilient, and higher performing results.

Download the full whitepaper and slideshow at www.HIPinvestor.com To discuss HIP Ratings, contact: R. Paul Herman, CEO, +1 415 902 7741, [email protected]

HIP Investor Inc is a registered investment adviser in CA, WA and IL with clients nationally.

iShares JPMorgan USD Emerg Markets Bond

iShares iBoxx $ Invst Grade Crp Bond

Vanguard FTSE Developed Markets ETF

Vanguard Dividend Apprec Idx ETF

Vanguard REIT Index ETF

Vanguard Total Stock Market ETF

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IMPACT: color of bubbles: Green = higher IMPACTYellow = medium IMPACTRed = lower IMPACT

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Ariel Appreciation Investor

DFA Five-Year Global Fixed-Income I

iShares JPMorgan USD Emerg Markets Bond

iShares International Dev Rel Est

KKR & Co LP

2 INDEXES + Shelton Green Alpha

Pax World High Yield Bond Individual Inv

Pax World Global Envrnmntl Mkts Indv Inv

iShares Morningstar Small-Cap

Guggenheim Timber ETF

Pope Resources LP

First Trust S&P REIT Idx

Parnassus Fixed-Income

Pax World Small CapIndividual Inv

Parnassus Workplace

Calvert Global Alternative Energy A

Calvert Global Water A

iShares S&P 100

ETFS Physical Swiss Gold Shares

RidgeWorth US Gov Sec Ultra-Short Bd I

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IMPACT: color of bubbles: Green = higher IMPACTYellow = medium IMPACTRed = lower IMPACT

ALLOCATION: size of bubbles is percent (%) allocated to fund




http://www.hipinvestor.com/


http://hipinvestor.com/wp-content/uploads/Sample-HIP-Portfolio-Grid.jpg

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

Map the individual investmentsMap the target profile Map the aggregate portfolio & compare to target

A Framework for Impact, Return and Risk

Manage risk through structural features

Identify the risks in the impact portfolio

Manage friction betweenimpact 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.


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

Table 2:

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


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


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


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.


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.


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.


http://www.pacificcommunityventures.org/impinv2

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


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.


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.


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 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.


• 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 [email protected] 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.


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.


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.


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.


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.


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.


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:


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.


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.


http://www.un.org/waterforlifedecade/food_security.shtml

http://www.ers.usda.gov/amber-waves/2013-august/developing-countries-dominate-world-demand-for-agricultural-products.aspx#.Uzdgs1ydrwI

http://www.ers.usda.gov/amber-waves/2013-august/developing-countries-dominate-world-demand-for-agricultural-products.aspx#.Uzdgs1ydrwI

http://www.ncreif.org/farmland-returns.aspx

http://www.un.org/waterforlifedecade/food_security.shtml

TOTAL PORTFOL IO ACT IVATION A FRAMEWORK FOR CREAT ING SOC IAL 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/publication/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


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


have also found meaningful opportunities to increase the potential for impact in the other activity areas as well: by taking more active ownership of assets, joining with other stakeholders in networks of common concern, and using policy tools and strategies.

Specific asset classes are also better suited for generating particular kinds of impact, so investors with targeted issue areas of concern will need to place greater stress on the activities and investments that align with their impact objectives. Cash and fixed-‐income investments in community development financial institutions, for example, are particularly useful ways to support affordable housing in targeted, low-‐income geographies. Active ownership initiatives, by contrast, appear particularly germane to investments in public and private equity and real assets, though they take very different forms in each asset class, ranging from high-‐impact shareholder engagement with publicly traded companies, to directly influencing companies through a board seat in private equity, to sustainably managing timberlands in real assets.

Ultimately, each investor will need to assess the primary social and environmental issue areas that are core to its mission and then evaluate the activities within each asset class that are most appropriate for increasing its potential for impact in those areas. The framework of Total Portfolio Activation provides a clear process for identifying what we term an investor’s “impact opportunity set,” by assessing the impact activities and investment opportunities within each asset class of its portfolio that are most relevant to increasing potential social or environmental impact.

IMPACT OF EQUITY ENGAGEMENT (IE2):

EVALUATING THE IMPACT OF PUBLIC EQUITY INVESTING IN TOTAL PORTFOLIO ACTIVATION

Since the report’s release, increasing numbers of investors have been grappling with the place of public equity investments within impact investing. Given that public equity investments continue to constitute a substantial allocation of most diversified investment portfolios, the potential for increasing the positive impact attributes of public equity investments presents a major opportunity for the impact investing space.

At the same time, a growing group of investors have committed to becoming active owners of their assets and to engaging corporations on environmental, social and governance issues through networks such as the UN-‐backed Principles for Responsible Investment. Yet the impact of these engagement activities remains poorly understood.

A new multi-‐stakeholder initiative, known as the Impact of Equity Engagement (IE2), is exploring these issues and developing a new more robust, standardized framework for tracking and reporting engagement activities in order to document investor’s impact through engaged listed equity investments. Coordinated by Croatan Institute, a new sustainability research center, IE2 is being sponsored by the original lead sponsors of Total Portfolio Activation, Tides and Trillium Asset Management, with a wider group of engaged investors, including Calvert Investments, Boston Common Asset Management, NorthStart Asset Management, Inc., and Walden Asset Management.

Croatan Institute is also exploring other opportunities to deepen TPA in other asset classes, such as cash, fixed income, private equity and real property.

For more information, or to get involved in these initiatives, please email Joshua Humphreys [email protected] .


A Historical Look at the SRI Industry and Recent Industry Research

At the start of 2012, $3.74 trillion—more than 11 percent of the $33.3 trillion in total investments under US professional management—was invested according to strategies of sustainable and responsible investing according to the US SIF Foundation’s 2012 Report on Sustainable and Responsible Investing Trends in the United States. The 2014 edition of the report is planned for release at the end of the year.

The US SIF Foundation undertakes research on behalf of US SIF: The Forum for Sustainable and Responsible Investment, the US membership association for professionals, firms, institutions and organizations engaged in sustainable and responsible investing (SRI).

US SIF and its more than 300 members advance investment practices that consider environmental, social and corporate governance (ESG) criteria to generate long-‐term competitive financial returns and positive societal impact. US SIF program areas to support SRI practitioners include research, an annual conference, policy and advocacy, online and live courses, and specialized working groups and committees. Learn more at http://www.ussif.org/.

Historical Developments in SRI

While investors in various ways have long considered how to manage their wealth for impact, we might date the start of the current quest to the 1970s, when a growing number of universities, faith-‐based institutions, foundations and others began to inquire if they had responsibilities to correct “social injury” caused by the companies in which they invested as minority shareholders.

From these philosophical underpinnings, and aided by regulatory changes by the Securities and Exchange Commission, individual and institutional investors filed the first dozens of shareholder resolutions raising questions about environmental and social responsibility at US publicly traded companies. Today, hundreds of shareholder resolutions are filed each year at US companies on environmental, social and corporate governance issues.

Several developments in the 1980s further galvanized responsible investing and broadened its range. The anti-‐apartheid campaign motivated endowments and other institutions to question whether companies doing business in South Africa could be pushed to work for democratic changes in that country. The environmental catastrophes at Chernobyl and Bhopal also drew investors’ attention to whether their portfolio companies had adequate policies to reduce and manage environmental risk.

Early interest in sustainable and responsible investing was not limited to publicly traded securities alone. Religious investors and those involved in the social transformations of the 1960s and 1970s also sought to use their investments to aid in community development through the United States and abroad. The Johnson Administration’s “War on Poverty” helped create community development corporations. The community investing industry developed further in the mid-‐1990s with the formation of the US


Treasury’s Community Development Financial Institution (CDFI) Fund, revisions to the Community Reinvestment Act of 1977, and creation of new tax incentives like the New Markets Tax Credit that helped to usher new investing into low-‐income communities.

For 30 years, the assets committed to this type of investing—alternatively known as socially responsible, sustainable or responsible investing-‐-‐grew rapidly, extended across the range of asset classes, and generated organizations such as US SIF, the Interfaith Center on Corporate Responsibility, Ceres, the Council of Institutional Investors, and the Principles for Responsible Investment.

In the last decade, a new wave of investors has emerged. They have sought out innovative alternative investment vehicles such as private equity and loan funds that have explicit missions to support such goals as economic development, sustainable agriculture, clean energy, transit-‐oriented development, quality education, fair trade or access to health care. This approach represents billions of dollars of capital and has forged networks such as the Global Impact Investing Network, organizations catering to foundations interested in mission investing and the 100% Network focused on managing total portfolios (from philanthropy to near market and market rate capital) for impact.

The Impact of Sustainable and Responsible Investment

Over the decades, sustainable and responsible investment professionals have changed the investment industry by challenging and shifting traditional notions of investment practices. In so doing, they have brought to market new investment options and services across a wide range of asset classes that appeal to both individual and institutional investors and help address serious social and environmental challenges.

The US SIF Foundation’s 2013 report, The Impact of Sustainable and Responsible Investment, presents examples of how sustainable and responsible investors have:

• changed the investment industry and added options for investors in public equities, depository institutions, loan funds, and private equity and other alternative investments,

• improved companies through active ownership and engagement, • helped communities and individuals, and • influenced public policy and developed global standard-‐setting organizations

The ideas and practices advanced through sustainable and responsible investment have captured global attention and are increasingly being integrated into investment decisions. Some of the most sophisticated investors around the world now understand that sustainable and responsible investment provides important insights and mitigates risks while also benefiting society.

The report can be found on the US SIF website at http://www.ussif.org/pubs.

Foundations and Impact Investing

A segment of institutional investors that has grown more interested in various aspects of sustainable and responsible investing is the foundation world. In Unleashing the Potential of US Foundation Endowments: Using Responsible Investment to Strengthen Endowment Oversight and Enhance Impact, the US SIF Foundation presents extensive data from primary and secondary sources to assess


the current range and state of foundation involvement in sustainable and responsible investing. It suggests that the number of foundations engaged in SRI, often employing such terms as mission-‐related investing and impact investing, has been growing in the last few years.

The guide encourages foundations to adopt SRI strategies in order to have tools, in addition to grantmaking, with which to generate positive impact and to fulfill their fiduciary duties. It profiles a number of foundations whose approaches to SRI—including shareholder advocacy at publicly traded companies and investments in vehicles supporting community development, land conservation and other sectors— have resulted in meaningful environmental, social or corporate governance outcomes. Another strategy foundations employ is to consider ESG criteria in addition to traditional financial indicators when selecting companies for their portfolios. Many of the foundations profiled in the guide provide background on the process they followed—with staff, trustees and consultants—to develop or update their responsible investing policies and procedures.

The report concludes with a list of practical steps that foundation staff and trustees can take to help their institutions align a broader portion of their assets with their programmatic or broader institutional goals. To assist these first steps, an extensive appendix of resources provides links to:

• organizations offering assistance in sustainable and responsible investing, including such specialties as impact investing, community investing and shareholder engagement,

• research papers on SRI and financial performance and on fiduciary duty for foundations, and • investment policies, proxy voting guidelines and case studies of several foundations that are active

sustainable and responsible investors.

The report can be accessed at http://www.ussif.org/pubs.


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Women, Wealth and Impact: InvestIng WIth a gender lens

The New INvesTINg ParadIgm: Female PosITIve aNd CarboN NeuTral! Impact investing is fundamentally changing the world for the better, but there is much more we can do. One of the most exciting, emerging areas of opportunity is Gender Lens Investing. With its goal of directing capital to investments that benefit women and girls, it is empowering them to address society’s most pressing social challenges. While complementing impact investing’s long-standing focus on poverty alleviation, climate change and sustainable technologies, Gender Lens Investing may ultimately produce a greater collective benefit.

Imagine the possibilities if 100% of the world’s population were fully engaged in creating positive change.

geNder leNs INvesTINg sPoTs oPPorTuNITIes hIdINg IN PlaIN sIghTGender Lens Investing evaluates investments for their positive impact for girls and women. The underlying premise is that women are powerful change agents, particularly when capital and opportunity flow to them. Gender Lens Investing supports the financial, educational and political development of women and girls, accelerating economic and social change. The opposite is also true: when women and girls are deprived of opportunity and capital, innovation and economic activity are stifled. The well-being of companies, communities and entire countries is also slowed or put at risk. Gender Lens Investing challenges capital markets to continually assess and support the contributions of women and girls. By incorporating gender in capital allocation decisions, investors can demand systemic change that actively values the contribution of women and girls. In the broadest context, investing in women is critically important for men, business and society, not just women.

The busINess Case For geNder INClusIveNessThe business case for gender equality is compelling, whether it’s advancing diversity on corporate boards and executive suites, or channeling capital to under-funded entrepreneurs worldwide. Research repeatedly demonstrates observable, positive impact when capital and opportunities flow to women. Findings include:

• Catalyst: Companies with three or more women corporate directors outperformed those with no women on the board by 84% on return on sales, 60% on return on invested capital and 46% on return on equity. And yet, women hold only 17% of board seats in the United States.

• Journal of Business Ethics: The quality of companies’ reported earnings positively correlates with greater gender diversity in senior management.

• “WomenandRepaymentinMicrofinance”(B.D’Espallier,etal):Microfinance institutions (MFIs) with more women clients have lower write-offs and lower credit-loss provisions, supporting the common belief that women are a better credit risk for MFIs.

• Illuminate Ventures White Paper: In Silicon Valley, a 2009 study found that venture-backed companies run by a woman had annual revenues that were 12% higher and used an average of one-third less committed capital with lower failure rates than those led by men.

• “WomeninAgriculture”reportoftheUN’sFoodandAgricultureOrganization(FAO):While women are the backbone of the rural economy in developing countries, they receive only a fraction of the credit, land, training and inputs that men get. The FAO estimates that if women received resources on par with men, the additional yield could reduce the number of undernourished people by 100 - 150 million (12 - 17%).


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From leNses To PorTFolIos: The how-ToAt Veris, we have been an early champion of Gender Lens Investing. We understand that tools for analyzing gender inclusiveness in portfolios are just being developed and that few investment vehicles are currently specifically constructed with a Gender Lens. Nevertheless, we have identified a wide range of investment opportunities that support gender equality. Ranging from promissory notes and private investments to public securities and funds, these investment vehicles promote: (a) increased access to capital and resources for women, (b) gender equity in the workplace and on corporate boards, (c) products and services that benefit women and girls, (d) access to firms that are led and/or are majority-owned by women, and (e) access to women portfolio managers and advisors.

The impact of these investments might be direct (e.g. investments in women-led enterprises) or indirect (e.g. shareholder advocacy around board diversity). These opportunities often provide financial performance comparable to traditional market returns. Others may return slightly below-market rates on a risk-adjusted basis.

our ProCessIn designing investment strategies that address both financial and impact goals, we work with investors to consider the following:

Step 1: Be Intentional: Decide to demand more than a financial return from your wealth. Identify the social, environmental and impact concerns that matter most and seek investments aligned with those values.

Step 2: Formalize an Investment Strategy: Crystallize your financial and impact goals in an Investment Mission Statement or Investment Policy Statement.

Step 3: Select a Knowledgeable Advisor: Share your goals with your investment advisor. Ask about the range and quality of investment opportunities they offer to meet your multiple objectives. Talk to other advisors and explore their investment philosophy.

Step 4: Assess Where You Are Now: Do you know what you currently own and the impact you are having? Are your holdings addressing issues such as board diversity? Are your managers focused on investments empowering women, thereby driving innovation and performance? Do your managers/funds have criteria for screening out industries or companies with products or practices that are counter to workplace equity or the wellbeing of women?

Step 5: Apply a Gender Lens: Assess the many facets of an investment opportunity, such as ownership and management structure, look at how well gender issues are integrated into security selection, and consider the services and products flowing to consumers. To maximize impact:

Evaluateinvestmentvehiclesthatspecificallytargetwomen:

◊ Publicly available options include: The Calvert Foundation’s WomenInvestinginWomen(WIN-WIN)promissory notes; Pax World’s GlobalWomen’sEquality fund; and the CDs, promissory notes and loan funds of community development financial institutions (CDFIs) and microfinance organizations that channel many of their loans to women.

◊ Impact Alternatives include: Private debt that supports microfinance institutions serving women; angel and venture capital targeted to women-led enterprises; impact investments such as Root Capital’s Women InAgricultureInitiative; and loan guarantees, such as those used by MicroCredit Enterprises empowering rural women in developing countries.

◊ For foundations and endowments: Consider lines of credit, loan guarantees and Program Related Investments (PRIs).


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◊ In assessing funds and portfolio managers, look for investment criteria that address gender equity and inclusiveness. Reference the UN Women’s Empowerment Principles and Calvert Women’s Principles® in evaluating a corporation’s impact on women in the areas of (a) employment and compensation, (b) work-life balance and career development, (c) health, safety and freedom from violence, (d) management and governance, (e) civic and community engagement, and (f) transparency and accountability.

Seekoutwomen-ownedandmanagedinvestmentfirms:Ask advisors about the ownership and management structure of their firms. When evaluating new investment professionals include women in your search.

Supportshareholderinitiativesandadvocacy:

◊ Evaluate managers and funds on the quality of their shareholder advocacy.

◊ Participate in Pax World’s JustSayNoToAll-MaleBoards campaign.

Support the movement: Many organizations are raising investors’ and the business community’s awareness about the goals of Gender Lens Investing. These include:

◊ Networksactiveinempoweringwomensuch as the Criterion Institute, 85 Broads, Women Moving Millions, Women Donors Network, and Women’s Funding Network.

◊ Organizationsworkingtoincreasethenumberofwomenonboardssuch as 20/20 Women on Boards, Catalyst and the 30% Coalition.

◊ Non-profitsincreasingwomenentrepreneurs’accesstoventurecapitalsuch as the Pipeline Fund and Astia.

◊ Angelinvestingnetworkssuch as Golden Seeds Network and 37 Angels.

CoNCludINg ThoughTsSmart investors are rapidly pivoting toward impact investments that deliver both financial performance and social change. The data unequivocally shows we can create better companies and communities by shifting the flow of wealth and power to women to lift them out of poverty, bolster their leadership and support their entrepreneurial pursuits. Investments with strategic impact empower all the world’ people to solve today’s complex challenges. The opportunity is clear. The benefit for all is compelling.

The auThorsLuisamaria Ruiz Carlile, CFP ® with Lori Choi, CFA ®, Patricia Farrar-Rivas, CIMA ®, and Alison Pyott, CFP ®

abouT verIs wealTh ParTNersVeris Wealth Partners, LLC is an independent, partner-owned wealth management firm that aligns investors’ wealth with their financial and social objectives. Veris believes that superior investment performance and positive impact are complementary parts of a holistic investment strategy. Veris is based in San Francisco, with offices in New York City and Portsmouth.

DisclaimerThismaterialisforinformationalpurposesonlyanddoesnotconstituteasolicitationinanyjurisdiction.Anyreferencetoindividualassetmanagesorsecuritiesdoesnotconstitutearecommendationorendorsement.Itdoesnotconstituteinvestmentresearch.Opinionsarecurrentasofthedateofappearinginthismaterial.


3From the Margins to the Mainstream

Contents Preface

3 Preface

4 1. Introduction to the Mainstreaming Impact Investing Initiative

4 1.1 Executive Summary

4 1.2 Motivation

6 1.3 Focus and Scope

7 2. Definitional Alignment

7 2.1 Clarifying the Taxonomy

8 2.2 Areas of Definitional Confusion

10 3. Impact Investment Sector Assessment

10 3.1 Harnessing the Hype

12 3.2 Impact Investment Ecosystem: The Landscape Today

18 3.3 Case Studies: Examples of Mainstream Investors in Impact Investing

18 3.4 Impact Investing Across Asset Classes

21 3.5 Voice of the Mainstream Institutional Investor

23 4. Challenges that Institutional Investors Face

23 4.1 Early-stage Ecosystem

24 4.2 Small Average Deal Size

25 4.3 Fit within Asset Allocation Framework

26 4.4. Double Bottom Line

27 5. Recommendations

27 5.1 Role of Impact Investment Funds

28 5.2 Role of Impact Enterprises

28 5.3 Role of Philanthropists and Foundations

29 5.4 Role of Governments

30 5.5 Role of Intermediaries

31 6. Conclusion

32 Appendix: Institutional Investors Interested in Getting Started

33 References and Further Reading

34 Acknowledgements

Investors have significant influence over the social, environmental and economic challenges of societies, yet continue to operate within a market infrastructure and investment ecosystem where the incentives do not generally balance social, environmental and economic impact.

Impact investing – an investment approach intentionally seeking to create both financial return and positive social impact that is actively measured – has been lauded as an emerging investment approach with the potential to reconcile key shortcomings in traditional financial markets. Yet with less than US$ 40 billion of capital committed cumulatively to impact investments out of the tens of trillions in global capital, it is no surprise that many have labelled impact investing “a hype”.

At its Annual Meeting in Davos in January 2012, the World Economic Forum brought together mainstream investors, impact investors and social entrepreneurs to discuss how to harness the potential of impact investing. What emerged was a list of constraints the sector faces, such as the perception that a social impact responsibility conflicts with a fiduciary duty, the fragmentation of the impact investing universe with small intermediaries and small deal sizes, and the lack of an established track record of exits for investors in double bottom line companies. While the list of reasons why impact investing would remain niche seemed overwhelming, bringing it into the mainstream was too important an opportunity not to pursue.

Impact Investing is a multistakeholder issue. It engages governments as impact investments offer opportunities for more efficient delivery of public services. It engages civil society, from the non-profits that design and implement projects to individual recipients of social programmes. And it involves businesses, ranging from entrepreneurs and lawyers to consultants and investors. Clearly, for impact investing to reach its potential, it must be considered from the perspective of all stakeholders. The focus of this report is the mainstream investor angle, which offers the biggest opportunity to scale the sector at this stage.

With this context in mind, the World Economic Forum launched the Mainstreaming Impact Investing initiative in 2012. This initiative builds on the Forum’s 2011 report Accelerating the Transition towards Sustainable Investing, which sought to stimulate the integration of environmental, social and governance (ESG) factors into mainstream investment analysis, as well as the 2011 Schwab Foundation for Social Entrepreneurship report, The Social Investment Manual, which sought to build absorptive capacity among prospective impact investees.

Undoubtedly, a number of leading global publications on impact investing have graciously laid the foundation for this. What makes this report different is the World Economic Forum’s access to the senior most decision-makers and portfolio managers of the largest and most innovative investors in the world; this uniquely helped facilitate a more realistic vantage point on the challenges in scaling the sector. Working with this group will also be instrumental in raising awareness and knowledge among key stakeholders for taking impact investing from the margins into the mainstream.

We recognize there remain many sceptics of impact investing. But, we believe that the best way to develop and mature this promising sector is through constructive criticism. So whether you believe impact investing will inevitably be mainstreamed or believe it to be merely a bellwether for what is not working in the economy, we look forward to hearing from you. It is in this spirit that we offer this report not to be filed in the archives of a library, but to start the journey to transform our financial paradigms for the better.

For more information on the Impacting Investing initiatives of the World Economic Forum, please contact us by e-mail at [email protected].

Michael DrexlerSenior Director, Head of Investors IndustriesWorld Economic Forum USA

Abigail NobleAssociate Director, Head of Impact Investing InitiativesWorld Economic Forum USA


Michael

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The World Economic Forum is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas. Incorporated as a not-for-profit foundation in 1971 and headquartered in Geneva, Switzerland, the Forum is tied to no political, partisan or national interests.

Michael

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4 From the Margins to the Mainstream

1.1 Executive Summary

Over the last few years, much excitement has been generated around the term “impact investing” – an investment approach that intentionally seeks to create both financial return and measurable positive social or environmental impact. Despite the buzz, there is limited consensus among mainstream investors1 and specialized niche players on what impact investing is, what asset classes are most relevant, how the ecosystem is structured and what constraints the sector faces. As a result, there is widespread confusion regarding what impact investing promises and ultimately delivers.

This report is a result of engaging over 150 mainstream investors, business executives, philanthropic leaders and policy-makers through interviews, workshops and conference calls. The overall objective of the Mainstreaming Impact Investing initiative is to provide an initial assessment of the sector and identify the factors constraining the acceleration of capital into the field of impact investing. The report is divided into five key sections.

Section 1 outlines the motivation, focus and scope of the initiative. It concludes that the primary asset owners that are allocating capital to impact investments today include development finance institutions, family offices and high-net-worth individuals,2 but that the sector can only realize its potential if other types of asset owners will allocate additional capital towards impact investments.

Section 2 defines impact investing, and most importantly, identifies areas of confusion in an effort to clarify how impact investing is different from traditional investing. It cites two examples of large-scale asset owners that are allocating capital towards investments that intentionally seek to create social or environmental value in addition to generating financial return.

Section 3 provides a snapshot of the state of the sector. It identifies the participants that are most actively involved in the impact investing ecosystem, and describes how these organizations are making investments across the various asset classes. It concludes with the observation that although the growth in impact investing has been driven largely by niche players, leading mainstream investors have now begun to allocate relatively small pools of capital to impact investments.

1. Introduction to the Mainstreaming Impact Investing Initiative

Section 4 describes the constraints that asset owners face when considering allocation of capital to impact investments. Most of these constraints can be attributed to one of the four broad overarching challenges: early-stage ecosystem, small average deal size, fit within asset allocation framework and double bottom line. The objective of this section is to identify and isolate the most prevalent challenges so that they can begin to be addressed and overcome by leading investors in the impact investing ecosystem.

Section 5 outlines key recommendations that various participants should take to advance impact investing out of the margins and into the mainstream. It concludes that mainstreaming impact investing will require a concerted effort and collaborative coordination among many participants, including impact investment funds, impact enterprises (investment targets), philanthropists and foundations, governments and financial intermediaries. The appendix recognizes that mainstream investors have a potential role to play as well, and outlines ideas for how investors that are interested in becoming more active in the impact investing sector could get started. 1.2 Motivation

The intended audience of this report will be investors interested in clarifying what impact investing is and what it is not, what the current sector landscape looks like and what is required for the sector to progress into the mainstream. The impetus for the World Economic Forum’s Mainstreaming Impact Investing initiative and publishing of this report is four-fold:

First, private investment to address social challenges can create tremendous societal change. Social issues continually present significant fiscal challenges for governments of developed, emerging and frontier economies; these challenges are particularly difficult when government budgets are declining as a result of burgeoning debt and fiscal austerity.3 Philanthropic organizations – while noble and needed – will not be able to solve the most pressing social problems alone due to their limited resources. Given the nature of how resources are distributed in the world, private investors have a potential role to play in addressing social challenges, including development of impact enterprises, economic development more broadly, and adjustment to major challenges such as climate change, urbanization and wealth inequality. Impact investing offers an opportunity to creatively fund projects that may otherwise go unfunded, while also helping to scale organizations with viable business models that meet pressing social or environmental challenges.

1 Mainstream investors include asset owners (e.g. pension funds, insurance firms, etc.) and asset managers (e.g. private equity firms, mutual funds) that are not actively investing in impact investments nor are informed about this emerging approach to investing.2 Statement refers to global markets, more broadly; this may not be true for all individual markets or geographies. 3 Accenture and Oxford Economics projected total government spending on public services through 2025 and found an expenditure gap ranging from 1.3% to 5.4% of GDP for the 10 countries included in the assessment (expenditure gap occurs when demand for public services outpaces expected delivery). (Source: Delivering Public Service for the Future: Navigating the Shifts (2012), Accenture)


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5From the Margins to the Mainstream

To the extent that there is demand from my investors, we would participate in this market.

Colin Teichholtz, Senior Portfolio Manager, Pine River Capital Management, USA

Impact investing is part of our multifaceted commitment to responsible investment; it serves as a brand distinction as well as fulfils our participants’ demand for both financial and social outcomes.

Amy O’Brien, Managing Director, Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF), USA

4 John J. Havens and Paul G. Schervish (2003): Why the $41 Trillion Wealth Transfer Estimate is Still Valid: A Review of Challenges and Questions, Boston College Social Welfare Research Institute. Note: The US$ 41 trillion is the researchers’ low-growth scenario estimate and assumes 2% real secular growth in assets. It will result in an approximately US$ 5 to 10 billion transfer per annum. (Source: Arthur Wood (May 2013): Impact Investing: Potential Tool for Development, Total Impact Advisors)5 “Millennials” are born after January 1982; those included in the study were Millennials from 18 countries who have a degree and are in full-time employment. Survey conducted by Deloitte in 2012. To learn more, visit: http://www.deloitte.com/view/en_GX/global/about/global-initiatives/world-economic-forum/annual-meeting-at-davos/8182b8e049b3c310VgnVCM3000003456f70aRCRD.htm#.UeRCrvlOSSo6 Nick O’Donohoe, Christina Leijonhufvud, Yasemin Saltuk, Antony Bugg-Levine, and Margot Brandenburg (2010): Impact Investments: An Emerging Asset Class, JP Morgan, Rockefeller Foundation, and the Global Impact Investing Network.7 The Economist (19 May 2012): Spreading Gospels of Wealth: America’s Billionaire Giving Pledgers Are Forming a Movement; Bloomberg BusinessWeek (6 June 2013): G8 Leaders Embrace Impact Investing with New Funds. 8 First Affirmative Financial Network, LLC (September 2012): 2013 To Be the Year of “Impact Investing”.9 Usman Hayat (11 July 2013): Do Investment Professionals Know About Impact Investing? , CFA Institute.

Second, asset management is in a state of flux. Over the next 40 years, Generation X and the Millennial Generation will potentially inherit an estimated US$ 41 trillion from the Baby Boomer Generation.4 These generations have grown up in a culture that calls on business to play a more active role in society. In fact, in a recent study of 5,000 Millennials5 across 18 countries, respondents ranked “to improve society” as the number one priority of business (see Figure 1). This does not imply that the next generation of investors will not seek market returns. Indeed, the investment industry thrives as a result of the pursuit of investment returns, and businesses are not sustained without a profitable revenue model. However, the emerging generation of investors is also likely to seek achievement of social objectives in addition to financial returns.

Figure 1: Primary Purpose of Business According to the Millennial Generation, % of Survey Respondents

Source: Deloitte

36% 35% 33% 29% 27% 25% 25%

20% 15%

0% 5%

10% 15% 20% 25% 30% 35% 40%

Improve society

Generate profit

Drive innovation

Produce goods & services

Enhance livilihoods

Enable progress

Drive efficiency

Exchange goods and services

Create wealth

a result of their knowledge of the organization’s investment approach. Although more work needs to be done to understand the direct and indirect benefits that impact investing achieves for the investor, mainstream investors agree that impact investing has the potential to drive a distinct competitive advantage.

Fourth, there is widespread confusion regarding what impact investing is. Since JP Morgan and Rockefeller Foundation collaborated on the seminal report in 2010 which claimed that the impact investment sector could reach US$ 1 trillion by 2020,6 a tremendous amount of buzz has been generated around the term “impact investing”. It was a topic on the public panel for the first time at the World Economic Forum Annual Meeting 2013 in Davos, Switzerland, was a key area of focus by David Cameron, Prime Minister of the United Kingdom, at the G8 meetings in June 2013, and was a leading topic among the Giving Pledge’s 2012 convening.7 Furthermore, according to a survey by First Affirmative Financial Network, impact investing was cited as the aspect of responsible investing that will grow the fastest over the next 12 months.8 Yet despite this buzz, the term “impact investing” elicits mixed, and often inconsistent, responses from different participants. In fact, in a survey conducted by the CFA institute, 66% of financial advisers claimed to be unaware of impact investing.9 There is an obvious need for defined clarity about the term itself.

Third, impact investing offers an opportunity to carve out a distinct competitive advantage. As part of this initiative, the research team interviewed a number of different institutional investors who explained that their active participation in the impact investing sector has helped to engage and motivate investment teams, signal to shareholders an emphasis on long-term value creation, and most importantly, drive higher investor commitments as


The World Economic Forum is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas.

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3From Ideas to Practice, Pilots to Strategy

Table of Contents 1. Preface

3 1. Preface

4 2. Introduction to the Mainstreaming Impact Investing Initiative

7 3. More than an Idea: Creating the Case for Impact Investing

7 3.1 Enhancing Financial Returns by Targeting Social Impact

9 3.2 Making Impact Investing an Institutional Priority for Achieving Superior Investment Performance

11 3.3 Evaluating Past “Impactful” Investments to Create a Future Impact Investing Strategy

15 3.4 The Current Limits and Potential Role of Institutional Investment Culture and Fiduciary Responsibility

18 4. Building a Strategy: Integrating Impact Investing in the Mainstream Investor’s Portfolio

18 4.1 A Portfolio Approach to Impact Investment: A Framework for Balancing Impact, Return and Risk

22 4.2 Leveraging Expertise across Asset Classes for an Institutional Impact Investment Mandate

26 4.3 Incorporating Impact Criteria in Portfolio Construction: From Policy to Implementation

29 4.4 How to Evaluate Impact Investing Fund Managers

32 4.5 Best Practices of High-Performing Impact Investing Fund Managers

36 4.6 Achieving Portfolio Diversification and Double Bottom Line through Investing in Underserved Markets

40 4.7 Impact Investing through Advisers and Managers who Understand Institutional Client Needs

43 5. Innovations for Unlocking Mainstream Capital

43 5.1 Social Stock Exchanges: Democratizing Impact Investing

47 5.2 Commingling Funds: Scaling Impact while Protecting the Interests of Diverse Capital Providers

50 5.3 The Social Impact Bond Market: Three Scenarios for the Future

53 6. Road Map: Next Steps for Mainstreaming Impact Investing

55 7. Acknowledgments and About the Authors

From Ideas to Practice, Pilots to Strategy is both an attempt – and an opportunity – to disseminate the best practices and lessons learned from the first movers, early adopters and bold innovators in the field of impact investing, with the goal of further advancing the sector.

When we published From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors in September 2013, we sought to add clarity to the field through a realistic, current assessment. With over 10,000 people accessing the report in the first two weeks, it became evident that we touched on a strong need. However, given the relatively small scale of impact investing, we realized that more than clarification was needed. For active investors in the field, to shift impact investing from a small part of their portfolios to a full-fledged strategy requires operational and practical knowledge. New players in the impact investing space, looking to take it from a compelling idea to a real investment approach, need to know how to get started in this nascent and potentially rewarding sector. This codified know-how and repository of best practice is currently as embryonic as the sector itself.

Readers of the Margins to Mainstream report reached out from far and wide to ask for advice on how to start (or do even more) with impact investing. While we could hypothesize and make suggestions, it is only experienced impact investors who can speak with authority about what does and doesn’t work, and why. With that in mind, we curated this collection of short, action-oriented and insightful thought pieces on how to put impact investing to work.

Because the sector is in a nascent stage and engages diverse individuals, organizations and societies, no one solution will apply to every situation. Rather, this publication can serve as a trailhead and as a semi-trodden path for new practitioners; but much more trail-blazing will be necessary before the sector can call itself mature.

We advocate learning by doing, failing fast, synthesizing feedback and quickly re-engineering shortcomings into a more informed approach. Above all, we believe that intentions (and certainly good ones) matter with every action and step towards building a new sector. With these principles in mind, we can collaboratively and proactively ensure that the impact investing sector is on the best path forward.

For the many key players whose wisdom and expertise could not be represented here, we look forward to hearing from you and, where possible, including your perspective in future efforts to help bring the impact investing sector to maturity.

Contact us at [email protected]

Michael DrexlerSenior Director, Head of Investors IndustriesWorld Economic Forum USA

Abigail NobleAssociate Director, Head of Impact Investing InitiativesWorld Economic Forum USA


4 From Ideas to Practice, Pilots to Strategy

2. Introduction to the Mainstreaming Impact Investing Initiative

Target Audience for Ideas to Practice, Pilots to Strategy

This publication’s target audience includes three key groups: (1) investors looking to start impact investing; 2) active impact investors looking to expand impact investing from a limited part of their work to a full-fledged strategy; and (3) intermediaries, policy-makers and development finance institutions whose support is vital for the sector’s growth. Since large investors often have a proportionally large influence on a sector, a key focus is on highlighting best practices or frameworks from large asset owners and asset managers.

Motivation and Scope of Ideas to Practice, Pilots to Strategy

The report’s goals are to show how mainstream investors and intermediaries have overcome the challenges in the impact investment sector, and to democratize the insights and expertise for anyone and everyone interested in the field. Divided into four main sections, the report contains lessons learned from practitioner’s experience, and showcases best practices, organizational structures and innovative instruments that asset owners, asset managers, financial institutions and impact investors have successfully implemented.

The strategic case for impact investing from the mainstream investor’s perspective is the focus of “More than an Idea: Creating the Case for Impact Investing”. This section includes the following key messages:

– Reflecting environmental, social and governance (ESG) standards in the investment process, across asset classes and alongside traditional financial metrics and competent risk management practices, can generate superior risk-adjusted, long-term investment returns. Moreover, inadequate ESG capability can lead to poor financial performance.

– Institutional investors can shape markets and encourage managers to design products with social impact. Recent data indicates that many institutional investors look to incorporate ESG standards into their investment decision-making. However, so that impact investment strategy becomes an institutional priority, decisions

Nearly two years ago, at its Annual Meeting in Davos in January 2012, the World Economic Forum convened a discussion among mainstream investors and social entrepreneurs on how to harness the hype of Impact Investing. While the list of reasons why impact investing would remain niche seemed overwhelming, bringing it into the mainstream was too important an opportunity not to pursue.

With this in mind, the Forum launched the Mainstreaming Impact Investing Initiative. The first milestone – From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors– was released in September 2013 and provided an overview of the sector, identified challenges constraining the flow of capital, and laid the groundwork for mainstream investors to begin a meaningful discussion on impact investment. Most of the constraints identified fit into one of four broad, overarching challenges: an early-stage ecosystem; small average deal size; the fit within an asset allocation framework; and double bottom line.

From Ideas to Practice, Pilots to Strategy is the second publication in the Forum’s Mainstreaming Impact Investing Initiative. The report takes a deeper look at why and how asset owners began to include impact investing in their portfolios and continue to do so today, and how they overcame operational and cultural constraints affecting capital flow. Given that impact investing expertise is spread among dozens if not hundreds of practitioners and academics, the report is a curation of some –but certainly not all –of those leading voices. The 15 articles are meant to provide investors, intermediaries and policy-makers with actionable insights on how to incorporate impact investing into their work.


Michael

Typewritten Text

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas. Incorporated as a not-for-profit foundation in 1971 and headquartered in Geneva, Switzerland, the Forum is tied to no political, partisan or national interests.

5From Ideas to Practice, Pilots to Strategy

must come from top leadership. Institutions that have a commitment from top leadership for impact investing (or a similar mission) find it easier to implement the strategy as well as collaborate for shared successes.

– Reviewing past successes, those intended or not, can help investors evaluate potential strategy within their institutions. Large investors can conduct a rigorous review and retroactively tag their investments as “impactful” (i.e. those with a measurable social and financial return, but without clear intent). By sharing this knowledge, such investors help to set a reassuring climate for future impact investment strategy that would include explicit intention to generate measurable social and financial returns.

– Traditional investors are seeing the benefits of diversifying portfolios by working with socially minded investment managers who generate reasonable returns that are somewhat uncorrelated.

– Conventional interpretations of fiduciary duty can lead to herding, which while providing safety of numbers, can produce investment decisions that are not in investors’ long-term interests. For impact investing to engage pension funds, there must be a clear account of how impact investing is congruent with fiduciary duty, and active engagement with asset owners on why impact investments may require funds to reassess their own attitudes towards what constitutes “conventional” investment.

The section on “Building a Strategy” provides examples of organizational structures, processes and strategies employed by large asset owners and asset managers to implement impact investing, while generating risk-adjusted financial returns and meeting the fiduciary responsibilities of institutional investors. Depending on the organizational structure, the frameworks may include impact investing as an investment approach across various asset classes; or, focusing and developing expertise in a particular sector. This section’s key messages include the following:

– Impact Investing can be done within a large institution through a variety of operational approaches: a stand-alone team, a hub-and-spoke structure, an outsourced adviser or an institution-wide commitment and strategy. Whatever the approach, the impact investment thesis and criteria for selecting and evaluating impact should be clear from the outset. In addition to diversifying across asset classes, impact investors can increasingly diversify across impact sectors as markets deepen

– Investors need to ensure that impact investing is

well-integrated into an organization’s decision-making processes and has buy-in from major internal stakeholders. If impact investing has received support from top leadership, integration of it throughout the organization is a matter of communication and coordination. In other circumstances, it is up to the teams to open communication channels laterally and collaborate across teams for shared objectives such

as diversified portfolios and reduced costs of entering new markets. Impact investors can diversify not only across asset classes, but also and increasingly across impact sectors, as markets deepen and the choice of investment opportunities grows.

– Given impact investing is a nascent sector, focusing

due diligence on fund managers’ track records may hold the industry back. Investors should rather seek to understand the factors determining a fund manager’s decision-making process.

– Partnership is critical for success. Successful impact

investing fund managers share four qualities: partnering effectively with the public sector, using catalytic capital, providing “multilingual” (i.e. cross-sector) leadership, and placing financial and social objectives on equal standing. Moreover, treating investors (LPs) as partners from the outset on governance structures, financial and development goals, as well as including impact objectives early in the investment process, is important to ensuring mission alignment among key players.

– Impact investing does not have to be “finance-first”

or “impact-first”, but can be “professional-first”. Asset managers can apply the same degree of professionalism to investment decision-making as to traditional investing, and so comply with the fiduciary responsibility of institutional investors. Investors can use a methodical approach to building an impact investment portfolio based on the risk, return and impact profile of individual investments and the portfolio as a whole.

“Innovations for Unlocking Mainstream Capital” looks at innovative impact investing solutions that can meet the needs of multiple stakeholders, including commercial investors, philanthropic organizations, governments and retail investors. The section’s key messages include the following:

– Commingling funds serve as innovative forms of partnership among previously isolated capital providers. Set up correctly, they can multiply the impact of capital while preserving their contributors’ interests.

– The Social Stock Exchange is a mechanism for opening up impact investing to retail investors, as well as making it more attractive to mainstream investment. A conducive environment for issuers and investors, along with an ecosystem within which they can interact, are important requirements for creating a vibrant public impact investing market.

– Social impact bonds (SIBs) are a novel way of finding economic solutions to social problems and, as such, have tremendous potential for channelling resources to programmes that work. Development of a mature, well-organized SIB market based on solid infrastructure is still very much a work in progress; a robust pipeline of SIB-ready projects, an ecosystem and a blended-value investor pool are and will be key factors for success


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